"Delaware Avenue, Buffalo, New York, Hitching posts, mounting blocks, ice wagons and gaslight at the dawn of the automobile age"
Ilargi: It’s starting to be time for the next move down. The fall of the Euro is stalling a little, gold is reaching new highs. So is denial that the promised recovery has failed to materialize. On that last point, one quick glance at global stock markets should be enough.
But it isn't. President Obama, as we’ve seen, said in face of Friday's job numbers that "the economy is getting stronger by the day." He said that based on data that indicate the vast majority of allegedly added jobs, as reported by his own government, are jobs in that same government, while without the, again, same, government's birth/death model, the numbers would have shown an employment loss of 200.000 or more. Plus half a million people dropped out of the work force. The real numbers are devastating, which makes the president's words all the more remarkable.
Now, I don’t want to bother you with too much repetition, but in my view it's time again to revisit the Obama campaign's promise of transparency. And it’s not as if I’m alone in criticizing the president’s take on the numbers. If anything, it gets harder all the time (though never impossible) to find pundits willing to take on the cheerleading role. Even Bob Herbert at the New York Times gets the idea now:
'A Very Deep Hole' on JobsI know the president has a lot on his mind, but the No. 1 problem facing the U.S. continues to fester, and that problem is unemployment. The jobs report for May, released on Friday by the Labor Department, was grim. President Obama tried to put the best face on it, but it was undeniably bad news, which is why the stock markets tanked. The private sector created just 41,000 jobs in May, a dismal performance. The government hired 411,000 workers to help with the census, but those jobs are temporary and will vanish in a few months.
Unemployment is crushing families and stifling the prospects of young people. Given that reality, President Obama’s take on the May numbers seemed oddly out of touch. "This report," he said, "is a sign that our economy is getting stronger by the day." The economy is sick, and all efforts to revive it that do not directly confront the staggering levels of joblessness are doomed. Even the meager job growth in the private sector last month was composed mostly of temporary work.
Lawrence Mishel, the president of the Economic Policy Institute, had the right take when he said, "These new data do not present a picture of a healthy private sector and offer nothing even closely resembling the job growth we need to dig us out of a very deep hole."
Does this mean that it's obvous to anyone what's going on, as long as they're not in the White House? That's hard to believe. It’s much more likely that 1600 Pennsylvania Avenue is still, and increasingly, if not exclusively, occupied with putting positive spins on negative realities. While I may not agree with Herbert's ideas and solutions, I do share most of this part of his view:
Bold and effective leadership would have put us on [the] road to a sustainable future. Instead, we’re approaching a dead end.
I understand that my take on this threatens to incur the wrath of America's fake left, the Democrats. I also have seen that what I say gets cited by right-leaning sources from time to time. Which is real fun: if only you knew, guys.
So, let’s get back to transparency, and to the real state of the US and world economy. As I just said, it’s time for the next move. And it won't be pleasant. The amount of "money" lost in the markets over the past month is once again staggering, and as far as I can see, there's nothing in sight to stop the fall.
The number of mom and pop investors must have plummeted again so far this year, we don’t need graphs or independent research to understand that, and the question now becomes: when will they return, if ever, and how does their departure influence the markets?
In other words, who’s still investing in stocks? I'd venture that to a large extent it’s the pension- and other funds that hold the same mom and pop's remaining capital, and they look to be in an ideal position to be bled very dry by the firms that control those same markets. Doug Short suggests an S&P low of 400. Not hard to imagine what that would do for those invested with a long-term perspective.
But still, little reality or transparency on the ongoing market crumble from the White House. Instead: "the economy is getting stronger by the day." No, it is not, and I think you know that very well.
Which, inevitably, takes us back to the Gulf of Mexico.
Where a US government-employed scientist suggests that the BP well may be spewing 100,000 barrels a day.
Where the University of Central Florida says the Oil Spill Could Cost Florida 195,000 Jobs, $10.9 Billion.
Where both multiple plumes and multiple leaks have now been confirmed.
Where 1 million gallons of dispersants (which are highly toxic) have been dropped.
And which has inspired president Obama to increase efforts to Reopen Oil Drilling in shallow American waters. Odd, I think, is the best term to characterize this move.
Obama also has "angrily" called for BP CEO Tony Hayward to be fired. Yes, sure, Hayward failed in many respects, BP has done so for a century or more. But this blame game still reeks of the pot and the kettle, or the mote in the president's eye if you will. And who’s going to fire Obama over his failings in the Gulf case?
It’s been 49 days, BP's still in charge of cleaning up its own mess, and failing miserably. There may well be far more oil leaking than before. Once Florida beaches get hit (and they have already), it’s a mere matter of time until the rest of the Atlantic coast will follow, and the White House calls for Tony Hayward's scalp.
WIll that solve anything (if so, please tell me how). Or is it perhaps just what we call political posturing, and channeling the public's anger?
At the time when it happened, none of us could have imagined that W's inadequacy over Katrina would or could ever be outdone. We may have to revisit that notion. Moreover, we face the prospect of seeing the "anger" over BP's performance be used to overshadow the deteriorating economy. In times like these, nations need leaders, not politicians. America, though, has none of the former, and far too many of the latter.
That next move in the economy? Robert Prechter provides a first glance:
Euro nears bottom vs dollar: PrechterThe euro is likely to bottom out against the U.S. dollar within two weeks, based on strong near-term technical indicators, longtime market analyst Robert Prechter said on Monday. He was speaking at the Reuters Investment Outlook Summit in New York. For stocks, Prechter said he was "quite convinced that we have resumed a bear market."
"We're in a period of widening spreads between high-grade and very low-grade debt," he said. This long term trend could last for two or three years, as fears grow whether some issuers can repay bondholder principal, he said. Municipal bond prices could fall steeply in coming years, Prechter also forecast. Even though municipal bonds rarely default, the unfolding depression may be a once-in-a-century event that puts some munis at serious risk of defaulting, he said. "The public has decided the safest pace to be is municipals as well as corporates. I think that's the next area of severe decline ... the area you want most to avoid," he said.
No, I don’t agree with 2 to 3-year timeframes. What I think is that if the Euro stops falling, and that is very possible, it’s at $1.19 now, and my view is that $1.10 will do the trick Europe's leaders are looking for, we will - indeed, must- see something else start to fall. My prime suspects would be the low-grade debt issuances Prechter mentions, which for me would certainly include muni bonds and related debt issued by utterly broke levels of government. But a downward trend that lasts for years? Who’ll keep buying for that length of time? Mom and pop? What will they have left by 2013?
One last point: gold is selling like hot cakes right now. But I think many parties buying now will have to sell their gold once their share of stocks and muni bonds keep plunging, and so our long-term idea stands unchallenged: gold is good, but only in the long term, and only once all present and future debts are paid off. Thinks Wall Street without any moms and any pops.
GDP 'growth' fetish is killing your retirement
by Paul B. Farrell - Marketwatch
What do we do now, oh great Zen master? "When you get to a fork in the road, take it," replies the wise one, Yogi Berra, greatest Yankee catcher of all time.
His sage advice to economists, politicians and investors everywhere: "The future ain't what it used to be. We made too many wrong mistakes. You've got to be very careful if you don't know where you're going, because you might not get there."
At the crossroads: Growth! Capitalism's most sacred commandment -- "grow or die" -- may itself be on death row. With us since 1776, it's being challenged by a new reality that's flashing relentless warnings of an emerging new command from critics, contrarians and eco-economists: "Grow and die." Yes, you heard right.
- "Grow or die." Traditional economists say we need 3% GDP growth to support 100 million new Americans in the 21st century. Drill, baby, drill. New jobs to fuel slow recovery. Worse, exploding growth demands as the rest of the world adds 2.9 billion new humans all chasing their unique American Dream.
- "Grow and die." New eco-economists see Big Oil's destruction of our coastal economies, the rape of West Virginia's coal mountains, the unintended consequences of uncontrolled carbon emissions, and they ask: "When will economists, politicians and corporate leaders stop pretending world's resources are infinitely renewable?" Unfortunately, even the new eco-economists fail to factor population growth, the big 800-pound gorilla, into the equation.
Yes, we are all at a crossroads, all facing a dilemma, all confronting the ultimate no-win scenario: Growth is essential to support the global population explosion. Growth is also killing our world, wasting our planet's non-renewable natural resources. As a result, the "growth" mantra will eventually destroy civilization.
Put a face on this dilemma: Governor Bobby Jindal. Louisiana's greatest economic and ecological assets -- marshlands, coastal fisheries -- are being destroyed by capitalism run amok, Big Oil's greed. Yet Jindal's already telling the President to forget the oil drilling moratorium, forget new studies, forget regulations, forget restraining the Big Oil greed machine that got us here. Drill baby drill, now!
Yes, we're at the crossroads. This politician's a perfect example of the no-win scenario confronting all politicians, economists and citizens. He's on the horns of a very sharp no-win dilemma: We're damned if we grow. Damned if we don't.
Ultimate sin: Turning a blind eye, failing to seek real solutions
"When you get to a fork in the road ... take it." But which fork? Flip a coin? Same result either way: Heads you lose, tails you lose. A no-win situation. Not just Jindal, Obama and America, but Greece, Brazil and China. All politicians, all economies, all trapped in capitalism's most sacred, rarely challenged, commandment: Growth or die. Growth has achieved biblical reverence, blinding us to its toxic collateral damage.
The difference between the mindset of traditional economists and the new eco-economists is actually simple: Traditional economists think short-term, react short-term, pursue short-term goals. New eco-economists think long-term. Initially this may seem overly simplistic, but it fits perfectly. Here's why:
- Short-term thinkers: Traditional economists are highly-paid employees and consultants in organizations with short-term horizons -- banks, institutional investors, big corporations, think-tanks, government. Quarterly earnings, tax season, election cycles are more important than what happens a decade in the future. If they can't survive the next budget cycle, "long term" is irrelevant.
- Long-term thinkers: New eco-economists see, think and plan for the long-term. They understand Yogi: "If you don't know where you're going, you might not get there." They know short-term thinkers are setting America up for more and bigger catastrophes than the gulf oil spill. The hit film Avatar is a perfect metaphor: By 2154, Earth's resources are exhausted forcing us to invade distant planets searching for new energy resources. Critics warn it'll happen earlier: United Nations and Pentagon studies predict population increases that will create unsustainable new natural resources demands by 2050.
Your 'growth' test
The decision is yours. So sit back for a few minutes, take this little test. Read each of the following 11 news items from my clip files, edited for length. Several are hot off the press. A couple are from the winter months. The rest from earlier reports about growth, the 800-pound gorilla hiding in every nation's living room in every quarterly economic report, in the expectations that will make-or-break your own retirement plans.
Here's how to keep score: If you think the message of one of these edited news items supports long-term growth, give it three points. Two points if it's neutral. And if it favors short-term growth plus has faith that technology and the American Spirit will take care of the long-term, add one point. Your total score will be between 33 and 11.
1. "Most new jobs temporary ... unemployment high," Peter Morici report, June 2010
"The economy added 431,000 jobs in May but 411,000 were temporary Census jobs. ... Forecasters had expected 540,000 new jobs ... the big challenge is to keep GDP growing at least 3% to pull down unemployment."
2. "OECD raises forecast for economic growth," The Wall Street Journal, May 2010
The Organization for Economic Cooperation and Development, the Paris-based think tank, "cited strong growth in developing economies and the rapid rebound in world trade to predict that the organization's 31 members will see their combined gross domestic product increase 2.7% this year and 2.8% next year. ... U.S. economy is expected to grow 3.2%" in each of those years."
3. "Geithner rallies Europe on growth," Ian Talley, The Wall Street Journal, May 2010
Geithner's "growth" pitch is a fight to minimize change and preserve the status quo for American banks: "We all understand that part of recovery, part of growth, is to make sure that we make clear and credible commitments to restore gravity to our fiscal positions over time ... But we're also working to make sure our economies are growing."
4. "Economic outlook: Slow growth at best," Gary Shilling's Insight Report, June 2010
"Our forecasts of slow U.S. growth through 2011 may prove overly optimistic ... Most investors believe 2008 was simply a bad dream from which they've now awoken. We're returning to the world they knew and loved, with free-spending consumers supporting rapid economic growth, fueled by ample credit and backstopped by governments."
5. "The new normal," Pimco's Bill Gross, InvestmentNews Conference, Dec. 2009
"Investors will never again see the returns and profits of a few years ago. 'New normal' returns are half what we have grown used to over the past 10 to 25 years."
6. "Stiglitz urges end to GDP fetish," Bloomberg News Report, Sept. 2009
"The Nobel Prize-winning economist urged world leaders to drop the obsession with GDP and focus more on broader measures of prosperity." Many things important to individuals are not included in GDP. But will short-term thinkers agree?
7. "Numbers racket," Kevin Phillips, Harper's Magazine, May 2008
"The use of deceptive statistics has played a vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it really is." Corruption taints CPI, GDP, unemployment stats. How bad is it? The real numbers are a face full of cold water. "Economic growth since the recession of 2001 has been mediocre, despite a surge in wealth and incomes of the superrich."
8. "A darker future for us," Robert Samuelson, economist, in Newsweek, Nov. 2008
"We Americans are progress junkies. We think that today should be better than yesterday and that tomorrow should be better than today. Compared with most other peoples, we place more faith in 'opportunity' and 'getting ahead.' We may now be on the cusp of a new era that frustrates these widespread expectations. ... Americans do not have a divine right to rapid economic growth."
9. "How a new jobless era will transform America," Don Peck, The Atlantic, March 2010
"The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come."
10. "Faustian economics," Wendell Berry, Harper's Magazine, May 2008
"The general reaction to the apparent end of the era of cheap fossil fuel, as to other readily foreseeable curtailments, has been to delay any sort of reckoning ... The dominant response, in short, is a dogged belief that what we call the American Way of Life will prove somehow indestructible. We will keep on consuming, spending, wasting, and driving, at any cost to anything and everybody but ourselves."
