"REO Mountaineer, New York to San Francisco and back." Percy Megargel and David Fassett pass Huber's Hotel on 162nd Street in the Bronx at the end of their 10-month, 11,000-mile trip in a 16-horsepower touring car.
Ilargi: As we remember the 25th anniversary of Chernobyl, it's getting clearer by the day that the level of secrecy exercised by Tepco, the Japanese government, and its international allies, rivals that of the Russian government 25 years ago. And the way things are going, Fukushima may soon surpass Chernobyl in the "secrecy files". When it became clear that Chernobyl had spewed its radioactive clouds up to thousands of miles away, for instance to Scandinavia, at least the Russians went in with all they could muster, deploying the full force of the army plus tens of thousands of "volunteers".
Japan today, on the other hand, is still mired in the denial phase. Which is becoming increasingly dangerous. There are increasingly reports coming out that claim that at least one of the explosions witnessed at Fukushima was not a hydrogen blast, but a nuclear explosion -in a spent fuel pool-. And while there won't be an instant runaway reaction like the one at Chernobyl, simply because the reactor design doesn't lend itself to it, this should be reason enough for grave concern (as well as transparency, of course, but don’t hold your breath on that one). And there are other twist emerging.
Professor Chris Busby, scientific secretary for the European Committee for Radiation Risks, states that a major difference between the two disasters lies in the amount of people living close to the blast site. So while the radioactive parts spread over a far smaller area, the immediate surroundings of Fukushima contain far more people. And Tokyo must by now even be greatly concerned about, well, Tokyo. Which may well be a major reason for the ongoing "policy" of continued opacity as executed by Japan.
Prof. Busby points to yet another issue that Tokyo is running up against: in his view, because there's still nuclear fissioning taking place at Fukushima, placing a sarcophagus over the reactor sites has no use, since -highly- radioactive material will then simply leak out into the ground and flow out to sea. Japan's answer? An underground wall is being considered. They'd do much better to come clean on what’s actually happening -and what already has-, send in their army with all it's got, and get the smartest minds in the world together to try and find the best way forward.
But since Japan has always been a highly secretive society, and the international nuclear industry is as powerful as it is rich, it's far more likely that they will continue to play down the impact, until they can't anymore, and the situation gets completely out of hand, so much so that Fukushima will indeed stand a chance for competing with Chernobyl as the worst nuclear incident ever.
To be continued indeed.
Now, don't get me wrong. I’m not trying to say that the level of secrecy at Fukushima has anything on the one in the world of finance. The race to the bottom, in which currencies are brought down to pay off debt and boost exports, is entering its next phase. I would see it as the first round of the playoffs. And Greece looks set to become the first case in point, as well as in all likelihood the main catalyst.
Paul Anastasi and Louise Armitstead write in the Telegraph:
EU poised for Greece crisis talksA delegation of leading European and international monetary officials are planning a crisis summit in Athens in May amid growing fears that Greece may default on its sovereign debt.
Senior officials from the European Union, the European Central Bank and the International Monetary Fund are expected to make a "lightning visit" for two days to ensure Greece can meet plans to cut its deficit by €24bn (£21bn). The trip is being planned for May 9, although insiders said this could be brought forward to May 5.
George Papandreou, the Greek prime minister, and other Greek officials have this weekend strongly denied rumours that Greece may be forced to restructure its debt imminently [..] Greek government spokesman George Petalotis denied "the persisting international reports about a restructuring of the debt". George Papaconstantinou, the Greek finance minister, said that a restructuring or an extension of any of the €340 billion national debt, which is set to hit 160% of GDP by next year, was out of the question.[..]
European officials are determined to avoid the need for Greece to change the terms of its debt repayments. On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008. "A restructuring would be short-sighted and bring considerable drawbacks," he told ZDF, the German broadcaster. "In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy."
Ilargi: Sounds nice and all, but very few serious voices think that Greece can down the line avoid restructuring its debt. The problem is that the problem is -potentially- so big. Dina Kyriakidou and George Georgiopoulous for Reuters:
Funds, banks exposed to any Greek restructuringIf Greece restructures its debt, it may choose to extend bond maturities rather than take the harsher step of cutting the amount of principal it repays. But the softer option might hurt Greek banks and state pension funds without doing enough to solve the country's debt problem.[..]
Although the government strongly denies any restructuring is on the cards, many bankers and analysts believe Greece may have to choose one or more of several options sometime in the next couple of years: extending maturities, lowering interest rates, and cutting capital. [..]
But merely extending maturities would be "a trick playing for time," said Jens-Oliver Niklasch, bond strategist at LBBW, who believes Greece will probably have to extend maturities and also make a haircut of 30-50 percent. "It is not enough."[..]
A simple maturity extension would have negative effects on Greek banks and state pension funds because they are sitting on big piles of Greek government bonds. Greek banks are estimated to hold close to 20 percent of the country's estimated €327 billion sovereign debt, or nearly €60 billion. National Bank has the biggest share at €12.8 billion; the second biggest bank, EFG Eurobank, has about €7.4 billion, according to sources at the banks.
Greek social security funds hold slightly over €8 billion, according to the Finance Ministry. But their relative exposure is huge, as their liquid assets total €11.68 billion. IKA, the biggest fund, has almost two thirds of its liquid assets in Greek bonds and Treasury bills. If they are unable to pay health and pension benefits, the state will be forced to help, which would further hurt its fiscal position as the government defies public opposition to impose waves of tough austerity measures.
Some analysts therefore think the Greek politicians who are urging debt rescheduling may not fully understand what it would entail. "Maturity extension could be costly. Banks could be forced to make mark-to-market adjustments on their total Greek bond positions, not just the affected bonds," Deutsche Bank said in a recent report.
Ilargi: And therein lies the danger. Not just for Greece, but for the entire international finance world. Once Greece begins its default, which is what debt restructuring is, the effects could well ripple away into cascading consequences that, while they may be very hard to oversee, would almost certainly make a substantial amount of victims among banks and funds.
Even "default-lite", maturity extension (where investors are promised their money, but later), can force mark-to-market measures on the table. A downright "haircut", which seems inevitable at some point in the future, would of course be far worse. So how bad would it be? Tyler Durden at Zero Hedge comments on a Citi report:
Citi Expects A 76% Haircut On Greek Debt (And 95% If Country Waits 4 Years) For Debt/GDP Ratio Back Down To 60%[..] Greece is once again scapegoating unrelated third parties for its problems.
In this particular case Citi London trader Paul Moss, who is being interrogated by Interpol because of a recap email indicating Greece may, gasp, restructure (or, as it is known in enlightened circles, conduct a "liability management exercise"). Yet when Greece reads the following note by Citi's Stefan Nedialkov, it will most likely issue a cease and desist order in perpetuity against Vikram Pandit's bank. Nedialkov's summary (released one day after Moss' April 20 note): "If a 42% haircut is taken in addition to these measures, we estimate Debt/GDP falls to below 90% in 2013 and below 60% in 2020."
The problem is that the market will likely give Greece at most a few months of breathing room in exchange for just a 90% debt/GDP reduction. If truly engaging in a liability exercise of some nature, Greece will likely pursue a permanently viable option. And as Nedialkov indicates, in order to achieve a far more credible 60% debt/GDP ratio, the country would need to take a 76% haircut now, or do nothing for five years, and eliminate a whopping 94% of its debt in 2015.
Since the market is already expecting roughly a 50% haircut it remains to be seen just how much further bond prices will plummet, and how much bigger the ultimate impairment on Citi debt, and European banks, Greek pension funds and local bond investors, will ultimately be. One thing is certain: with Greek 2012 debt/GDP expected to peak at 159.4%, the country will restructure, and a a vast swath of insolvent European banks are about to see the tide go out.
Ilargi: There are vast differences of opinion among experts, analysts and pundits on the timing of the restructuring. Bloomberg's Matthew Lynn says it needs to happen as soon as possible, in order to minimize losses:
Greece Haircut for Bondholders Already Overdue[..] The sooner Greece imposes a haircut, to use the financial market’s term for losses incurred in a default, the better it will be for everyone. Delay leads to bigger haircuts, and economic research suggests the bigger the haircut, the worse the pain that follows. The damage being inflicted on the Greek economy is too great. And once defaults within the euro area are accepted, a sensible conversation about how to fix the single currency can begin.
Over the last week, the prices in the market make it clear that most traders have already concluded that a Greek default is a done deal. The yield on two-year Greek debt rose higher than 22 percent at the end of last week. Only the most sharkish credit company charges those kinds of rates. Ten-year bond yields are now close to 15 percent. The cost of insuring Greek sovereign debt jumped to a record, with the prices of credit- default swaps now suggesting there is a 67 percent chance of default.
In reality, there isn’t much point in buying the protection. It’s like insuring yourself against the possibility it might rain in London in the next year. It’s going to happen; it’s just a question of when.
[..] ... the worse the losses inflicted on the bondholders, the more the markets will punish you later on, and the longer it will be before you can access the capital markets again. Greece’s debt position is worsening. Delay isn’t an option. It would be better to impose a 40 percent or 50 percent loss on bondholders this year than a 70 percent or 80 percent loss in 2013.
[..] ... once Greece has defaulted, a serious conversation can begin about how to reassemble the euro area. Plan A was to rescue Greece, arrange a bailout, get the country back on track and stop the contagion. It’s as clear as day that it hasn’t worked. Greece isn’t showing signs of recovery, and both Ireland and Portugal have had to apply for bailouts as well. If that doesn’t persuade people to switch to Plan B, it’s hard to know what will.
Ilargi: Not everyone agrees with Mr. Lynn. Dan Crawford at Angry Bear/Benzinga thinks the restructuring will be pushed forward into the future, in order of the EU to shore up its defense and preparations.
Greece will not be 'allowed' to default until policy shores up the Irish bond market[..] (2) The banking system's not ready. Unless the Germans want to instantly recapitalize the Landesbanks this year, I'd argue that the Euro banking system remains overly exposed to mark-to-market accounting (i.e. holding the assets at fair value not wishful thinking) for all of the crappy debt that it holds on balance.