11. "What's so good about growth?" Michael Mandel, BusinessWeek book review, Nov. 2005
Ben Friedman's "The Moral Consequences of Economic Growth" "has scored a dead-center hit on the critical question: Why do we value economic growth? The usual argument is that a bigger GDP -- more goods and services -- leads to happier, more satisfied citizens ... [But] as the average income in a country goes up, so do expectations. As a result, the level of GDP per person in a country, taken alone, doesn't necessarily say much about the level of happiness. The lack of a direct link between personal satisfaction and the level of GDP per person seems to undercut the purely economic arguments in favor of growth."
Add it up
So what's your total score? Folks in the "grow and die" crowd (long-term thinkers and eco-economists) will score above 22. Anyone in the "grow or die" crowd (short-term thinkers and traditional economists) will score under 22.
Me? I'm still at the plate talking to Yogi about that fork in the road, about Avatar in 2154, about why God let that bad umpire's call kill a perfect game. Yes, still asking the wisest of all Zen masters which way to go. And after he repeats his answer for the umpteenth time, he pauses, then silently shakes his head, turns away and walks off the field and into the dugout. He caught a perfect game, and scored 33 points.
Euro nears bottom vs dollar: Prechter
by Dena Aubin and Dan Burns - Reuters
The euro is likely to bottom out against the U.S. dollar within two weeks, based on strong near-term technical indicators, longtime market analyst Robert Prechter said on Monday. He was speaking at the Reuters Investment Outlook Summit in New York. For stocks, Prechter said he was "quite convinced that we have resumed a bear market."
He also said municipal and corporate bonds may be the next assets to suffer severe declines. Prechter is known for forecasting a big bull market in stocks in 1982 and for getting out before the 1987 market crash. He continues to expect U.S. stocks will fall below the March 2009 low of about 666 points on the S&P 500 index .SPX, he told Reuters Insider on Monday. The euro fell below $1.19 against the dollar for the first time in more than four years on Monday on investors' growing concern about the European sovereign debt crisis. But recent readings of market psychology show about 98 percent bearishness on the euro and 98 percent bullishness on the dollar, signaling a turnaround is likely soon, Prechter said.
The euro could gain about 10 percent against the U.S. dollar over the next two-to-three months, he said. "We're getting very close to the peak of the first major move up in the dollar (and are) probably within a week or two of the end of the decline of the euro against dollar," he said. Prechter said, however, he remained bullish about the U.S. dollar's prospects over the long term. Prechter continues to favor cash and Treasury bills as safe havens against a U.S. deflationary depression, which he believes is slowly taking hold, he said.
Prechter, the president of research company Elliott Wave International in Gainesville, Georgia, is also known for his 2002 book "Conquer the Crash", which warned about the huge credit bubble that burst a few years later. Even after U.S. corporate bond yield spreads over Treasuries reached extremes at the height of markets' panic in December 2008, non-government bonds are likely to see a second phase of selling, he warned on Monday. U.S. junk bond spreads have widened about 150 basis points since late April to about 700 basis points over Treasuries.
"We're in a period of widening spreads between high-grade and very low-grade debt," he said. This long term trend could last for two or three years, as fears grow whether some issuers can repay bondholder principal, he said. Municipal bond prices could fall steeply in coming years, Prechter also forecast. Even though municipal bonds rarely default, the unfolding depression may be a once-in-a-century event that puts some munis at serious risk of defaulting, he said. "The public has decided the safest pace to be is municipals as well as corporates. I think that's the next area of severe decline ... the area you want most to avoid," he said.
On The Stamp: Food Stamp Participation March 2010
by Paper Money
As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is continuing to rise.
In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.
The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased 23.74% while individual participation, as a ratio of the overall population, has increased 20.06% over the same period.
The March results confirm that participation is continuing to climb, likely as a result of the jump in total unemployment, driving the nominal benefit costs up an astounding 42.36% on a year-over-year basis to $5,375,705,401 for the month.
Easy Money to Stick Around a While
by Jon Hilsenrath - Wall Street Journal
Fed Unlikely to Raise Rates as Euro-Zone Crisis Keeps Pressure on Economy; Risk of a 'Tail Event'
Investors spent much of early 2010 wondering when Federal Reserve Chairman Ben Bernanke would start to tighten financial conditions to rein in the substantial support to the U.S. economy. Instead, Europe is doing the job for him. Worries about the 16-nation euro zone's financial turmoil has pushed U.S. stocks lower and the dollar higher, made risky debt in the U.S. costlier compared with less-risky debt, inflated interest rates for the short-term loans that banks make to one another and helped slow down the issuance of commercial paper.
As a result of that, along with meager job growth and low inflation, the odds that Mr. Bernanke will soon reverse the easy-money policies that have greased the wheels of the financial system since the crisis began are far smaller than they seemed just a few months ago. "I don't think economic conditions yet call for it," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview. James Bullard, president of the Federal Reserve Bank of St. Louis, said the latest signs of strain are reinforcing the central bank's cautious economic outlook. "You've got more risk out there of a tail event occurring," he said in an interview.
Still, the growing pressure on the market isn't severe enough yet to alarm Fed officials. Mr. Bullard said there are powerful offsets to the recent downturn in stock prices and some of the troubles surfacing in credit markets. For example, the decline in long-term government bond yields is helping to hold down interest rates broadly. Rates on 30-year fixed-rate mortgages have fallen below 5%, fueling mortgage refinancing.
Mr. Fisher expects the U.S. economy to slow a bit in the second half of 2010 and inflation to remain subdued. Recent strains in financial markets could "take a little bit out" of economic growth, he said Friday. The Dallas Fed chief added that he isn't "overly preoccupied" about it, partly because credit markets aren't showing "too many signs of distress" and stock volatility is normal.
Futures markets see less than a 50-50 chance that the Fed will push the federal funds rate up to 0.5% by December from its current level just below 0.25%. That is a major shift since the beginning of May, when an increase was viewed as almost a sure thing. Many investors also are backing down from predictions of aggressive Fed action next year. Futures-market prices suggest that investors expect the fed funds rate to hit 0.75% by July 2011. In early April, the market put the rate at more than 1.25%.
There are plenty of signs of tighter financial conditions. Some efforts to raise capital have been scrapped in the past few weeks. Radiation-monitoring specialist Mirion Technologies Inc. and Smile Brands Group Inc., a provider of support services to dentists, withdrew initial public offerings in late May, while airline operator Allegiant Travel Co. backed away from a $250 million junk-bond sale. Overall issuance of junk bonds in the U.S. came to a standstill late last month, and interest rates on junk bonds climbed to roughly 2.4 percentage points above Treasury bonds, up from a spread of 1.8 percentage points in April.
Meanwhile, issuance of investment-grade corporate debt slowed to a total of $75.6 billion in April and May, down from the year-earlier $183.6 billion, according to research firm Dealogic. In the "repo" lending markets where Wall Street banks get short-term loans to finance their securities holdings, activity is down 46% from a year ago, while commercial loans made by banks are down 17.5%. The next test of the Fed's intentions will come at its meeting June 22-23. So far, with the exception of Thomas Hoenig, the Federal Reserve Bank of Kansas City president and an inflation hawk who wants to move quickly, officials have given little indication that they want to start moving toward higher interest rates.
Well before making any move, the Fed would remove language from its policy statement assuring investors that rates will stay very low for an "extended period." So far, Fed officials haven't indicated that they are moving in that direction. "For the foreseeable future, the Fed is going to keep the 'extended period' language," says Jan Hatzius, chief U.S. economist with Goldman Sachs Group Inc.
A Goldman financial-conditions index, which tracks the combined effect of stock-market moves, interest rates and the dollar, has deteriorated since April. Its move was equivalent to a half percentage-point increase in the Fed's benchmark federal funds interest rate, Mr. Hatzius says. That has been only partially offset by a decline in oil prices, which put more money into the pockets of Americans.
IMF Calls for 'Decisive Action' on Euro-Area Fiscal Problems
by Agnes Lovasz and Joshua Zumbrun - Bloomberg
The International Monetary Fund urged euro-area governments to take "decisive action" to ensure the sovereign debt crisis doesn't derail the region's monetary integration. "Policy makers need to take decisive action to complete the project of monetary union," the IMF said in a statement today. The IMF said European nations need to take action to "establish fiscal sustainability" and "spur growth."
The Washington-based fund also said the European Central Bank's benchmark interest rate, currently at 1 percent, can "remain low" because inflation will likely be tame for the next two years. European governments approved an unprecedented financial rescue package on May 10 in a bid to end speculation that the euro area might fall apart because of a debt crisis that started in Greece.
The European rescue fund, backed by 440 billion euros ($526 billion) in national guarantees, was created after a 110 billion-euro loan package announced for Greece on May 2 failed to stem a surge in Portuguese and Spanish borrowing costs. The ECB "rightly took strong action" by establishing its bond-purchase program to smooth out differences in the tightness of credit conditions between member states, the IMF said in today's statement. "The Securities Markets Program has reduced the extreme volatility in sovereign debt markets that was infecting other credit and financial markets" and preventing "a supportive monetary stance" from being efficient, according to the statement.
The IMF also commended the policy response to stabilize the euro region's fiscal crisis as being "bold." "As you know the situation is a serious situation, but it was amazing to see how the Europeans were able to react promptly - when pushed," IMF Managing Director Dominique Strauss-Kahn told reporters earlier today before a meeting of euro region finance ministers, which he is attending to present the IMF report. "Now the question is to make all this operational. In the next days and weeks people will come back to the reality of figures."
Strauss-Kahn also said the euro region's debt and deficit levels "aren't hugely higher than elsewhere. The stress put on Europe is probably exaggerated." Even with the ECB's policy rate at a record low, euro- region economic "growth remains weak," and is being curbed by a productivity decline resulting from policies limiting a climb in unemployment, the IMF said in the report. While an increase in demand globally coupled with euro depreciation will help fuel growth, labor and financial market "rigidities" in some member states are curbing a "necessary" overhaul of economies.
The fund also urged policy makers to take measures to safeguard "fiscal sustainability," while promoting growth. The fund also said the stability of Europe's banking system needs to be secured, and authorities need to accelerate financial restructuring plans.
Banks Park Record Funds at ECB on Default Fears
by Terence Roth - Wall Street Journal
The euro-currency system opened the week under fresh strain after concerns about bank liquidity and Hungarian finances heightened investor aversion to risk. The open lack of official concern about the plunging euro, Hungarian debt warnings, fear of bank defaults and uncertainty about economic recovery have added to the level of toxicity.
In a clear sign of shaken nerves in the euro-zone banking system, the European Central Bank said early Monday that banks parked a record €350.9 billion ($419.9 billion) in cash at the ECB's low-yielding but safe overnight deposit facility. If markets are functioning properly, banks use the ECB facility to the tune of only a few hundred million euros. Despite massive injections of ECB funding into the banking system, banks appear increasingly unwilling to lend to each other in money markets, where banks lend to each other at higher rates. "The environment remains rather tense, with banks extremely keen on staying liquid," say analysts at UniCredit Bank.
Not helping was last week's ECB financial stability report that banks face around €200 billion in loan losses this year and next, they observed. Although not a member of the 16-nation euro zone, the new Hungarian government's warnings about the state of the country's finances raised fear of default risk for euro-zone banks. Budapest's attempts to downplay the warnings didn't fully reassure markets.
The Hungarian default talk weakened government bond markets along Europe's fiscally week periphery. On Monday, the cost of insuring most European government debt against default continued rising, with Portugal and Belgium showing the largest gains. Market analysts at Danske Bank detected that the ECB had to step up use of its controversial bond-purchasing program as a result. The ECB tried letting the government bond markets of Spain, Portugal, Italy, Greece and Ireland stand on their own two feet last week by scaling back is purchases. "However, markets did not function well and the ECB began buying once more Friday," Danske said. The ECB remains the only bidder in many of these markets, they added.
There also is a lot of competition for bunds. Belgium, the Netherlands, Austria, Germany, Portugal, Spain and Italy will issue up to €26 billion of bonds this week. The absorption of this amount will be cushioned by around €16 billion of German redemption and coupon payments. Markets could face another liquidity crunch at the end of this month, when the ECB's mammoth €442 billion tender of 12-month funds expires. That total equates to almost half of the liquidity provided by the ECB and the 16 national central banks that currently provide around €846 billion in temporary funds to banks in the region.
Investors also have remarked on the apparent unconcern among euro-zone officials with the euro's precipitous decline against the dollar. Trading under $1.2000 early Monday, the shared European currency is down 21% from a December peak. The ECB has made no sign of intervening, verbally or materially with actual euro purchases. Nor are senior EU officials likely to push for it, with the weak currency offering an edge for an export-led economic recovery.
Euro Group Chairman Jean-Claude Juncker said Sunday the current level of the euro isn't a concern, but called for improved government cooperation between countries using the currency. Mr. Juncker said the euro's recent volatility is due to a perceived weakness of the common European currency that makes it vulnerable to rumor and badly thought out statements from policy makers. "There have been imprudent statements from some Hungarian officials that have made financial markets think that Hungary is the future domino," he said.
Spreading European Fiscal Crisis Hurts Banks
by John Glover - Bloomberg
Signs the global economic recovery is faltering and Europe's fiscal crisis is spreading added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they're owed by that region's most indebted nations. The cost of insuring against a default on financial-company bonds surged, with the Markit iTraxx Financial Index of credit- default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points to 189, according to CMA DataVision in London, near the highest level since March 2009.