In fact, the German banks purchased 11bn euro in Greek sovereign bonds in January. That's the most current data available; but I bet they're simply moving debt out of the Greek banks and corporates and into the sovereign as the probability of default rises.[..]
(3) This one's critical: policy makers must shore up Ireland and Portugal in order to avoid a quick contagion across the European banking system. They haven't done that yet. In fact, the Finnish election results exposed the tenuous negotiation process overall.
Ilargi: While Wolfgang Münchau in the Financial Times even thinks there is no immediate need for a restructuring:
The eurozone’s quack solutions will be no cureWhat is less forgivable is the serial incompetence of the eurozone’s decision-makers [..]. Their ignorance is an ideal breeding ground for quack solutions. One such is immediate default. German Christian Democrats and Finnish isolationists spent the last week trying to convince themselves that a Greek debt-restructuring would save them a lot of money.
That belief is premised on two false assumptions. The first is that a voluntary restructuring could solve the Greek debt problem. It can work in limited cases, but not when countries are insolvent. Greece, however, faces no short-term liquidity squeeze, because it is supported by the European Union and the International Monetary Fund. There is no need for any restructuring, voluntary or involuntary, right now. But Greece may need to impose a "haircut" in the future to ensure debt-sustainability. The ideal moment would be when the country achieves a primary surplus, probably in 2013.
The second wrong assumption is that the Greek banking sector would survive a restructuring unscathed. This is a conditional error. If you believe that a voluntary restructuring would be sufficient, then the Greek banking sector would indeed survive. But it would surely not survive a large and involuntary haircut. The European Central Bank would face a haircut on its direct investments of Greek government bonds, and, more importantly, much of the collateral posted by Greek banks would vanish. On my calculation, the cost of a Greek default to the German taxpayer alone would be at least €40bn ($58bn), including recapitalisation of the ECB. A bail-out would be cheaper.
Ilargi: It certainly looks a lot like a tangled web inside a deep hole. And the above still doesn't cover near all the angles.
What we can take away from the Citi report and other sources is that, no matter how much Athens denies even the possibility, a minimum 50% outright haircut is a probable way forward, if Greece is to regain its status as a viable economy. Still, a haircut like that would have such devastating consequences for banks all over Europe that it's not hard to imagine why nobody wants to go there. Looking through various graphs, it’s hard not to get confused on exact amounts, but the overall picture still is clear:
Obviously, the numbers don’t quite add up. Indeed, the numbers in the left hand side graph are about double those of the right hand side one. This is partly because the right hand side graph is a year old, partly because of exchange rates, and partly because of different sources from which numbers are derived. Still, the main idea stands out in shining armor: Greek sovereign debt for 2010 stood at well over €300 billion, or $450 billion at today’s rates. Greek banks and funds hold about 20% of that, some €60 billion. The ECB holds an unknown percentage. French and German banks together hold about 50% of what's left, still easily over €100 billion, or $150 billion.
Now apply that 50% haircut. Greek banks would simply disappear, as would their pension funds, unless some sort of miracle happens. French and German banks would need huge amounts in relief money. So it's not that strange to argue that Greece won't be "allowed" to default until Berlin and Paris come up with a rescue plan for their own banks. Questions then are: can they? And do they want to?
Whether they can is up for debate. Rescuing your own banks is less controversial than bail-outs for foreign countries and institutions. But where would France and Germany get the money? Wherever that is, it would certainly impair any subsequent Eurozone bailouts. Which are increasingly unpopular to begin with. Thing is, they are also increasingly inevitable. Here's a graph of foreign bank exposure to Greece, Spain and Portugal (note: this does not include Ireland, Italy, Belgium, Baltics etc.).This graph, too, is about a year old. The numbers have since risen substantially, even if they were already some $1.7 trillion then. Berlin and Paris may wish to keep the Eurozone alive, and they may want to sweep Greece under the carpet in order to do so. But their governments are not only filled with doofuses. These guys and gals see the numbers too. There is no graceful way out of this. The debts have quite simply piled up way too high for that, and in too many different places. The richer parts of Europe can choose to try and save their own financial institutions, or they can attempt to save the periphery. But chances are, they have understood by now that neither option is credible. All that's left for them is pushing the snowball-can ahead downhill the road a bit further.
Whichever default option comes out of the hat, it will place severe strains on mark-to-fantasy accounting. And that’s how the US, Japan, China et al., who have relatively minor direct exposure to Europe, will be sucked into the downward spiralling maelstrom along with everyone else.
One last bit: Greece has gotten quite a bit of relief from the extreme highs of the Euro vs the US dollar so far this year. However, those highs are very damaging to the German and French economies, and the Euro therefore must fall, no matter how successful Washington has been in racing to the bottom. Europe has left its powder dry in that race, but it can't afford to do so much longer. And as the Euro starts to fall, Greece, Spain, Portugal and Ireland will see their import budgets skyrocket over the summer.
The race to the bottom has entered the playoffs. I was thinking of the NBA and NHL playoffs, but that doesn't mean that this won't continue to play out until the boys of summer become the boys of October. It looks, after all, as if we're going to be witness to the financial World Series.
Busby: 'Can't seal Fukushima like Chernobyl - it all goes into sea'
by RT
Greek Deficit Tops Forecasts as Merkel Aide Says Debt Must Be Restructured
by James G. Neuger and Marcus Bensasson - Bloomberg
Greece’s budget deficit exceeded goverment estimates and the euro area’s overall debt reached a record, narrowing Europe’s options for putting an end to the fiscal crisis.
Greece’s shortfall was 10.5 percent of gross domestic product in 2010, higher than a 9.4 percent estimate made by the Greek government in February, official European Union figures showed [Tuesday]. Greek bond yields surged, rekindling speculation that a debt write-off or extension of the country’s repayment timelines will be the only way out of the fiscal trap.
"I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future," Lars Feld, a member of the German government’s council of economic advisers, told Bloomberg Television’s Nicole Itano in Frankfurt. "Greece should restructure sooner than later." Two-year Greek yields rose as much as 64 basis points to 23.65 percent, before slipping back to 23.41 percent as of 11:13 a.m. in London. Ten-year yields reached 15.26 percent. Portugal’s two-year note yields touched 11.62 percent, before easing to 11.53 percent. All of the yields reached records.
Default Risk
The cost of insuring debt sold by Greece and Portugal rose to records, according to traders of credit-default swaps. Contracts on Greece jumped 13 basis points from April 21 to 1,345 basis points, signaling a 66 percent chance of default within five years, according to CMA. Portuguese swaps climbed six basis points to 666. Greek Prime Minister George Papandreou’s government has ruled out a restructuring, saying it would devastate domestic banks and hammer an economy that shrank 4.5 percent last year.
Today’s data brought the debt crisis back to where it started. Greece last year obtained a 110 billion-euro lifeline from European governments and the International Monetary Fund. Ireland followed with a 67.5 billion-euro package and Portugal is now negotiating for 80 billion euros in aid. A buildup of debt is making it harder for wealthier countries to aid the fiscally weaker states along Europe’s periphery. Debt rose in all 16 countries using the euro last year to 85.1 percent of GDP from 79.3 percent in 2009, today’s Eurostat report showed.
European Debt
Aggregate euro-area debt moved closer to the 90 percent level that economists Kenneth Rogoff and Carmen Reinhart say can weigh on long-term growth prospects. A political backlash is already under way in AAA rated countries such as Finland, where an anti-euro party is set to enter government after finishing third in elections this month. German Chancellor Angela Merkel’s poll ratings have also suffered as the bill for bailing out deficit-hit states mounts.
Greece’s debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history, the EU figures showed. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP. Greek bond yields have soared since April 14, when German Finance Minister Wolfgang Schaeuble was quoted as saying Greece may need to restructure its debt, breaking with the official stance of European governments and the European Central Bank.
A debt restructuring by a euro country risks triggering a banking crisis that in a "worst case" scenario could do more damage than the failure of Lehman Brothers Holdings Inc., ECB Chief Economist Juergen Stark told ZDF German television on April 23.
Greece said the worse-than-expected recession was responsible for the wider deficit, while noting that it cut the deficit by 4.9 percentage points, more than any other euro country.
A deterioration of tax revenue and worsening finances at local governments, social-security funds and public hospitals also contributed to the wider deficit, the Greek Finance Ministry said in an e-mailed statement.
Feld, the German government adviser, said there is a consensus among most economists that a Greek restructuring is inevitable. Germany "is currently not willing to support a Greek restructuring and when you look at the ECB and also the German representatives in the ECB, they’re not supporting a Greek restructuring as well," Feld said.
Under pressure from Germany to tighten the screws on budgets, euro-area countries pared their overall deficit to 6.0 percent of GDP in 2010 from 6.3 percent. Germany wasn’t among the 12 countries with lower deficits. The German shortfall widened to 3.3 percent from 3.0 percent, edging back over the limit for euro users.
EU poised for Greece crisis talks
by Paul Anastasi and Louise Armitstead - Telegraph
A delegation of leading European and international monetary officials are planning a crisis summit in Athens in May amid growing fears that Greece may default on its sovereign debt.
Senior officials from the European Union, the European Central Bank and the International Monetary Fund are expected to make a "lightning visit" for two days to ensure Greece can meet plans to cut its deficit by €24bn (£21bn). The trip is being planned for May 9, although insiders said this could be brought forward to May 5.
George Papandreou, the Greek prime minister, and other Greek officials have this weekend strongly denied rumours that Greece may be forced to restructure its debt imminently – possibly as early as this weekend. A year after Greece was forced to accept €110bn (£97bn) of financial aid from the EU and IMF, Greek government spokesman George Petalotis denied "the persisting international reports about a restructuring of the debt". George Papaconstantinou, the Greek finance minister, said that a restructuring or an extension of any of the €340bn national debt, which is set to hit 160pc of GDP by next year, was out of the question.