The Markit iTraxx SovX Western Europe Index of contracts on 15 governments fell 1.5 basis points to 167, compared with the record-high 174.4 reached on June 4. Europe's debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. data. A U.S. jobs report at the end of last week fell short of economists' forecasts, while a spokesman for Hungary's prime minister said it was "no exaggeration" to suggest the eastern European nation may default. "The market is so volatile right now, it's ready to blow up on any headline no matter how meaningful it should be," said Aziz Sunderji, a credit strategist at Barclays Capital in London.
"People are extremely risk-averse." Italy needs 1.07 trillion euros by 2013 to refinance debt coming due, Spain must raise 546 billion euros and Greece needs 152.6 billion euros, according to a Bank of America estimate in May. Portugal and Ireland each have to raise about 80 billion euros, the data show. Risk Indexes Rise Elsewhere in credit markets, JPMorgan Chase & Co. is marketing $716.3 million of bonds backed by commercial mortgages. Triumph Group Inc. plans to sell $350 million of eight-year notes as soon as tomorrow.
Freddie Mac, the mortgage- finance company with U.S. government support, plans to sell about $1 billion of securities backed by loans on multifamily properties. Broader credit-default swaps indexes in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index climbed 2.46 basis points to a mid-price of 128 basis points as of 12:31 p.m. in New York, the highest since March 23, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of contracts linked to the debt of 125 companies increased 9.6 basis points to a mid-price of 135.38, Markit data show. Both indexes typically rise as investor confidence deteriorates and fall as it improves.Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Commercial Mortgage Debt
The JPMorgan transaction, which is the second of newly issued commercial-mortgage backed bonds to be sold this year, consists of 36 loans on 96 properties, said the person, according to a person familiar with the sale who declined to be identified because terms aren't public. Sales of commercial-mortgage backed securities halted in 2008 as credit markets froze, choking off funding to property borrowers. Even with government aid, only $3.04 billion of the debt was issued last year, compared with $11.2 billion in 2008 and a record $232.4 billion in 2007, according to data compiled by Bloomberg. Royal Bank of Scotland Group PLC sold $309.7 million of the bonds in April. During the boom, sales grew as large as $7.6 billion, the data show. Debt from Triumph, the Wayne, Pennsylvania-based maker of aircraft components, may yield 8.5 percent to 8.75 percent, according to a person familiar with the offering. Moody's Investors Service assigns Triumph a Ba2 corporate family rating. Standard & Poor's rated the proposed offering B+.
The Freddie Mac debt, which will be the third of six such transactions that the McLean, Virginia-based company expects this year, is likely to be sold around June 11, according to an e-mailed statement. Investors will be protected against default on the underlying mortgages by a Freddie Mac guarantee and by credit protection created by the deal's structure, the company said. Bank of America and Deutsche Bank AG will lead the underwriting, according to the statement. In emerging markets, the extra yield investors demand to own corporate debt instead of government securities widened 2 basis points to 334 basis points, or 3.34 percent, according to JPMorgan's EMBI+ Index. Spreads have tightened from this year's high of 346 basis points on May 20. Argentine bonds declined for a second straight day. The yield on Argentina's 8.28 percent dollar bond due in 2033 rose 5 basis points to 13.01 percent. The price fell 0.25 cents to 64.93 cents on the dollar.
German Bund Yield Is Near Record Low After Risk Aversion Rises
by Keith Jenkins - Bloomberg
German 10-year bond yields held near a record low as concern the euro-region’s debt crisis may spread boosted demand for the perceived safety of the 16-nation currency’s benchmark securities. Bunds advanced for a fourth day as equities continued their descent after a U.S. labor market report disappointed investors last week and a Hungarian official’s June 4 comments suggested a debt default was possible. Demand at an auction of 10-year Belgian debt today fell from the previous sale of the securities in February.
"Bunds continue to benefit from flight-to-quality demand," said Orlando Green, an interest-rates strategist at Credit Agricole Corporate & Investment Bank in London. "The sentiment is quite gloomy and there’s still a threat to the global recovery." The yield on the 10-year bund, Europe’s benchmark government security, declined two basis points to 2.56 percent as of 4:18 p.m. in London. It fell to 2.54 percent according to Bloomberg generic data, the lowest since at least 1989. The 3 percent security due July 2020 rose 0.17, or 1.7 euros per 1,000-euro ($1,194) face amount, to 103.85. The two-year note yield dropped one basis point to 0.49 percent.
Bunds pared gains as a report showed German factory orders rose 2.8 percent in April, versus analysts’ forecast for a decline. Concern that the European sovereign-debt crisis may spread from Greece to other countries and prompt nations to default has underpinned demand for German securities. Almost a month ago, the European Union unveiled a rescue package of as much as 750 billion euros and the European Central Bank said it would purchase government and private bonds to end the crisis.
Belgium sold a total 3.2 billion euros of bonds due in 2012, 2016 and 2020. Investors bid for 3.12 times the amount of the 2-year notes on offer, according to the Belgian Debt Agency. The so-called bid-to-cover ratio for the 10-year bond was 1.40, less than the 1.80 cover at the previous auction of the security on Feb. 22. "It was a pretty difficult auction," said Huw Worthington, a fixed-income strategist at Barclays Capital in London. "The bonds underperformed going into the supply and underperformed afterwards. It wasn’t a particularly good supply event." Investors demanded an extra 104 basis points, or 1.04 percentage point, in yield to hold Belgian 10-year securities instead of bunds, up from 49 basis points a week ago. That’s the widest spread since March 2009.
Belgian, Spanish Yields
Belgian 10-year bonds fell for a fifth day, driving the yield nine basis points higher to 3.59 percent. French 10-year securities also declined, with the yield rising three basis points to 3.04 percent. The Spanish 10-year yield increased eight basis points to 4.64 percent, the Irish yield rose five basis points to 5.27 percent and the yield on Portuguese securities gained four basis points to 5.27 percent. French 10-year bond yields also widened versus their German counterparts.
The yield difference, or spread, between French 10-year debt and German bonds gained six basis points to 49 basis points, the most since April 2009. The ECB reduced its government bond purchases last week, a market notice showed today. The Frankfurt-based central bank said it will take term deposits tomorrow to absorb 40.5 billion euros of bond purchases settled up to June 4. That indicates it bought 5.5 billion euros of bonds in the fourth week of its program, down from 8.5 billion euros in the third week, 10 billion euros in the second and 16.5 billion euros in the first.
"The ECB has been less active, and this has recently allowed spread widening in peripherals," Credit Agricole CIB’s Green said. The Netherlands will sell up to 4 billion euros of a 1.75 percent Dutch State Loan due 2013 tomorrow, while Austria plans to sell a total of up to 1.65 billion euros of securities maturing in 2018 and 2021. Austrian bonds cheapened before tomorrow’s auctions, with the 10-year yield rising 12 basis points to 3.38 percent, the highest since May 10. "Auction concession is the main reason for the cheapening, but concerns over Austria’s exposure to Hungary also contributed to the move," Green said.
Bunds have returned 6.9 percent this year, compared with 4.6 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Belgian debt rose 3.4 percent and French securities increased 5.6 percent, the indexes show. Greek bonds declined 11 percent, Portuguese securities dropped 3.4 percent, and Spanish debt fell 2.7 percent. Irish securities gained less than 1 percent, while Austrian debt returned 6.2 percent, according to the indexes.
Medicaid Cut Places States in Budget Bind
by Kevin Sack - New York Times
Having counted on Washington for money that may not be delivered, at least 30 states will have to close larger-than-anticipated shortfalls in the coming fiscal year unless Congress passes a six-month extension of increased federal spending on Medicaid. Governors and state lawmakers, already facing some of the toughest budgets since the Great Depression, said the repercussions would extend far beyond health care, forcing them to make deep cuts to education, social services and public safety.
Gov. Edward G. Rendell of Pennsylvania, for instance, penciled $850 million in federal Medicaid assistance into the revenue side of his state’s ledger, reducing its projected shortfall to $1.2 billion. The only way to compensate for the loss, he said in an interview, would be to lay off at least 20,000 government workers, including teachers and police officers, at a time when the state is starting to add jobs. "It would actually kill everything the stimulus has done," said Mr. Rendell, a Democrat. "It would be enormously destructive."
The Medicaid provision, which would extend assistance first granted in last year’s stimulus package, was considered such a sure bet by many governors and legislative leaders that they prematurely included the money in their budgeting. But under pressure from conservative Democrats to rein in deficit spending, House leaders in late May eliminated $24 billion in aid to states from a tax and jobs bill that was approved and forwarded to the Senate.
The Senate plans to take up the measure this week, and the majority leader, Senator Harry Reid of Nevada, favors restoring the money, said his spokesman, Jim Manley. The House speaker, Nancy Pelosi, signaled last week that her chamber was open to reconsidering the appropriation. But state and Congressional officials said the evolving politics of a midterm election year meant that the federal aid could no longer be taken for granted. And if it does not arrive, it will leave gaping shortages for states that are already slashing services and raising taxes to balance their recession-racked budgets.
According to the National Conference of State Legislatures, states are relying on the money to close more than a fourth of the $89 billion in cumulative budget shortfalls projected for the 2011 fiscal year, which starts on July 1 in 46 states. In California, Gov. Arnold Schwarzenegger’s proposed budget assumed $1.5 billion in increased federal aid for Medicaid. With his state reeling from $57 billion in cuts over three years and facing a shortfall of $19 billion in 2011, further reductions would be "both cruel and counterproductive," Mr. Schwarzenegger, a Republican, wrote to members of Congress last week.
In New York, which started its fiscal year on April 1 without a financial plan, Gov. David A. Paterson’s proposed budget included $1.1 billion in unsecured federal financing. Mr. Paterson, who is depending on the money to narrow a $9.2 billion gap, joined Mayor Michael R. Bloomberg of New York City at Gracie Mansion on Thursday to lobby their state’s Congressional delegation.
Governors and state lawmakers were caught largely by surprise by the House’s removal of the appropriation. Over the previous 10 months, the Medicaid money had been included in separate bills passed by each chamber, and President Obama had wrapped the extension into his executive budget proposal. "There was every reason to think they’d get together," Mr. Rendell said.
But in recent weeks, Republicans and conservative Democrats began to complain that the proposed spending would add to the deficit because it was not "paid for" with new revenue or other cuts. Their success in reducing the size of the bill reflected a deepening debate in Congress — and on the campaign trail — about the long-term consequences of using deficit spending to fight the recession. Democratic aides in both the House and the Senate said state officials had not pressed their case forcefully enough. "We may have fallen asleep at the wheel a little bit because we took it as a certainty for so long," said Michael Bird, federal affairs counsel for the National Council of State Legislatures.
Republican governors in particular, the aides said, had been reluctant to petition for relief while the party’s leaders in Congress were criticizing Democrats for driving up the national debt. "Governors need to make it clear that it is vital that their states receive this money, instead of blasting Congress for ‘out-of-control spending,’ " said a senior Democratic aide in the House, speaking on the condition of anonymity because he was not authorized to talk about the issue publicly. But the need to balance state and federal interests makes for awkward politics for some governors. Timing has made the conflict more pronounced because state budgets typically do not recover until well after a national recession fades.
"I’m very concerned about the level of federal spending and what it would mean for the long term," said Gov. Jim Douglas of Vermont, a Republican and chairman of the National Governors Association. "But for the short term, states need this bridge to sustain the safety net of human services programs and education."
A report issued Thursday by the National Governors Association and the National Association of State Budget Officers projected that state revenues would "remain sluggish" for two more years. State general fund spending declined by nearly $75 billion, or 11 percent, from 2008 to 2010, according to the report. But states, which unlike the federal government must balance their budgets, avoided even harsher cuts because of nearly $135 billion in stimulus grants from Washington.
The aid included $87 billion made available by adjusting how states and the federal government share the growing cost of Medicaid, the health insurance program for the poor and the disabled. The economic downturn is expected to drive up enrollment in the program by 21 percent from 2009 to 2011, according to the report. Although the federal Medicaid share varies by state, the stimulus act raised it to an average of 66 percent, from 57 percent, according to the Kaiser Family Foundation.
The reimbursement increase was limited to a 27-month period that ends on Dec. 31. Almost as soon as it took effect, governors began fretting about the fiscal precipice they would face when the enhanced payments ended. In February, governors from 42 states and several territories signed a letter to Congressional leaders pleading for a six-month extension. But with the public alarmed about deficit spending, House leaders found that they could not muster the Democratic votes needed to pass the tax and jobs bill without jettisoning several expensive components.
In a conference call with bloggers last week, Ms. Pelosi, Democrat of California, took note of the changed political climate, calling the package "too large for members to digest." "If I had all the votes that I needed in the non-Blue Dog world," she said, referring to the caucus of conservative Democrats, "I would not have had to make some of the changes I made to get some of the Blue Dog support."
Many states do not have contingencies for replacing the federal money. Their options will be limited by the severity of the steps they already have taken, and by federal requirements that they maintain eligibility levels for Medicaid. "We don’t have a specific list of things we would do if we don’t get the money," said Erik Kriss, a spokesman for Mr. Paterson’s budget office, "but we are looking for the most part at the cut side of the ledger."
U.S.'s $13 Trillion Debt Poised to Overtake GDP
by Garfield Reynolds and Wes Goodman - Bloomberg
President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a "debt super cycle." The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades.
"Over the long term, interest rates on government debt will likely have to rise to attract investors," said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. "That will be a big burden on the government and the people." Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that "the debt super cycle trend" suggests U.S. economic growth won’t be enough to support the borrowings "if real interest rates were ever to go up instead of down."
Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s. "The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury," Boston-based Fuss said. "Do you really want to buy the debt of the biggest issuer?"
'A Very Deep Hole' on Jobs
by Bob Herbert - New York Times
I know the president has a lot on his mind, but the No. 1 problem facing the U.S. continues to fester, and that problem is unemployment. The jobs report for May, released on Friday by the Labor Department, was grim. President Obama tried to put the best face on it, but it was undeniably bad news, which is why the stock markets tanked. The private sector created just 41,000 jobs in May, a dismal performance. The government hired 411,000 workers to help with the census, but those jobs are temporary and will vanish in a few months.