However, Greek news channels have continued to broadcast the rumours. The biggest network, Mega TV, on Saturday reported a government official saying that "in the worst of cases, a rearrangement rather than a restructuring will take place in the future, featuring an extension of the repayment period for the loan, as has been granted for other countries". The influential newspaper To Vima reported that, in addition to the lengthening of deadlines for repayment instalments, Greece might seek a 30pc reduction in the debt itself. But it said such a decision might take "up to six months".
European officials are determined to avoid the need for Greece to change the terms of its debt repayments. On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008. "A restructuring would be short-sighted and bring considerable drawbacks," he told ZDF, the German broadcaster. "In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy."
Fears among the international community have been met with increasing anger in Greece. On Friday, Mr Papandreou lashed out at the credit rating agencies. In a piece posted on a Greek government website, the prime minister said the agencies were "seeking to shape our destiny and determine the future of our children".
Meanwhile, Greece's finance ministry has asked the local prosecutor to launch an investigation after a banker at Citigroup warned clients of the potential need for a debt-restructuring. In an email the Citi employee said: "There seems to be some increased noise over Gr[eek] debt restructuring as early as this Easter weekend." Citigroup said: "We are co–operating with the authorities and do not consider there to have been any wrongdoing by Citi or its employees."
When the markets closed before the Easter weekend, Greek credit default swaps hit a record high of 1,335 basis points, up 53 points, pushing the annual cost of insuring £10m of the government's debt to more than £1.3m. Last week the Greek government unveiled plans to raise €50bn over the next two years from a sale of national assets including palaces, marinas and beaches.
Athens has said it will also implement fiscal measures worth €26bn in an attempt to reduce the budget deficit to 1pc of GDP by 2015. The plans have sparked a fresh wave of anger in Greece and more threats of strikes and marches from trade unions.
Funds, banks exposed to any Greek restructuring
by Dina Kyriakidou and George Georgiopoulous - Reuters
If Greece restructures its debt, it may choose to extend bond maturities rather than take the harsher step of cutting the amount of principal it repays. But the softer option might hurt Greek banks and state pension funds without doing enough to solve the country's debt problem. A growing number of Greek politicians, including some from the ruling socialist party, is urging the government to bite the bullet and go for a "soft restructuring" as markets remain sceptical about fiscal and economic reforms.
Although the government strongly denies any restructuring is on the cards, many bankers and analysts believe Greece may have to choose one or more of several options sometime in the next couple of years: extending maturities, lowering interest rates, and cutting capital. Of those, extending maturities seems the most likely; in a Reuters poll of 55 analysts this week, 38 said Greece would most likely use that method. Nineteen picked cutting the principal, known as a "haircut".
But merely extending maturities would be "a trick playing for time," said Jens-Oliver Niklasch, bond strategist at LBBW, who believes Greece will probably have to extend maturities and also make a haircut of 30-50 percent. "It is not enough."
Maturities
A simple maturity extension would have negative effects on Greek banks and state pension funds because they are sitting on big piles of Greek government bonds. Greek banks are estimated to hold close to 20 percent of the country's estimated 327 billion euro sovereign debt, or nearly 60 billion euros. National Bank has the biggest share at 12.8 billion euros; the second biggest bank, EFG Eurobank, has about 7.4 billion euros, according to sources at the banks.
Greek social security funds hold slightly over 8 billion euros, according to the Finance Ministry. But their relative exposure is huge, as their liquid assets total 11.68 billion euros. IKA, the biggest fund, has almost two thirds of its liquid assets in Greek bonds and Treasury bills. If they are unable to pay health and pension benefits, the state will be forced to help, which would further hurt its fiscal position as the government defies public opposition to impose waves of tough austerity measures.
Some analysts therefore think the Greek politicians who are urging debt rescheduling may not fully understand what it would entail. "Maturity extension could be costly. Banks could be forced to make mark-to-market adjustments on their total Greek bond positions, not just the affected bonds," Deutsche Bank said in a recent report.
For example, a five-year Greek government bond with a coupon of 6.5 percent currently yields about 19 percent in the secondary market with its price at 61.8. If its maturity were extended to 10 years, its price could be expected to fall to 45.8, based on a drop of 26 percent in net present value, according to a calculation by an analyst at a Greek bank. The impact of this would be limited by the fact that banks and pension funds hold the bulk of their bonds to maturity in their banking books, meaning -- depending on their accounting approaches -- that they would not have to take trading losses on those bonds.
"If repayment is extended on the bonds without an increase in the coupon, there will be a mark-to-market impact for bonds held in banks' trading books, but no direct impact on those held to maturity in their banking books," said Natixis Securities analyst Antoine Burgard. But a pure extension of maturities would not actually cut Greece's debt burden, but simply shift part of it further into the future. So while it would help Greece's liquidity in the near term, it would not address its underlying problem.
For that reason Greece might also have to cut the interest paid on some of its outstanding debt, an option expected by 24 of the analysts in the Reuters poll. This would start to become painful for the banks and pension funds by reducing the income they received.