Unemployment is crushing families and stifling the prospects of young people. Given that reality, President Obama’s take on the May numbers seemed oddly out of touch. "This report," he said, "is a sign that our economy is getting stronger by the day." The economy is sick, and all efforts to revive it that do not directly confront the staggering levels of joblessness are doomed. Even the meager job growth in the private sector last month was composed mostly of temporary work.
Lawrence Mishel, the president of the Economic Policy Institute, had the right take when he said, "These new data do not present a picture of a healthy private sector and offer nothing even closely resembling the job growth we need to dig us out of a very deep hole."
More than 15 million Americans are out of work, and nearly half have been jobless for six months or longer. New college graduates are having a terrible time finding work, and many are taking jobs that require only a high school education. Teachers are facing the worst employment market since the Depression.
Entire communities are going under. A remarkable article in The Times last week detailed what has happened in Memphis, where a majority of the residents are black. It said the city epitomizes "how rising unemployment and growing foreclosures in the recession have combined to destroy black wealth and income and erase two decades of slow progress." The median income of black homeowners in Memphis has dropped to a level below that of 1990.
It’s impossible to overstate the threat that this crisis of unemployment poses to the well-being of the United States. With so many people out of work and so much of the rest of the population deeply in debt, where is the spending going to come from to power a true economic recovery? The deficit hawks are forecasting Armageddon, but how is anyone going to get a handle on the federal deficits if we don’t get millions of people back to work and paying taxes?
Some inner-city neighborhoods, where joblessness is off the charts, are becoming islands of despair. Rural communities and rust belt cities and towns are experiencing their own economic nightmares. There is no plan that I can see to get us out of this fix. Drastic cuts in government spending would only compound the crisis. State and local governments, for example, are shedding workers as we speak.
Policy makers have acted as if they are unaware of the magnitude of this crisis. They have behaved as though somehow, through some economic magic perhaps, or the power of prayer, this ocean of joblessness will just disappear. That’s a pipe dream. Even if we somehow experienced a sudden, extraordinary surge in job growth (which no one is expecting), it would take a very long time just to get back to the level of employment that we had when the recession started in late-2007.
Heidi Shierholz, an economist with the Economic Policy Institute, addressed this. "In the boom of the late-1990s," she said, "the fastest year of employment growth was 2.6 percent, in 1998. If, in the event we have that extremely strong level of growth from here on out, we would still not get down to pre-recession unemployment rates until January 2015."
For all the money that has been spent so far, the Obama administration and Congress have not made the kinds of investments that would put large numbers of Americans back to work and lead to robust economic growth. What is needed are the same things that have been needed all along: a vast program of infrastructure repair and renewal; an enormous national investment in clean energy aimed at transforming the way we develop and use energy in this country; and a transformation of the public schools to guarantee every child a first-rate education in a first-rate facility.
This would be a staggeringly expensive and difficult undertaking and would entail a great deal of shared sacrifice. (It would also require an end to our insane waste of resources on mindless and endless warfare.) The benefits over the long term would be enormous. Bold and effective leadership would have put us on this road to a sustainable future. Instead, we’re approaching a dead end.
Finance Panel Accuses Goldman of Stalling
by John D. McKinnon and Susanne Craig
A commission probing the financial crisis denounced Goldman Sachs Group Inc., saying the firm first dragged its feet over requests for information then dumped hundreds of millions of pages of documents on the panel.
The Financial Crisis Inquiry Commission issued a subpoena to Goldman, demanding that the firm provide a key for identifying customer names and a way of matching up specific documents to the commission's requests for information. The subpoena also demanded documents concerning Goldman's mortgage-backed derivative securities, which are central in current federal probes of the firm.
The commission is particularly interested in Goldman's dealings with American International Group Inc., which had to be bailed out by the government during the financial crisis in 2008. The subpoena demanded interviews with a number of executives, including Chief Executive Lloyd Blankfein, as well as the executive who's most knowledgeable about "transactions between AIG and Goldman," the FCIC said. A Goldman spokesman said, "We have been and continue to be committed to providing the FCIC with the information they have requested."
Any revelations unearthed by the commission could pose public-relations and legal risks for Goldman as it fends off federal investigations and private litigation. The commission is asking for audio tapes of internal discussions at Goldman, a type of disclosure that hasn't previously figured in the firm's public battles, according to people familiar with the situation.
The battle with the commission represents another Washington stumble for Goldman. The firm was sued by the Securities and Exchange Commission in April over one of its subprime-mortgage securities, and endured a public thrashing by the Senate Permanent Subcommittee on Investigations over other deals where lawmakers said the firm unfairly profited at the expense of its customers. Goldman said it did nothing wrong.
Commission chairman Phil Angelides, the former California state treasurer, termed Goldman's response to document requests "a very deliberate effort to run out the clock." The 10-member panel, formed by Congress last year, has a December deadline to submit its final report. "We should not be forced to play 'Where's Waldo' on behalf of the American people," said Mr. Angelides, referring to the children's books. Vice chairman Bill Thomas, a former Republican House member, termed the firm's conduct "deliberate obfuscation," adding, "They may have more to cover up than maybe we thought."
A timeline released by the commission late Monday showed that the FCIC began asking for documents and other information in late January. But it received only incomplete or inadequate responses, along with repeated requests for delays, the timeline said. Among other items, the FCIC is seeking more information about the ABACUS transactions that figured in the SEC's fraud lawsuit against Goldman. Many of the commission inquiries appear to be in preparation for a coming FCIC hearing on derivatives, at which Goldman executives could testify.
AIG effectively wrote insurance on many Wall Street mortgage deals that later soured. Goldman has disclosed receiving roughly $14 billion from AIG in such deals, representing virtually full payment on AIG's obligations. Goldman said it didn't retain much of the money, using it instead to meet similar obligations to other clients of the firm. The commission also has asked Goldman about its sale of subprime derivative securities that later plunged in value. Goldman traders made side bets against some of these same securities. Goldman executives have emphasized the firm's status as a market maker that has minimal obligations to look after its customers' interests.
In response to the commission's inquiries, Goldman insiders say the firm has provided more than 20 million documents to the committee. Commission officials said Goldman delayed responding to their requests for months. Within the past three weeks, the firm provided the commission a mass of material totaling about five terabytes, officials said, or hundreds of millions of pages. "We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish," Mr. Angelides said.
Goldman Sachs Stung by Backlash in China
by Jamil Anderlini - Financial Times
Public criticism of Goldman Sachs has come to China, where the investment bank has been lambasted in articles in state-controlled media. Parts of the media, apparently emboldened by congressional inquiries and public anger in the west, have openly slated Goldman, arguably the most successful foreign investment bank in China.
"Many people believe Goldman Sachs, which goes around the Chinese market slurping gold and sucking silver, may have, using all kinds of deals, created even bigger losses for Chinese companies and investors than it did with its fraudulent actions in the U.S.," read the opening lines of an article in the China Youth Daily, a state-owned daily newspaper, last week. The article was widely distributed through commercial news portals and the websites of government mouthpiece Xinhua News and the People’s Daily, the Communist Party publication.
Referring to Goldman as a "black hand" that "played little tricks carefully designed to gamble with Chinese enterprises", the article made few specific accusations of wrongdoing by the bank. The report followed similar commentary and articles published in publications including the 21st Century Business Herald, one of the largest financial newspapers in the country, and New Century Weekly, a liberal magazine.
The reports were highly critical of Goldman for designing and selling oil hedging contracts to state-owned Chinese companies that then lost billions of dollars when oil prices plunged, contrary to Goldman analysts’ predictions, in 2008 and 2009. Probably the most telling assertion in all of the articles is the complaint that Goldman has been too successful in China, that it has made too much money from underwriting initial public offerings, arranging deals and making its own private equity investments.
Goldman saw a 2007 investment in a small pharmaceuticals export company of less than $5 million rise to nearly $1 billion at the company’s IPO, a gain of 20,000 percent. The bank has a lead role in the IPO of Agricultural Bank of China. "Goldman has just been so successful in China, but this is one of the perils of success here," said a senior banker at one rival in China. "Many of its domestic competitors and some in the government are very unhappy that they have been doing so well lately."
Chinese business reporters are rarely allowed to criticize powerful state enterprises, but foreign companies are often regarded as fair game. "We’ve a very strong track record in China and one we’re proud of, but we need to help people better understand our business," Edward Naylor, a spokesman for Goldman, said.
As China’s Wages Rise, Export Prices Could Follow
by David Barboza - New York Times
The cost of doing business in China is going up. Coastal factories are increasing hourly payments to workers. Local governments are raising minimum wage standards. And if China allows its currency, the renminbi, to appreciate against the United States dollar later this year, as many economists are predicting, the relative cost of manufacturing in China will almost certainly rise.
The salaries of factory workers in China are still low compared to those in the United States and Europe: the hourly wage in southern China is only about 75 cents an hour. But economists say wage increases here will eventually ripple through the global economy, driving up the prices of goods as diverse as T-shirts, sneakers, computer servers and smartphones. "For a long time, China has been the anchor of global disinflation," said Dong Tao, an economist at Credit Suisse, referring to how the two-decade-long shift to manufacturing in China helped many global companies lower costs and prices. "But this may be the beginning of the end of an era."
The shift was illustrated Sunday, when Foxconn Technology, one of the world’s largest contract electronics manufacturers and the maker of well-known products that include Apple iPhones and Dell computer parts, said that it was planning to double the salaries of many of its 800,000 workers in China, beginning in October. The new monthly average would be 2,000 renminbi — about $300, at current exchange rates. The announcement follows a spate of suicides at two Foxconn campuses in southern China and criticism of the company’s labor practices. Foxconn, based in Taiwan and employing more than 800,000 workers in China, said the salary increases were meant to improve the lives of its workers.
Last week the Japanese automaker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32 percent, in hopes of ending a two-week strike, according to people briefed on the agreement. The new monthly average would be about $300, not counting overtime. And last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140. Many other cities are expected to follow suit.
Analysts say the changes result from the growing clout of workers in China’s economy, and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces. These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week. But there are other reasons. Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports. The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.
But Chinese policy makers also favor higher wages because they could help ease a widening income gap between the rich and the poor. Big manufacturers are moving to raise salaries because they are desperate to attract new workers at a time when many coastal factory cities are struggling with labor shortages. A Foxconn executive said last week that the turnover rate at its two Shenzhen campuses — which employ over 400,000 people — was about 5 percent a month, meaning that as many as 20,000 workers were leaving every month and needed to be replaced.
Marshall W. Meyer, a China specialist at the Wharton School at the University of Pennsylvania, says that demographic changes in China are reducing the supply of young workers entering the labor force and that this is behind some of the wage pressure. "Demography will do what the Strategic and Economic Dialogue hasn’t: raise the cost of Chinese goods," he said, referring to United States-China talks on Chinese currency reform and other economic issues. "There is no way out."
Economists say many of the same forces that were at work in 2007 and 2008, when China’s economy was overheating, have returned and even intensified this year. Local governments have stepped up enforcement of labor and environmental regulations, driving up production costs. And perhaps most troubling for companies here is the prospect of an appreciating Chinese currency, which would make their exports more expensive overseas. Beijing has long promised to allow its currency to fluctuate more freely. But when the global financial crisis shuttered many Chinese factories, the government effectively repegged the renminbi to the dollar to protect exporters.
Pietra Rivoli, a professor of international business at Georgetown University and the author of "The Travels of a T-Shirt in the Global Economy," says the effects of rising labor costs will vary by industry, perhaps with lower-valued goods like garments being forced to move to western China or even to Vietnam and Bangladesh. But she says high-end electronics like smartphones are likely to remain, because they command high profit margins and because China has built a sophisticated infrastructure and quality-control system.
"Labor is such a small piece of the pie for them," Professor Rivoli says of the electronics brands. "The money’s all in the design, the marketing and the complicated distribution system, including retail outlets. Like with Apple, they have those rents in the shopping malls, fancy stores and all those hip people working there. That costs a lot." Still, salary increases are expected to affect many stages of the supply chain and force some companies to raise prices. For many exporters who simply produce on contract for global brands, profit margins are already razor-thin, and raising prices could hurt business.
"They’re going to have to find a way to pass this on to the end user," says Mr. Tao at Credit Suisse.
Economists say a necessary restructuring is under way, one that should allow the nation’s huge "floating population" of migrant workers to better share in the benefits of growth and stimulate domestic consumption. United States and European Union officials have been pressing China to help improve the global economy by consuming more and reducing the country’s huge trade surpluses. Rising labor costs here are not the end of cheap production in China, analysts say, but they are likely to help change the country’s manufacturing mix.
"China isn’t going to lose its manufacturing base because it’s got a huge domestic market," said Mary Gallagher, director of the Center for Chinese Studies at the University of Michigan. "But it will move them toward higher-end goods. And that matches the Chinese government’s ambition. They don’t just want to be the workshop of the world. They want to produce high-tech goods."
Bank Risk Nears Record High on Spain’s $60 Billion Capital Call
by Abigail Moses - Bloomberg
Bank credit-default swaps surged near to a record on concern Spanish lenders will have to raise $60 billion to shore up capital as lawmakers struggle to finance a swollen budget deficit. The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed as much as 14 basis points to 208, approaching the all-time closing high of 210 basis points set in March 2009, JPMorgan Chase & Co. prices show. Banco Santander SA, Spain’s biggest bank, increased 23 basis points to a record 258, according to CMA DataVision.
Spanish lenders need as much as 50 billion euros ($60 billion) of capital, according to Banco Bilbao Vizcaya Argentaria SA, as they face mounting writedowns triggered by a housing market collapse and losses on government bond holdings. Civil servants went on strike today to protest at Prime Minister Jose Luis Rodriguez Zapatero’s efforts to tame the euro area’s third-largest deficit.