Haircut
And if Greece resorted to a haircut, a debt restructuring could have a very substantial impact on banks' capital adequacy levels and on pension funds. For banks, a 30 percent haircut might cost them over 12 billion euros, and a 50 percent haircut, more than 24 billion euros, analysts estimated. In the harsher 50-percent haircut scenario, all Greek banks would experience a capital shortfall and would need to recapitalise. This might force them to turn to Greece's 10 billion euro Financial Stability Fund (FSF).
Mediobanca Securities estimates that if there is a 43 percent haircut, the erosion of the core Tier 1 capital ratio of Greek banks would range from 2.07 percentage points for Alpha Bank to 7.68 percentage points for National Bank. If one assumed banks had a core Tier 1 capital target of 9.5 percent of risk-weighted assets, this would mean Alpha Bank needed to raise additional capital of about 40 percent of its market value, now at 2.04 billion euros, Mediobanca estimated.
"A less severe assumption of a 20 percent haircut could be digested without additional capital pressure, with National Bank still enjoying a 10.3 percent Tier 1 ratio," analyst Alex Tsirigotis said in a recent report. For troubled social security funds, any haircut could be catastrophic. Already facing the effects of an ageing population and a shrinking of the labour market, they were given a lifeline through recent reforms but their position is hardly secure. They would be dependent on a state that lacked the resources to support them.
"Greece has lived beyond its means for some time and I think they will pay the price," Niklasch said. "This will last a decade or even longer."
Citi Expects A 76% Haircut On Greek Debt (And 95% If Country Waits 4 Years) For Debt/GDP Ratio Back Down To 60%
by Tyler Durden - Zero Hedge
Yesterday we learned that in borrowing a page right out of 2010, when the Greek government was mounting a full frontal assault against CDS traders everywhere (only for Eurostat to tell us that CDS traders had absolutely no impact on Greek solvency), Greece is once again scapegoating unrelated third parties for its problems.
In this particular case Citi London trader Paul Moss, who is being interrogated by Interpol because of a recap email indicating Greece may, gasp, restructure (or, as it isknown in enlightened circles, conduct a "liability management exercise"). Yet when Greece reads the following note by Citi's Stefan Nedialkov, it will most likely issue a cease and desist order in perpetuity against Vikram Pandit's bank. Nedialkov's summary (released one day after Moss' April 20 note): "If a 42% haircut is taken in addition to these measures, we estimate Debt/GDP falls to below 90% in 2013 and below 60% in 2020."
The problem is that the market will likely give Greece at most a few months of breathing room in exchange for just a 90% debt/GDP reduction. If truly engaging in a liability exercise of some nature, Greece will likely pursue a permanently viable option. And as Nedialkov indicates, in order to achieve a far more credible 60% debt/GDP ratio, the country would need to take a 76% haircut now, or do nothing for five years, and eliminate a whopping 94% of its debt in 2015.
Since the market is already expecting roughly a 50% haircut it remains to be seen just how much further bond prices will plummet, and how much bigger the ultimate impairment on Citi debt, and European banks, Greek pension funds and local bond investors, will ultimately be. One thing is certain: with Greek 2012 debt/GDP expected to peak at 159.4%, the country will restructure, and a a vast swath of insolvent European banks are about to see the tide go out.Some more color from Citi, which is sure to get the Greek inquisition on the heels of Nedyalkov: "Citigroup said that no country with a debt-to-GDP ratio of over 150 percent has “ever avoided a default.” Greece’s austerity measures aren’t achieving the “desired results as quickly as hoped,” it said."
And some more:
In Figure 11, we illustrate the path of Debt/GDP under some of the above scenarios. Privatisation appears to be the most effective solution on its own, with the Debt/GDP ratio at c.150% in 2020 vs. 175% in the base-case scenario, according to our estimates. Better yet, all options (short of haircut) taken together would bring the ratio down to c.110% in 2020. And if a 42% haircut is taken in addition to these measures, we estimate Debt/GDP falls to below 90% in 2013 and below 60% in 2020.
Most disturbing is Citi's sensitivity on the type of haircut needed in order to bring total debt down even more: Cut 76% of the debt now (to get Debt/GDP to a healthy 60%), or wait until 2014... and impose a 95% haircut.
As for the debtholders, we believe that most have come to the conclusion that some sort of haircut is needed, especially as the austerity measures are not bringing in the desired results as quickly as hoped. At this point, debtholders would rationally want to minimise the amount of haircut taken. In Figure 13, we calculate the “incremental” haircuts debtholders would suffer if they were to wait a certain number of years from today.
For example, to bring the Debt/GDP ratio down to 90% in 2011 would mean a 52% haircut, 63% haircut in 2012, 68% in 2013, 70% in 2014 and 70% in 2015. Hence, the marginal haircut (“damage”) from waiting longer diminishes quickly — this is in-line with the expected recovery in the primary government balance and the return of real GDP growth. Therefore, we see two rational strategies for debtholders:
Option 1 — “Act Now”: Insist on restructuring as soon as possible in order to avoid more haircutting in later years. The market (see Figure 14) seems to be voting for “Act Now”, or rather act within the next two to three years. The yield on the 3Y GGB is 21.1% compared to the 30Y yield of 9.6%.