"There is illness in the Spanish banking system," said Jeroen van den Broek, head of credit strategy at ING Groep NV in Amsterdam. "It’s very similar to 2008, when the market was hunting down the next bank failure. Now, the market’s hunting the next sovereign fiscal problem." The spread between Spanish 10-year securities and German bunds widened 10 basis points to 213 basis points, a level not seen since before the introduction of the euro in 1999. Stocks slumped with Spain’s IBEX 35 Index falling 1.4 percent to 8,669.8, heading for a third straight decline and to the lowest in more than a year.
Spanish bank capital needs may amount to about 5 percent of the nation’s gross domestic product of about 1 trillion euros through 2013, Bilbao-based BBVA said yesterday. The estimate exceeds a forecast by Standard & Poor’s that a state-backed rescue of Spain’s banking industry could cost 35 billion euros. At least 16 savings banks known as "cajas" that account for about half of Spanish loans, have embarked on plans to merge since the Bank of Spain seized CajaSur on May 22 after judging it was insolvent. Finance Minister Elena Salgado said last week that the cost of restructuring the savings banks wouldn’t be much more than 12 billion euros already raised by a government rescue fund.
Swaps on Bancaja, the Valencia-based lender downgraded by Fitch Ratings on June 1, rose 32.5 basis points to 668.5, CMA prices show. Contracts on BBVA increased 23 basis points to a record 292, Banco de Sabadell SA climbed 20 to 369 and Banco Pastor SA rose 35.5 to 495, CMA prices show.
Investors are paying record high rates to protect bonds of banks in Europe from default relative to the rest of the market. The Markit iTraxx Financial Index is more than 60 basis points higher than the corporate Markit iTraxx Europe Index, according to JPMorgan. As recently as January, the relationship was reversed. The corporate benchmark increased 4.75 basis points to 140.4.
"There’s no doubt that this EU sovereign crisis will change the course of economic history," Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. "It may be up to the central banks to provide stability going forward."
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
The cost of insuring against losses on oil companies surged as the U.S. Minerals Management Service said it’s looking into a report that a second Gulf of Mexico oil-drilling rig is leaking. Default swaps linked to Diamond Offshore Drilling Inc. rose 46 basis points to 202 after Businessinsider.com said the company’s Ocean Saratoga rig is leaking oil in the Gulf. Contracts on Transocean Ltd., whose Deepwater Horizon rig caught fire April 20 and triggered the biggest U.S. oil spill on record, jumped 17 basis points to 169. Swaps on Technip SA, Europe’s second-largest oilfield-services provider, climbed 27.5 basis points to 130 and Anadarko Petroleum Corp. increased 44 basis points to 420.
Hotel California's $36,000-per-household bill
by Debra J. Saunders - SF Gate
In the United Kingdom, Tory Prime Minister David Cameron has warned that his new coalition government will have to invoke austerity cuts that could affect Brits for years, even decades. New Jersey GOP Gov. Chris Christie has turned into a conservative hero for telling an irate teacher who complained about her pay at a town hall meeting that she doesn't have to teach. Illinois Gov. Pat Quinn signed a bill in April to cut pension benefits for new state workers - it raises the full-pension retirement age to 67 and bases pension benefits on the last eight years' salaries - and he's a Democrat.
The spirit has spread even to what Christie refers to as Hotel California. Gov. Arnold Schwarzenegger has vowed not to sign a budget that doesn't include pension reform for new state workers. "I will hold up the budget," Schwarzenegger told Politico.com. "It doesn't matter how long it drags - into the summer or fall or into November or after my administration - and I think people will support that."
Last week, the Libertarian-leaning Reason Foundation released a report that found that California's unfunded pension liability "translates to roughly $36,000 for each California household." Author Adam B. Summers called the current system "unsustainable and unaffordable." It's been too tempting for dysfunctional Sacramento to pass pricey pension bonanzas. For example, in 1999, Gov. Gray Davis signed a bill that retroactively allowed some state employees to retire at age 50 with a pension as high as 90 percent of the last year's salary.
Schwarzenegger tried to fix the problem. In 2005, he proposed ending state employees' generous defined-benefit pensions by setting up 401(k)-style plans for new state hires. He collected 400,000 signatures for a special-election ballot measure toward that end. Did a grateful public rally behind Schwarzenegger? Short answer: No.
The governator did himself no favor by drafting a flawed measure that failed to address death and disability benefits. Schwarzenegger pulled the measure when it became clear there was little appetite for an augmented, improved version. As he explained, "I saw friends of law enforcement officers and crime victims and widows, many of them Republicans, saying, 'Please, governor.' " To which he replied: Uncle.
Later that year, Schwarzenegger watched voters defeat three other measures - including an initiative to curb state spending - with depressed turnout in GOP strongholds. If you can't get Republicans to back you when you're trying to cut state spending, what's the point in sticking your thick neck out? But with this broad national popular push to control out-of-control government costs, Schwarzenegger could succeed this year.
His economic adviser David Crane believes that the time is ripe for the governor's proposed defined-benefit version of the 2005 overhaul. For one thing, current state workers are paying dearly for retirees' benefits. They have had to endure furloughs, and as long as the status quo continues, he argued, they face "reduced chances for pay increases." Also, the more Sacramento pays and owes yesterday's workforce, the less Sacto can spend on programs dear to progressives today. "If Illinois can do it," Crane told me, "California can do it." Or maybe Illinois can do it, but Hotel California still can't.
Fitch Says U.K. Fiscal Challenge ‘Formidable;’ Pound Declines
by Lukanyo Mnyanda - Bloomberg Business Week
Britain is facing a fiscal challenge and needs to accelerate plans to reduce its budget deficit, Fitch Ratings said. The pound extended declines. "The scale of the U.K.’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget," Fitch analysts including Brian Coulton in London wrote in a report today. Interest payments on U.K. debt, rated AAA at Fitch, may reach a "staggering" 70 billion pounds ($101 billion) in five years, from 31 billion pounds in the past fiscal year, Prime Minister David Cameron said yesterday.
Standard & Poor’s, which also gives Britain the top credit grade, has a "negative" outlook amid concern about the deficit. The pound slid 0.5 percent to $1.4396 as of 10:16 a.m. in London, pushing its decline this year to 11 percent. It weakened 0.5 percent to 82.86 pence per euro. Sterling climbed yesterday to the strongest level since November 2008 against the 16-nation currency. Credit rankings in countries including Spain, Portugal and Greece have been cut on concern that widening budget deficits will hamper growth.
S&P reduced the Greek classification to BB+, below investment grade, on April 27. The U.K. needs a "strong and credible medium-term adjustment plan to underpin the U.K.’s AAA credit rating, particularly as investor concerns about sovereign risk in advanced economies have risen," Fitch said last month.
Merkel spells out €80bn spending cuts
by Quentin Peel - Financial TImes
Drastic public spending cuts totalling more than €80bn ($96bn, £66bn) were unveiled by Angela Merkel, German chancellor, on Monday, combined with up to 15,000 job cuts in the public sector, as part of a sweeping austerity package. New taxes will also be imposed on air travel and the nuclear power industry, and some form of financial transactions tax is planned, in addition to a banking levy already agreed by the German government.
Ms Merkel said Germany would be pushing for an as yet unspecified form of Europe-wide financial transaction tax to ensure the financial sector contributes to the cost of the economic crisis. She admitted, however, that the chances of agreeing such a measure at global level in the G20 were slim.
The four-year savings plan was approved after two days of intense negotiations between the partners in the ruling centre-right coalition. It is intended to curb the country’s soaring budget deficit, set to exceed 5 per cent of gross domestic product this year, and to set an example to other members of the European Union, Ms Merkel said. She described the package as a "unique effort" to reinforce budget discipline and meet the demand written into the German constitution to keep a balanced budget. The "debt guillotine" requires a maximum structural deficit of just 0.35 per cent of GDP by 2016, or little more than one-tenth of the present level set by the EU stability and growth pact.
Looking exhausted after the long hours of talks, the chancellor admitted that other EU members, and the US administration, have urged Germany to spend more to maintain the current economic recovery, and reduce its export surplus. But she insisted that an exit plan from the present stimulus was reasonable and necessary from next year. The plan stops short of any increases in income tax or cuts in pensions, but focuses instead on reduced social security and unemployment benefits, in a deliberate effort to reduce the numbers of long-term unemployed and raise the rate of employment. There will be more means-testing of benefits for the unemployed, and cuts in child allowances for unemployed parents, as well as cuts in pension contributions for the jobless.
The package was swiftly condemned by the opposition as an assault on the poorest, with its concentration on unemployment benefits. Sigmar Gabriel, leader of the Social Democrats, called it "pathetic and incomplete", for sparing the wealthy and taxing the unemployed, families and local municipalities. He described the plan for a bank levy as an accounting trick. But Guido Westerwelle, the vice-chancellor and leader of the liberal Free Democrats in the government, who fiercely resisted tax rises, said the plan was fair, imposing costs of €5bn on business, €5bn on social spending, and €3bn on public bodies in 2011. Net spending cuts in the first year will be €11.1bn, followed by €16.1bn in 2012, €25.7bn in 2013, and €32.4bn in 2014, he said.
Ms Merkel said a decision on the abolition of conscription in the armed forces had been postponed, but the Bundeswehr would face radical reforms in order to meet its spending target. She said Germany would fight for a Europe-wide financial transaction tax by 2012, and suggested that it would bring an extra €2bn a year to the German budget. The German thinking is to have a tax on all financial transactions, including computer trading and derivatives.
The aim would be to include all high-speed transactions, rather than simply levy a tax on turnover. Although it is not expected to reach any agreement at the G20, Germany plans to push for an EU decision. If that is blocked, for example by the UK, Berlin will try for a eurozone transaction tax. The "ecological tax" on air travel is intended to raise €1bn a year. Nuclear power producers will have to pay an extra tax in exchange for permission to extend the working lives of their plants, levied as a tax on enriched fuel elements. That is intended to provide a further €2.3bn.
The countries George Osborne can learn from when reducing Britain's national debt
by Angela Monaghan and Edmund Conway - Telegraph
Canada is the new Sweden, apparently. Sweden being the new Ireland, which is the old Germany. We’re talking, of course, about spending cuts. Everyone is on the look-out for the latest and greatest example of who to copy if you’re looking to reduce public sector flab. But while we’ve all heard of Canada (or have now), what of the lesser-known public sector bonfires? What about Finland, or the Netherlands, or post-reunification Germany? Here, for George Osborne and Danny Alexander’s benefit, are a few quick pointers.
In Finland between 1994 and 2000 a programme of fiscal consolidation was carried out after a collapse in asset prices and a subsequent banking and credit crisis. Unemployment peaked in 1994 at just under 20pc. Like the Conservatives, the Finns placed more emphasis on spending cuts than tax rises, although their ratio was 55:45 compared with David Cameron’s 80:20. The guiding principle of the consolidation was a shift away from public spending to a culture of fiscal restraint with caps placed on social welfare spending and wage restraint. Unemployment benefits were heavily targeted among the cuts.
They had a coalition government too, formed in 1995 – the year of Finland’s accession to the EU – to reduce its debt to gross domestic product (GDP) ratio to 60pc by 1999. In fact, they managed to hit this target by 1996, according to a recent study by think tank Policy Exchange. The deficit reduction boosted confidence in the Finnish economy and the government, and consolidation continued into 1998. Thereafter there was a shift, with the proceeds of recovery moved away from cutting the deficit towards reducing the tax burden. By 2000 the government was in a position to offer income tax reductions across the board. The process of consolidation was an economic and political success.
There were two phases of consolidation in Ireland between 1987 and 2000, focused almost entirely on spending cuts across all departments. During the first phase in 1987-1989, wages were cut and civil service jobs reduced to deal with a fiscal crisis. Public sector employment fell by 10pc between 1986 and 1989. Spending on social welfare, health and pensions were among the areas targeted. Benefits were frozen and tougher eligibility criteria imposed. The government also introduced university and hospital fees and major public sector projects were dropped. The process was politically unpopular.
The second phase of consolidation took place from 1994, despite economic growth and no crisis, as the government sought to rein in mounting public spending. The cuts took a similar shape to those in the first phase and the deficit was cut to zero by 1996. By 2000 Ireland’s debt had fallen to an estimated 37pc of GDP, from 50pc the year before. It was running a surplus equivalent to 4.75pc of GDP. The reduction in spending, combined with strong economic growth, facilitated cuts in corporation and income taxes, as well as VAT.
Between 1983 and 2000 The Netherlands imposed spending cuts to address the problem of soaring wages, high inflation and a deteriorating fiscal position. According to the Policy Exchange, in 1983 the government outlined plans to cut public-sector salaries, minimum wages and benefits by 3.5pc across the board. The process of social welfare cuts and wage restraint over the years was volatile but the government was able to secure the consent of workers and unions because of an understanding that there was a need for change for the sake of the economy.
The deficit fell to 0.7pc of GDP in 1998, although debt was 70pc. The government thrived despite the unpopular consolidation process. Of course, were you after a more morbid lesson, there are no end of examples of what not to do about your deficit. If you’re determined not to cut spending, there are two other less desirable ways out of a public sector debt hole: inflation or default.
Argentina chose the latter, as Russia had done a few years earlier. Judging that inflation would prove too damaging to its economy and stuck anyway in a fixed currency arrangement, Argentina defaulted on its dollar debt, converting it into the far less lucrative peso denomination. The move was economic suicide, and prompted a financial crisis which saw the government effectively confiscate funds in people’s bank accounts. So badly did the population take it that ultimately the only way out for President De La Rua was to be airlifted from his palace.