Option 2 — “Pretend and Forget”: as the “haircut curve” starts to flatten out beyond year 2015, debtholders could close their eyes, help refinance maturing Greek debt, and hope that Greece slowly finds its way out. But this could be a long wait and may require concessions such as extending maturities. In addition, no country with Debt/GDP ratio of more than 150% has ever avoided a default anyways. Why would Greece be different?
As for the analysis of which European banks will suffer the biggest capital income in case of a 50-60% haircut, not surprisingly the list is topped off by France, Germany, Austria and Belgium. Here's to hoping (as the EU is currently doing) that these banks can easily digest the capitaliaztion hit should "assets" have to be written down post a restructuring.
Greece will not be 'allowed' to default until policy shores up the Irish bond market
by Dan Crawford - Angry Bear
Just look at Tracy Alloway's imagery at FT Alphaville, and you'll know what's expected: an imminent Greek default. I still argue no, although European policy tactics are quite enigmatic and their next move is really anyone's guess. Alas, here's mine.Assuming that Greece does not secede from the Euro area, I give you three reasons why Greece will not be allowed to default soon (at least the next 12 months, given current market conditions). I say 'allowed' because true to the IMF legacy, EU/Euro area officials very likely see restructuring as a 'gift' for good fiscal behavior.
(1) Moral hazard is an important issue in Europe, and Greece has only begun its austerity program. We'll need confirmation that they are not on track in order to assess the timing of default, in my view.
Ironically, the EU/IMF/Euro area are sticking to the 'exports will grow the Greek economy' story. I say ironically because Greece was exporting a larger share of GDP before the recession, average 22.6% spanning 2005-2007, than it is now, 19.8% in 2010 (average Q1-Q3).
(2) The banking system's not ready. Unless the Germans want to instantly recapitalize the Landesbanks this year, I'd argue that the Euro banking system remains overly exposed to mark-to-market accounting (i.e. holding the assets at fair value not wishful thinking) for all of the crappy debt that it holds on balance.
In fact, the German banks purchased 11bn euro in Greek sovereign bonds in January. That's the most current data available; but I bet they're simply moving debt out of the Greek banks and corporates and into the sovereign as the probability of default rises (see chart below).
(3) This one's critical: policy makers must shore up Ireland and Portugal in order to avoid a quick contagion across the European banking system. They haven't done that yet. In fact, the Finnish election results exposed the tenuous negotiation process overall.
See, the Greek yield curve is inverted - so are the Portuguese and Irish yield curves, albeit to a much lesser degree. The point is, that Portugal and Ireland are very close to the Greek brink.
Inversion matters. Currently a Greek 10yr bond yields 14.5% with a euro price of 59, while a 2-yr bond yields 21.4% with a euro price of 73. Bond investors are going for the cheapest bond not the highest yield (at the end of the yield curve) as a bet on a binary situation: haircut or no haircut. When a curve is inverted, it's all about price not yield.Portugal and Ireland are already inverted and close to the Greek brink. If Greece were to restructure without a full-fledged backstop from the Euro area governments, the Portuguese and Irish curves would swiftly turn over. And if European policy makers could stop the contagion there, then that would be a true feat....
Spain, the economic 'line in the sand', would be next. We saw last week how markets view the Spanish sovereign, still risky. Bond yields on the Spanish 10yr broke out of a 4-month trading band, hitting 5.55% on April 18 (latest number is 5.47%).
More on Ireland
I assure you, that it's too early to deem the Irish sovereign as impervious to the Irish banking system's fake asset base. The banking system is living on emergency liquidity assistance (ELA) and the ECB's marginal refinancing operations (currently Irish banks can borrow as much as they want on a short-term basis from the ECB at the current rate, 1.25%).By my calculations, the Central Bank of Ireland (via the ELA) and the ECB are subsidizing - I say subsidizing because market funding costs are proxied by the sovereign borrowing costs of 10% - 16% of the Irish banking system's balance sheet. As such, profit margins are thin, and mortgage rates are running low at 3-4%. (see CBI website for plenty of data.) These funding costs are not sustainable - not to mention the Irish stress tests assume that they remain fixed at Q4 2010 levels (see exhibit 2 in Appendix C of the stress test documentation). Nonperforming loans will rise.
I leave you with this illustration of possible non-performing loans when mortgage rates rise on the following:
(A) ECB rate hikes - mortgages are tied to 12-month euribor and most Irish mortgages are variable.
(B) the dissipation of record-low bank borrowing costs (this also is another post, but the ECB has yet to release its medium-term funding program for Ireland).
Note: if/when they do default, Kash at the Street Light blog provides an overview of some technical considerations.
Can Greece Default and Keep the Euro?
by Kash - The Street Light
Felix Salmon notes the following:Greece is going to restructure its debts — and it’s going to do so before mid-2013. That’s the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months.
This is a major development. The markets haven’t believed Greece for a while — but now they don’t believe the European Union, either.