Zimbabwe took the other path (trodden previously by Weimar Germany) and printed money to pay the government debt. It resulted in a bout of hyperinflation which turned one of Africa’s strongest economies into a financial and social disaster case. Neither of these two episodes are particularly encouraging, which probably explains why, for now at least, Cameron would rather focus on Canada.
German Government Agrees on Historic Austerity Program
by Der Spiegel
The German government put together the largest austerity package since World War II on Monday, with spending cuts and new business levies aimed at saving 80 billion euros by 2014. Chancellor Angela Merkel says Germany, as Europe's largest economy, must set an example. The German government on Monday announced plans to reduce spending by €80 billion ($95.7 billion) by 2014 in the largest package of cuts since World War II. The austerity program aims at reducing the budget deficit and helping to protect the euro as it continues its slide.
"We have to save €80 billion by 2014 to put our financial future back on a solid footing," Merkel told a press conference on Monday afternoon. She said the budget cuts for Germany, Europe's largest economy, were a "unique show of strength" that signalled her government's commitment to tackling the European debt problems that have plunged the euro single currency into crisis. "Germany as the largest economy has a duty to set a good example," she said. A number of European nations have fashioned similar austerity programs, with Spain passing sharp cuts last week and Greece having pushed through far-reaching emergency savings measures earlier this year in a last ditch attempt to avoid bankruptcy.
The government plans to cut social spending in such areas as jobless benefits and will also shed many civil service jobs. There will be no reductions in government spending on education and research and no increases in income or value-added-tax, Merkel said. Business subsidies, however, will be reduced and a new levy will be imposed on air traffic. Power companies will be charged a new nuclear fuel rod tax and there will also be a financial markets tax. The government also plans to save money through a comprehensive reform of the German army, the Bundeswehr, though conscription is to continue, despite musings to the contrary by German Defense Minister Karl Theodor zu Guttenberg.
'We Can't Afford Everything'
Merkel's cabinet also agreed to delay the planned reconstruction of Berlin's city palace by three years from 2011 to 2014 -- a move that will save the government €440 million. The savings plan is a far cry from the mission Merkel's governing coalition -- which pairs her conservatives with the pro-business Free Democratic Party (FDP) -- set for itself when it took office last October. Together with FDP head Guido Westerwelle, she had hoped to pass significant tax cuts. But the ongoing financial crisis and rapidly developing euro crisis, which has led to the fashioning of a €110 billion bailout of Greece and a €750 billion war chest to prop up the euro, has strapped Germany's already fragile budget.
The savings plan comes as yet another blow to Westerwelle's political fortunes. Tax cuts had become a signature issue for him and his party and he seemed loathe to abandon the plan even as Merkel began talking about austerity measures. Leaders of Merkel's coalition met for 11 hours on Sunday to agree on the plans and then spent longer than expected finalizing them on Monday. Merkel said there was no alternative to drastic savings. "These are serious and difficult times," she said. "We can't afford everything we would like if we want to be able to shape our future."
The government has to make radical budget savings to meet its commitments to reduce the budget deficit. The Stability Pact governing Europe's monetary union calls for Berlin to reduce the deficit from its current level of 5 percent of GDP to below the 3 percent ceiling by 2013. Furthermore, Berlin recently passed a constitutional amendment requiring that the federal budget be balanced by 2016. After a brief period of relative stability, the euro fell again against the dollar over the weekend and was trading on Monday below $1.20.
Hungary Is Playing Political Games on Debt
by Landon Thomas Jr. - New York TImes
By the numbers, Hungary is not Greece. Its budget deficit is about one-half that of Greece. It does not use the euro and so could, if pressed, lift exports by devaluing its own currency, the forint. And it is in the middle of an economic overhaul program with the International Monetary Fund and can call upon an additional $2 billion if needed. But that did not prevent the politically charged comments made last week by senior Hungarian officials from sending world markets into a tailspin on Friday.
The reason, perhaps, is that the newly elected center-right prime minister, Viktor Orban — like other political leaders in Europe — is finding it nearly impossible to satisfy two very different constituencies: disaffected voters who are unwilling to see their pay and benefits cut further, and the European Union, the I.M.F. and bond investors, who are demanding ever deeper austerity measures as a way of reducing debt.
Compounding this dilemma is the increasingly stagnant condition of the European economies. On Friday, Eurostat, the statistical arm of the European Union, released data showing that euro zone economies grew just 0.2 percent in the first quarter, putting the region last among all the major global economies — even behind slumbering Japan. Japan, however, has a new and comparatively activist prime minister who some analysts say will stimulate its long-dormant domestic economy. So worries are now building that Europe will become the world’s next growth laggard.
If Europe’s recovery is snuffed out by its debt problems, it will pose a danger to the global economy as a whole — a threat highlighted over the weekend in a letter the United States Treasury secretary, Timothy F. Geithner, sent to finance officials at a Group of 20 summit meeting in South Korea. "Without further progress on rebalancing global demand, global growth rates will fall short of potential," Mr. Geithner wrote. "In this context, we are concerned by the projected weakness in domestic demand in Europe and Japan."
Spain, Greece and Ireland are battling to balance the growth-choking effects of government austerity programs, while Germany — to the disappointment of many — seems to be focusing more on pushing through its own budget cuts instead of stimulating its economy, which grew only 0.2 percent last quarter. And while Britain’s growth rate of 0.3 percent last quarter beat that of the euro zone, its own economy — more reliant on government spending than peripheral euro zone economies like Greece and Spain — will also suffer when the new government of Prime Minister David Cameron follows through with its promises of deep cuts in public spending.
Against this backdrop of slower growth in the euro zone, in Britain and in surrounding Eastern European economies like Hungary, last week’s inflammatory comments by Hungarian government spokesmen carried a more powerful punch. Peter Szijjarto, a spokesman for the new prime minister, was quoted Friday by news agencies as saying that the Hungarian economy was in a "very grave situation." He even raised the specter of a default, saying such speculation "isn’t an exaggeration."
The day before, Lajos Kosa, a vice president of Fidesz, the governing center-right party, and other officials warned that Hungary was in danger of suffering a Greek-style crisis, with budget deficits possibly reaching 7.5 percent of G.D.P. this year. (They were officially 4 percent of gross domestic product in 2009.) After the comments, the forint slid, the yield on 10-year Hungarian government bonds surged and shares on the Budapest Stock Exchange tumbled.
Over the weekend, the Hungarian government took pains to assure shaken investors that it was nowhere near bankrupt and that it intended to meet the deficit target of 3.8 percent of G.D.P. Mr. Szijjarto also said Sunday that the introduction of a 16 percent flat tax on personal income was among the possibilities discussed at a three-day meeting on the country’s economy.
The notion that Hungary might report a higher deficit has raised concerns within the country about the accounting of past governments and the possibility that they relied heavily on off-balance-sheet mechanisms to finance large infrastructure investments.
Speaking on background, government officials and bankers advising the government said over the weekend that Hungary was committed to continuing the deficit reduction begun by the outgoing Socialist government. And while they admitted that it was possible the deficit could overshoot its 2010 target, they said this would be caused more by differences over how to account for the finances of municipal and government-owned public entities than Greek-style number massaging.
Nonetheless, while likening Hungary to Greece may unnerve international investors, the comparison has domestic political merits. On the one hand, it could steel a reluctant populace for tougher spending cuts to come; on the other, it gives the government bargaining power to push through tax cuts and other deficit-busting measures that might stimulate growth. "It is all about growth now," said a government official who declined to be identified, having not been authorized to speak publicly.
Such political gamesmanship could also backfire, with investors bolting the forint, as happened last week, and refusing to continue to finance the budget deficit. (Recent bond auctions have already been met by very weak demand.) "If you were a neoconservative banker, you could believe that they were going to pursue a proper internal devaluation — and if you were an indebted small businessperson in the countryside, you could believe they were going to cut your taxes to offset increased loan repayments," said Mark Pittaway, a history professor at the Open University in Britain with an expertise in Hungarian politics and economics.
"Even with a perfect economic situation, not all of these things could be true, and some parts of this constituency were going to be very upset." Indeed, according to Goldman Sachs, Hungary’s projected growth rate of 0.1 percent is one of the lowest in all of Europe, and a number of analysts in Hungary are forecasting a negative number — although that would be an improvement over the 6.2 percent contraction in 2009.
In Hungary — a small, open economy that traditionally depends on exports to drive growth — there is also a view that officials invoked the specter of a Greece-style financial meltdown to talk down the value of the forint and thus make Hungarian exporters more competitive in world markets. But 75 percent of Hungary’s exports go to a slowing euro zone economy, whose officials seem more inclined to talk down the euro to spur the region’s own exports, rather than work to stimulate domestic demand. Given that, Hungary is unlikely to get the desired effect of a sharp increase in exports.
So, although the politics of last week’s comparison to Greece may well have been local, the cause of it — Europe’s declining growth — will remain decidedly global as long as Hungary’s debts and deficits remain as high as they are.
Zapatero Contends With Spain's Biggest Strike
by Emma Ross-Thomas and Paul Tobin - Bloomberg
Spain’s public-sector strike received backing from 11 percent of workers, the government said, strengthening Socialist Prime Minister Jose Luis Rodriguez Zapatero’s hand as he seeks to tackle the euro area’s third- largest deficit. In the central government, 11 percent of public workers joined the strike and the figure was similar in the regional administrations, Consuelo Rumi, deputy minister for the civil service, told reporters in Madrid today.
Unions UGT and Comisiones Obreras, which is threatening a general strike over the government’s plan to overhaul labor rules, said 75 percent participated. "This gives the government strength to take dramatic measures," said Rafael Pampillon, head of economic analysis at the IE business school in Madrid. "Who is going to join a general strike at a time of crisis?"
Zapatero, who said in 2005 he slept with his union card by his bed and pledged full employment before his 2008 re-election, has been forced to cut wages and freeze pensions to convince investors and European allies he can reduce a budget deficit of 11.2 percent of gross domestic product and cut the 20 percent jobless rate. The risk premium on Spanish debt is at a 13-year high as the domestic backlash fuels concerns he won’t be able to make good on the deficit controls.
Unions are reacting to budget cuts across Europe, after protests in Greece turned violent in response to austerity measures imposed in return for a European bailout. Germany’s main labor federation said today it will mobilize demonstrations against Chancellor Angela Merkel’s plan to cut spending by 81.6 billion euros ($97 billion) over four years.
Protesters gathered outside the Finance Ministry in central Madrid and plan other demonstrations across the country today.
The strike comes a day before government officials, union leaders and employers hold what may be the last round of talks on changing labor laws before a June 16 deadline for the administration to impose a new system. The government is backing employers’ calls to loosen firing rules by making it easier for companies to claim economic hardship and pay less severance. "I want to believe that until the last minute there’s a possibility of reaching an agreement," Ignacio Fernando Toxo, secretary general of the CCOO union, said in an interview with Cadena Ser radio today. "The government has disappointed me."
Currently employers must offer 45 days’ pay for every year worked to fire individuals protected by permanent job contracts. That severance drops to 20 days in cases in which the company can convince a labor court it needs to reduce staff for economic reasons. The government is proposing to make it easier for employers to qualify for the 20-day payout, state-controlled radio network RNE reported June 3, citing a draft of the plan. "Spain cannot afford to not do a labor reform," said Alfredo Pastor, a former deputy finance minister and a professor at the IESE business school. "Until something is done in that direction, confidence won’t be regained in the markets."
Workers have said any changes to the rules that harm job security will trigger a general strike, the first in Spain since 2002, when the country was ruled by the opposition People’s Party. Employers and economists say that Spain has some of the most rigid labor-market rules in Europe, discouraging companies from taking on workers even when times are good. Unions argue that the doubling of the unemployment rate to 20 percent in two years proves that companies have no problem cutting workers.
Zapatero is under pressure to show he can trim the deficit and prevent borrowing costs from becoming so high that Spain struggles to finance its debt. Spain faces 16 billion euros of bond maturities on July 30 at a time when the yield on its benchmark 10-year bond is at 4.593 percent, 207 basis points more than comparable German debt. That spread rose to 216 basis points earlier today, the highest since 1996.
Fitch Ratings cut the country’s top credit rating one notch to AA+ on May 28, saying Spain’s deficit-cutting efforts will weigh on growth, making it harder to reduce the debt. The economy is forecast to contract for a second year in 2010 even with European Union growth expanding. Greece was forced to seek a 110 billion-euro bailout from the euro region and International Monetary Fund in May, when its financing costs became prohibitive, leading the euro region to adopt a broader 750 billion-euro financial backstop in case other countries like Spain got in trouble.
Deeper Deficit Cuts
As part of that plan, Zapatero agreed to deeper deficit reductions and last month announced a package of measures that included the first public-wage reduction in the country’s 30- year democracy. Zapatero, who lacks a majority in parliament, needed the abstention of his some-time legislative allies the Catalan nationalist party, or CiU, to win approval by a one-vote margin on May 27.
During the vote, the CiU put Zapatero on notice that the party wouldn’t support his 2011 budget and called on the premier to hold early elections if he couldn’t get the spending plan passed later this year. Polls indicate Zapatero would lose an election, not due until 2012, if he called a vote now. The People’s Party, which tends to back pro-business policies and is allied to Christian Democrat parties in Europe, has criticized Zapatero’s budget cuts, saying they attack the weak. Esteban Gonzalez-Pons, the PP’s communications secretary, said he would strike if he were a civil servant, according to an interview with state broadcaster TVE today.
The PP leads the Socialists by 10.5 percentage points, enough to secure a majority in parliament, according to a poll by Metroscopia for newspaper El Pais published on June 6. Zapatero was first elected in 2004, when growth in Spain was outpacing that of the EU and a debt-fueled construction boom drove employment growth that accounted for almost half of EU job creation between 2002 and 2006. The global financial crisis burst the Spanish property bubble, leading to the deepest recession since the aftermath of the country’s Civil War that ended in 1939.
Bond costs may wipe out Irish reforms
by Andras Gergely - Reuters
The high cost of financing Ireland's debt could become unsustainable and wipe out the fruits of its much-lauded fiscal tightening programme, said an economist who was one of the main advisers on the reforms. University College Dublin (UCD) professor Colm McCarthy last year chaired an official commission whose savings proposals formed the basis of the government's spending cuts in the 2010 budget presented in December.
The spending cuts have put Ireland on a firmer footing than Greece, despite the fact Dublin's budget deficit for last year compared to the size of its economy was bigger than that of Greece. However, McCarthy said in an op-ed piece for The Sunday Business Post newspaper that elevated bond yields could mean Dublin's efforts had been in vain. "If much steeper interest rates have to be paid by the peripheral euro zone countries, then their best efforts to contain and reduce fiscal deficits could come to naught," McCarthy wrote.
"What did for the Greeks was the steep increase in the rate demanded on new and rolled-over borrowings -- and it could do for us too." Another UCD professor, Morgan Kelly, suggested in an article published last month Ireland's sovereign debt problems could overshadow Greece due to its state guarantee for bank liabilities. In the prolonged public debate prompted by Kelly's article, ministers have maintained Ireland's public finances were stabilising and on track to meet the EU deficit limit of 3% of gross domestic product by 2014, compared with more than 14% in 2009.
Finance Minister Brian Lenihan said the Irish economy did not face the same structural problems as its southern European peers. Dublin also has a much lower debt per gross domestic product (GDP) than Greece. All seven analysts who answered the question in a Reuters poll this week whether there was any risk at all of an Irish sovereign debt default in the next two years answered "No". Professor McCarthy said Dublin should resist any calls for higher spending as any relaxation of fiscal targets would have "an immediate and devastating effect"."We will be lucky if we can borrow enough to keep the show on the road," McCarthy said.
UK pubs, bars and nightclubs struggle to keep partying
by David Prosser - Independent
The number of bar and pub companies going bust has more than doubled over the past year, an adviser to the sector said today, calling on the Government to look sympathetically on operators as it frames the emergency Budget due later this month. The accountancy practice Wilkins Kennedy, said 23 pub, bar and nightclub companies collapsed during the first three months of 2010 alone – up from the 11 such businesses that went into insolvency during the first three months of 2009.
The failures took the total number of such companies to have gone under over the last 12 months to 87, compared with 79 in the previous 12-month period. By contrast, corporate insolvencies across the whole economy were down by a third in the past year. Anthony Cork, a director of Wilkins Kennedy said: "What the pub and bar industry needs to see in the June 22 budget is an end to duty increases – the Government needs to be understanding of the sector, and not tax it out of existence."
Obama to Reopen Oil Drilling
by Laura Meckler and Jonathan Weisman - Wall Street Journal
The Obama administration, facing rising anger on the Gulf Coast over the loss of jobs and income from a drilling moratorium, said Monday that it would move quickly to release new safety requirements that would allow the reopening of offshore oil and gas exploration in shallow waters.
Gulf Coast residents, political leaders and industry officials said delays in releasing the new rules, along with the administration's six-month halt on deepwater drilling—both issued amid public pressure—threatened thousands of jobs. Well-owner BP PLC, meanwhile, faces penalties "in the many billions of dollars," for the Deepwater Horizon drilling disaster that has been spewing an estimated minimum 12,000 to 19,000 barrels of oil a day into the Gulf, said White House Press Secretary Robert Gibbs. The costs of the spill will "greatly exceed" the amount BP could recoup by selling any of the captured oil on the market, he said Monday.
Retired U.S. Coast Guard Admiral Thad Allen, who heads the federal response, said BP's latest emergency containment system is on track to capture as much as 15,000 barrels of oil per day, which is the maximum amount of oil the drill ship on the surface can process. BP's latest update on the rate of recovery late Monday implies that the containment procedure is approaching that limit. Any leakage beyond 15,000 barrels per day will continue to go into the sea until a second ship arrives, likely in mid-June.
The oil industry is awaiting new safety regulations from the Interior Department's Minerals Management Service, which canceled some offshore drilling permits last week and has had others on hold since early May. Administration officials say new rules for shallow water oil and gas drilling could be released as soon as Tuesday. The White House also said Monday that it supported lifting the cap on liability damages altogether for any oil companies drilling offshore. The cap is $75 million unless the government can show criminal negligence. Some Republicans and industry groups have cautioned that putting the liability cap too high could make it tough for smaller companies to drill offshore.
President Barack Obama met with Cabinet officials on the spill Monday and expressed optimism that it would be contained, but he pointed to the potential for long-term economic damage. "What is clear is that the economic impact of this disaster is going to be substantial and it is going to be ongoing," he said. The new drilling regulations are expected to require drillers to have independent operators certify that the blowout preventers work as designed to shut off the flow of oil; that independent operators certify the well design plan is adequate, including proper casing, or cement lining; that the driller certifies it is in compliance with all regulations and have done all needed tests.
The moratorium on offshore drilling is shaping up to be one of the most contentious elements of Mr. Obama's response to the April 20 explosion that sank the rig and touched off the worst offshore oil spill in U.S. history. The White House is working on a legislative package that will include further unemployment benefits for people who have lost work due to the spill or the drilling moratorium.
The Small Business Administration is offering economic injury loans to Gulf Coast businesses that have been impacted. Industry trade groups say that each deepwater rig employs 180 to 280 workers, with each of those jobs supporting another four industry workers, for a total potential loss of more than 40,000 jobs. The moratorium "will result in crippling job losses and significant economic impacts for the Gulf region," the National Ocean Industries Association said in a letter Monday. The House passed an economics package in May that more than quadruples a levy on oil companies for spill mitigation, to 34 cents a barrel from eight cents.
House Democratic leaders will meet on Tuesday with committee chairs to work out the House's next steps on raising liability limits, reorganizing the federal regulatory structure on oil drilling and forcing the oil industry to spend more on safety and environmental technology research. The debate over how to respond to the Gulf spill disaster has put Mr. Obama in a difficult spot. He has sought to answer environmental concerns in part by ordering a six-month moratorium on new wells in water deeper than 500 feet, and calling for tougher safety regulation.
But during a trip to the Gulf on Friday, Mr. Obama also heard widespread complaints about the deepwater moratorium. At a meeting at the New Orleans airport, Charlotte Randolph, president of Lafourche Parish, said she implored Mr. Obama for the second time in eight days to immediately lift the deepwater drilling moratorium. Billy Nungesser, president of Plaquemines Parish, suggested to the president he should deploy a federal official on every rig with the authority to shut it down at the first sign of trouble. Then he could lift the moratorium.
When neither of those ideas gained traction, Steve Theriot, president of Jefferson Parish, said he asked the president to lift the moratorium on every oil company but BP. Finally, Sen. David Vitter (R., La.) said the administration needed to immediately issue the new safety regulations that were holding up drilling permits. Mr. Vitter said he made the same appeal to Interior Secretary Ken Salazar three hours after the Obama meeting broke up.
On Monday, the widows of two Deepwater Horizon crewmembers called at a congressional hearing for stepped up safety enforcement in the offshore drilling industry, and voiced their support for continuing to drill offshore. "I fully support offshore drilling and I always will," said Natalie Roshto, of Liberty, Miss., whose husband, Shane, was among 11 people killed in the blast.
Mr. Obama defended the deep-water moratorium on Friday, and administration officials said Monday that it wasn't being reconsidered. "A repeat of the BP Deepwater Horizon spill would have grave economic consequences for regional commerce and do further damage to the environment," the White House said Monday.
BP well may be spewing 100,000 barrels a day, scientist says
by Renee Schoof and Erika Bolstad - McClatchy Newspapers
BP's runaway Deepwater Horizon well may be spewing what the company once-called its worst case scenario — 100,000 barrels a day, a member of the government panel told McClatchy Monday. "In the data I've seen, there's nothing inconsistent with BP's worst case scenario," Ira Leifer, an associate researcher at the Marine Science Institute of the University of California, Santa Barbara, and a member of the government's Flow Rate Technical Group, told McClatchy.
Leifer said that based on satellite data he's examined, the rate of flow from the well has been increasing over time, especially since BP's "top kill" effort failed last month to stanch the flow. The decision last week to sever the well's damaged riser pipe from the its blowout preventer in order to install a "top hat" containment device has increased the flow still more; far more, Leifer said, than the 20 percent that BP and the Obama administration predicted. Leifer noted that BP had estimated before the April 20 explosion that caused the leak that a freely flowing pipe from the well would release 100,000 barrels of oil a day in the worst-case scenario.
The oil was not freely flowing before the top kill or before they cut the pipe, Leifer said, but once the riser pipe was cleared, there was little blocking the oil's rise to the top of the blowout preventer. Video images confirm that the flow of black oil is unimpeded. "If the pipe behaved as a worst-case estimate you would have no visual change in the flow, and I don't see any obvious visual change," Leifer said. "How much larger I don't know but let's just quote BP."
How much oil is gushing from the well has been the subject of heated debate for weeks, with independent scientists suggesting that as much as 95,000 barrels could be gushing into the Gulf of Mexico each day. For more than a month BP and the Obama administration placed the figure at 5,000 barrels a day.
On Monday, Coast Guard Adm. Thad Allen, the Obama administration's point man on the unfolding disaster, said that the government and BP still don't know how much oil is escaping. The "top hat" containment device captured 11,000 barrels of oil on Sunday, Allen said, and that BP was moving a second ship into position above the well to bring to 20,000 barrels the amount of crude that could be processed daily.
Allen also said that BP is moving a production platform with far greater capacity to the Gulf though that equipment may not be in place for several weeks. "We just know that's their capacity. We still haven’t established what the flow rate is," he said. "That is the big unknown that we’re trying to hone in and get the exact numbers on."
Even so, BP’s videos of the gusher showed black oil continuing to flow heavily from all around the wellhead as the crude leaks from around the cap’s edges. A team of experts from government science agencies and universities estimated last week that at a minimum 12,000 to 25,000 barrels a day were flowing from the well, but the team declined to estimate an upper end for the flow because the information they received from BP was inadequate.
Leifer, who is described in the flow rate's preliminary report released last week as a "world reknown researcher" who's published more than 60 scientific articles, said BP still has not delivered the data that scientists need for an accurate appraisal of the spill's size. "We're still waiting," he said.
Allen said that one reason it was important to be able to estimate the rate of flow was so that officials could know how much flow the cap could handle and how much would be lost into the Gulf. Officials say the gusher won’t be over until BP finishes drilling relief wells, probably in August. Allen said the containment cap would have to be watched "very, very closely."
"We ought to be ruthless in our oversight of BP, and trying to understand what oil is not being contained that's leaking out around that rubber seal, once we know what that flow rate is," he said. "And we need to understand completely that if we have severe weather in the form of a hurricane, there may be times where we’re going to have to disconnect that operation and re-establish, and during that time we’re going to have oil coming to the surface again."
Allen said early Monday that BP had closed one of the four vents on the cap and would try to close the others to get more oil flowing to the containment vessel. However, Wells, the BP vice president, later in the day said that the company had changed its view about the need to close the vents. At first glance, it seemed that closing the vents was necessary to maximize the amount of oil and gas that could be collected, but that didn’t prove to be the case, he said. Keeping some vents open gave the company more flexibility when it had to shut down temporarily during a storm, as it did during a thunderstorm Sunday, he said.
Allen and Robert Gibbs, the White House press secretary, said during the news briefing that they didn’t know whether BP was required to pay federal royalties on the oil it was collecting from the runaway well. McClatchy reported Thursday that BP stood to make millions of dollars on the oil. The Department of the Interior’s Minerals Management Service wouldn't say at that time whether BP would pay royalties to the U.S government on the oil that it captures. Department of Interior spokeswoman Kendra Barkoff said Monday, however: "The Department of the Interior will ensure that all royalties owed to the United States are collected."
Imagining the Worst in BP’s Future
by Andrew Ross Sorkin - New York Times
It seems unthinkable, even now, that the disastrous oil spill in the Gulf of Mexico could bring down the mighty BP. But investment bankers get paid to think the unthinkable — and that is just what they are doing. The idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cordon off its liabilities from the spill, is starting to percolate on Wall Street. Bankers and lawyers are already sizing up potential deals (and counting their potential fees).
Given the plunge in BP’s share price — the company has lost more than a third of its value since Deepwater Horizon blew — some bankers and analysts say BP is starting to look like takeover bait. The question is, who would buy BP, given its enormous potential liabilities? Shell and Exxon Mobil are both said to be licking their chops. And already, flinty legal minds are dreaming up scenarios in which BP would file a prepackaged bankruptcy and separate the costs of the cleanup — and potentially billions of dollars in legal claims — into a separate corporate entity.
Tony Hayward, BP’s chief executive, has insisted that his giant will weather this storm. BP is indeed a money machine: it turned a profit of nearly $17 billion last year. "The strength of cash-flow generation in recent quarters has provided us with a balance sheet that allows us to fully take on the responsibility for the Gulf of Mexico response," Mr. Hayward told employees last Friday.
But that hasn’t stopped the deal crowd from blue-skying potential outcomes. Here is some of the math: BP’s costs for the cleanup could run as high as $23 billion, according to Credit Suisse. On top of that, BP could face an additional $14 billion in claims from gulf fisherman and the tourism industry. So while conservative estimates put the bill at $15 billion, something approaching $40 billion is not out of the question. After all, little about this spill has turned out as expected.
The company has about $12 billion in cash and short-term investments, but there is already a debate about whether it should cut its dividend out of fear that it could run out of money. Of course, it could sell assets or seek loans, which in this environment is still not that easy. But all those numbers don’t account for the greatest possible threat: a jury verdict against BP. Such a verdict might push the cost of the spill into the hundreds of billions. If that happened, even BP might buckle. This outcome might seem far-fetched right now. But on Wall Street bankers have already coined a term for it: "the Texaco scenario."
In 1987, Texaco was forced to file for Chapter 11 because it could not afford to pay a jury award worth $1 billion to Pennzoil. That award had been knocked down by a judge from a whopping $10.53 billion. (Pennzoil successfully sued Texaco for "jumping" its planned merger with Getty Oil, in part, by moving the case to local court near its headquarters. The jury awarded triple damages.)
Imagine the BP case playing out in a Louisiana courtroom, against the backdrop of an oil-choked local economy, high unemployment and an angry public. How high can you count? Under the Oil Pollution Act of 1990, BP’s liability for economic devastation — above the cost of the cleanup — is capped at $75 million, a number Mr. Hayward has already said he plans to blow through. But if BP is found to have violated safety regulations, which seems likely, that cap becomes irrelevant.
That’s not to say that BP won’t fight a huge judgment against it. After the Exxon Valdez spill, Exxon fought a $5 billion fine for punitive damages for two decades. It won. The fine was cut down to $4 billion, then to $2.5 billion. The case eventually made it to the Supreme Court, which found that Exxon’s actions were "worse than negligent but less than malicious," and vacated the fine. The judgment limited punitive damages to the compensatory damages, which were calculated as $507.5 million.
"There are so many imponderables over whether its liabilities would be capped or not," David Buik of BGC Partners in London wrote of BP. "If BP’s share price continues to fall, it could become a takeover target." Given that Shell and Exxon have billions in cash on hand and market values that easily exceed BP — Exxon is twice the size — bankers say now is the time to make a deal, as long as an acquirer can find a way to separate the legal exposure. That, of course, is a big ‘if.’
There are many people — besides BP — who think even discussing the possibility of a bankruptcy or takeover is silly. But looking out a few years, that may be BP’s best, last hope. "Even with a prepackaged bankruptcy, BP’s brand is permanently tainted," said Robert Bryce, a senior fellow at the Manhattan Institute and author of "Power Hungry: The Myths of ‘Green’ Energy and the Real Fuels of the Future." Yes, BP is financially sound now. It is unlikely to go bust near term, he said.
"Instead, BP will spend the coming decades circling the drain, mired in endless litigation, its reputation irreparably damaged, and its finances weakened," Mr. Bryce said. That, if you believe the bankers, is the optimistic outcome.
Wildlife deaths show spill is spreading
by Brian Winter and Donna Leinwand, USA TODAY
As BP made progress containing the Gulf of Mexico oil spill over the weekend, the number of birds hobbled by the oil increased at an alarming rate, indicating the oil is spreading farther into sensitive marshlands. The Fort Jackson Oiled Wildlife Rehabilitation Center here has treated 203 oiled birds, many brown pelicans, since the center opened six weeks ago. Of those, 110 have arrived since Friday, said Jay Holcomb, executive director for the International Bird Rescue Research Center, one of two groups tasked with cleaning the ailing birds.
At least 75 oiled birds across the Gulf Coast have died, according to statistics compiled by the Coast Guard's Unified Command. Animal rehabilitation groups and the U.S. Fish and Wildlife Service have also rescued 28 oiled sea turtles. "This really increases the urgency of efforts to shut off the leak," Holcomb said.
Admiral Thad Allen, the federal incident commander, said Sunday that BP had made some progress toward containing the leak, but added that even after the spill is contained, oil will remain in the Gulf "well into the fall." "This is a siege that is going to go on for a long time. We are spread from south central Louisiana over to Port Saint Joe, Florida," Allen said Sunday on CBS' Face the Nation. "It is not going to end soon."
A cap and siphon system installed last week over the ruptured Deepwater Horizon well is now capturing about 420,000 gallons of oil a day, BP officials say. Scientists have estimated that 500,000 to 1 million gallons of oil a day are gushing from the well. The gusher will not stop until BP completes drilling a relief well, can divert the oil and plug the broken well with cement, Allen said.
Meanwhile, technicians at the bird rehabilitation center spend up to an hour cleaning each bird, first rubbing it with vegetable or canola oil to break up the crude oil, then washing them with warm water and detergent. The inside of the bird's beak and gullet must be scrubbed, too, Holcomb says. Typically, as many as half the birds die while in captivity, although the survival in this spill appears to be higher, he says. Seeing the oiled birds is "very heartbreaking," says Doug Inkley, senior scientist for the National Wildlife Federation, but he's troubled most by what isn't visible. "The vast majority of impacts to fish and wildlife you will never see because it's occurring under water."
Matt Simmons: Forecasting The Gulf Economy
Plumes of Oil Deep in Gulf Are Spreading Far, Tests Find
by Justin Gillis, Campbell Robertson and John Broder - New York Times
The government confirmed Tuesday that plumes of dispersed oil were spreading far below the ocean surface from the leaking well in the Gulf of Mexico, but it said the concentrations of chemicals in the water were relatively low. The National Oceanic and Atmospheric Administration released test results from samples taken by researchers at the University of South Florida. They showed detectable levels of petroleum compounds as far as 42 miles northeast of the leaking well.
The tests confirm that some toxic compounds that would normally evaporate from the surface in a shallow-water oil spill are instead spreading through the ocean in the Deepwater Horizon leak, which is occurring a mile below the surface. But it was not immediately clear how worrisome the levels of toxins are for sea life. The government and the Florida researchers were scheduled to present more details later Tuesday at a news conference in St. Petersburg, Fla.
Jane Lubchenco, the NOAA administrator, said the agency was working hard to figure out "where the oil is going, and where it is at the surface, and where it might be below the surface, and what the consequences of that oil will be to coastal communities as well as to the health of the gulf."
The announcement of test results appeared to confirm information first presented three weeks ago by two other groups of researchers, from the University of Georgia and the University of Southern Mississippi, regarding huge plumes of dispersed oil droplets. Those scientists have not yet completed their analysis of the water samples they collected, but one of them, Samantha Joye of the University of Georgia, held a news conference Tuesday where she presented detailed instrument readings. Those readings confirm that a plume, probably consisting of hydrocarbons from the leak, stretches through the deep ocean for at least 15 miles west of the gushing oil well, Dr. Joye said.
Bacteria appear to be consuming the oil-related compounds at a furious pace, Dr. Joye said. That is depleting the water of oxygen, she said, though not yet to a level that would kill sea creatures. The announcement of test results on the plumes came in a morning news conference in which the national commander of the response to the spill, Adm. Thad W. Allen of the Coast Guard, said that BP’s new containment cap had captured 14,482 barrels of oil in the most recent 24-hour period, though several of the vents on the cap remain open. The captured oil is being brought to the surface for processing, though a great deal of oil is still leaking out at the ocean floor.
The new figures bring the total collected over four days to about 42,500 barrels of oil, while 30.6-million cubic feet of natural gas has been flared off. Responding to a reporter’s question about why more progress has not been made, Admiral Allen responded: "I have never said this is going well. We’re throwing everything at it that we’ve got. I’ve said time and time again that nothing good happens when oil is on the water."
Earlier Tuesday, President Obama said he would have fired BP’s chief executive, Tony Hayward, over the handling of the oil spill if Mr. Hayward worked for him. Mr. Obama’s remarks, part of an interview on NBC’s "Today" show , came as the president was defending his own response to what is being called the nation’s worst environmental disaster. Critics have said that Mr. Obama has not displayed enough outrage over the spill, which resulted from an explosion on a drilling rig on April 20 that killed 11 workers. "I don’t sit around just talking to experts because this is a college seminar," Mr. Obama told the show’s host, Matt Lauer, in an interview conducted Monday in Kalamazoo, Mich. "We talk to these folks because they potentially have the best answer, so I know whose ass to kick."
The Interior Department was preparing on Tuesday to release new safety and environmental rules that would allow shallow-water drilling in the Gulf of Mexico to resume. The step would answer concerns from the energy industry and local officials that the freeze on all drilling in the gulf is putting hundreds of people out of work and denying the industry millions of dollars in revenue.
The Obama administration declared a six-month moratorium on deep-water drilling in the aftermath of the BP spill, but said that it would allow exploration and production wells to continue operating in water less than 500 feet deep. Even so, it essentially halted shallow-water drilling operations while the new guidelines were being written. Those new rules are expected as soon as Tuesday afternoon from the Minerals Management Service, the Interior Department unit responsible for policing offshore operations.
Well operators complained that the wait for the new guidelines was causing hardship across the gulf. The president of the National Ocean Industries Association wrote in a letter on Monday, "Although as this accident shows, one accident is one too many, a lengthy shutdown of drilling will only multiply the economic and emotional stress and loss of jobs that has already devastated the region." The trade group official, Randall Luthi, who is a former director of MMS, said that offshore drilling is responsible for 200,000 jobs along the gulf coast and 30 percent of the nation’s domestic oil production.
An Interior Department official said that the new rules would clarify how shallow-water drillers could meet safety and environmental regulations and resume operations. "Pulling back exploration plans and development plans and requiring them to be updated with new information is consistent with this cautious approach and will ensure that new safety standards and risk considerations are incorporated into those planning documents," the agency said in a statement.
With 1 million gallons of dispersants in Gulf, worries mount
by Lauren French and Reid Davenport - McClatchy Newspaper
Concerns are mounting over the chemical dispersants BP's using to fight the oil spill in the Gulf of Mexico now that over 1 million gallons of the chemical have been pumped in Gulf waters. Nonetheless, a federal study says using the dispersants are less harmful to the environment than allowing the oil to reach shorelines. "Up to this point, (the) use of dispersants and the effects of dispersing oil into the water column has generally been less environmentally harmful than allowing the oil to migrate on the surface into the sensitive wetlands and near shore coastal habitats," the report done for the National Oceanic and Atmospheric Administration.
But retired Coast Guard Adm. Thad Allen said Monday that officials are now worried about the toxicity of the chemicals — Corexit 9500 and Corexit EC9527A — and will begin cutting back on their use.
"I believe they're worthwhile. But I think there's enough concern as we approach the million-gallon mark ...regarding the unknown implications of that amount of dispersants," Allen said. According to the Environmental Protection Agency about 1.08 million gallons of dispersant have been deployed in the Gulf, with 779,000 gallons used on the surface and 303,000 gallons used under the water.
Jerald Ault, a professor at the University of Miami, said Corexit could have "significant" effects on the food chain and on environmental and human heath.
"It's uncharted waters and the magnitudes are so large," Ault said of the potential consequences and of the reports that dolphins and other animals are dying from the chemicals. "Eventually the correlation starts to say, (the animals) weren't dying before and they are dying now. Geez, I wonder what the correlation is." In a letter to BP's CEO Tony Hayward, officials from Louisiana asked about the unknown effects of dispersants. "As heads of Louisiana's agencies that oversee public health, environmental quality and wildlife and fisheries... we have serious concerns about the lack of information related to the use of dispersants in fighting the oil spill at and below the surface of the Gulf of Mexico, and what, if any, impact the dispersants could have on our people, water and air quality," the letter read.
BP replied and sent documents from Nalco — the manufacturer of Corexit — that classified the health and environmental risks as "low," despite the fact that one of the ingredients causes damage to red blood cells and kidneys in laboratory animals "However, human studies suggest that humans are relatively resistant to any such effects or once the dispersant is applied, it is diluted and broken down in the environment," BP said.
Carys Mitchelmore, a professor with the University of Maryland, noted there has not been adequate research to say if Corexit, or any dispersant, is more harmful than oil. Without the chemicals as a "tradeoff," Mitchelmore said, the shorelines would be flooded with oil. "What you're doing is...making an environmental tradeoff. You're not getting oil coming to those shorelines. What you're doing though, is dispersing that oil down...down into the ocean where you're going to be killing and impacting the environment there," she said. And the long-term effects are unknown, she added.
The EPA originally approved the use of dispersants on May 10 and BP has defended the use of the chemicals even after the agency began questioning the toxicity levels. Ault said dispersants allow the oil to break down under the water, avoiding a large, and visual sign, of BP's liability. "It's trying to reduce the surface impact," he said. "The reason they are using it is to reduce the obvious visual effect."
Oil Spill Could Cost Florida 195,000 Jobs, $10.9 Billion
by Blake Ellis - CNN
The oil spill in the Gulf of Mexico could end up costing Florida 195,000 jobs and $10.9 billion in spending, research from the University of Central Florida shows. That's what could happen as a result of the oil spill, assuming that Florida's 23 Gulf Coast counties lose half of their tourism and leisure jobs and spending according to Sean Snaith, the director of UCF's Institute for Economic Competitiveness. Even if the affected counties lose 10% of their tourism and leisure jobs, as well as spending, Florida would still lose 39,000 jobs and $2.2 billion in spending.
"This is just not what we need in a state with 12% unemployment and where the tourism industry was already on shaky legs to begin with," said Snaith. "We were already predicting it would take a year and a half to two years for the sector just to recover from the recession, and now it has to recover from a recession and an oil spill." Before BP's oil well began spewing thousands of gallons of crude into the Gulf of Mexico, the leisure and tourism industries in Florida's gulf counties produced 269,000 jobs and $12.4 billion in spending per year, Snaith said.
But as stores, restaurants and other businesses on the Gulf Coast are forced to close, companies across the entire state are getting hit. "Less business [on the Gulf Coast] means less business for a wholesaler who provides produce to a restaurant, and less business for the wholesaler in turn means less business for the mechanic of refrigerated trucks that the wholesaler uses to deliver the produce," said Snaith.
"There's a chain of events in the economy that results in a ripple effect, after the initial is damage done to the leisure and hospitality industries," he said. While his research provides a range of possible outcomes, Snaith said the actual impact of the oil spill on Florida's economy remains to be seen. "This certainly doesn't define the entire set of possibilities," he said. "It's just a way to put a number on an impact that we know is pending, but has been difficult to quantify."