Count me with the majority of the economists surveyed here; I've been suggesting for quite a while that default is going to prove to be the least bad option for Greece. (For a cogent counter-argument, however, see this post by Rebecca Wilder.)The reason that default seems increasingly likely is summed up in this picture from Deutsche Bank. It illustrates that the Greek government will have to run a primary budget surplus of more than 10% of GDP in order to simply stabilize its level of debt. How likely do you think that is? To me it seems frankly impossible. The only alternative is for German and French taxpayers to send Greece additional and ongoing chunks of money to make up that shortfall, and we seem to have reached the end of their willingness to do that.
But if default (I suppose we can use the polite term, "restructuring") happens, there are some interesting technical issues that bear thinking through. The most interesting of them, to me, is what this means for Greece's continued use of the euro as its currency. Does default mean that Greece must necessarily drop the euro?
I think the answer is that Greece won't necessarily have to drop the euro... but that the pressures to create a local Greek currency will be tremendous, and that it will probably turn out to be the least bad option.
The problem is the banking system. As debt restructuring seems increasingly likely, and certainly if and when restructuring actually happens, depositors in Greek banks will rush to withdraw their savings in order to place them in non-Greek banks. To some degree, this process has already started, but this will become a full-fledged bank run once debt restructuring becomes imminent. (Oh, but wait: bank runs are supposed to be forestalled by deposit insurance, and deposits in Greece are guaranteed... by the Greek government. Oops.)
I don't think there's much uncertainty about this part of the story. But now the Greek government has a choice. Do they:My guess is that they will choose option 2. As I've noted before, my preferred analogy to this situation is Argentina in 2001, and this is exactly what Argentina did by establishing the corralito in late 2001. I suppose in this case we could call the freeze on Greek bank deposits the mantríto (from what I believe is the Greek word for corral).
- Simply allow the bank run to happen, let banks in Greece collapse, and let Greek depositors lose all their savings; or
- Freeze bank assets and forbid people from withdrawing their savings, at least for the time being, thereby preserving the amount of their deposits.
Okay, so now we have an incipient bank run prevented by a freeze on bank deposits, a Greek government that has defaulted and can not borrow externally (though they may be receiving some hand-outs from the EU or IMF), and a financial sector that has completely seized up, with no borrowing or lending in Greece. What next?
The problem the Greek government now faces is how to create a financial sector again - how to get borrowing and lending to recommence, so that the economy can start to get moving. And this is where a new, local currency would be very, very welcome.
The Greek government will therefore face a second choice. Do they:My guess is that they will pick either option 2 or option 3. (For reference, Argentina picked option 3 in 2001-02.) Note that the euro wouldn't have to be completely abandoned -- it's easy to imagine two currencies operating side-by-side, at least for a while. (There are many examples of countries operating with parallel or complementary currencies.) But if they create a new currency (which will rapidly depreciate against the euro), then in addition to unfreezing the banking sector it would have the huge added benefit of quickly improving Greece's competitive position, and putting the country in a position to resume economic growth.
- Continue to rely only on the euro as a currency, but keep the mantríto in place to preserve depositors' bank balances while rendering them untouchable, with the result that the banking sector is effectively frozen and Greece becomes a cash-only economy;
- Start issuing New Drachmas (as well as accepting them as a legitimate form of payment for tax liabilities), provide banks with a tranche of start-up capital in New Drachmas in exchange for Greek government bonds so they can start lending and creating the new money, allow people to retain their euro savings, but keep the mantríto to prevent massive capital flight; or
- Start issuing New Drachmas but also forcibly convert depositors' savings in Greek banks from euros into New Drachmas, thereby effectively shrinking the Greek public's savings balances significantly, and then allow the mantríto to gradually wind down as the danger of bank runs disappears.
This is all very speculative, of course, and there are various decision points in the story I've outlined here where things could go the other way. But this story makes sense to me, and seems likelier than the alternatives. So my short answer to the central question posed here is: yes, Greece can keep the euro if it defaults, but it won't.
Greek woes getting worse
by Ora Morison, Postmedia News
Restructuring considered a certainty as economic outlook remains dire
For Greek sovereign debt, it is no longer a question of if restructuring will occur, but a matter of when. A TD Economics report says the European sovereign debt crisis has entered a new stage this week where restructuring of Greek debt is virtually assured.
Talk of maturity extension for Greek sovereign debt at the most recent meeting of European finance ministers sent the yield on 10-year government bonds to 14.55 per cent. The outlook for the Greek economy remains dire. The economy is still expected to contract after debt restructuring, and the fiscal policy and monetary conditions will remain tight.
According to an International Monetary Fund review completed mid-March, Greek fiscal revenues were weaker than expected in 2010. They grew 5.6 per cent instead of the planned 13.7 per cent, despite a policy of stringent fiscal tightening in the country.
A number of Greek subnational entities, including state-run companies, are operating with expense overruns. At the end of November, the Greek general government was about 4 billion euros in arrears. Craig Alexander, chief economist for TD and the report's author, said restructuring will happen in the near future, although probably not before June because of Greek debt rollovers and scheduled IMF and European Union revisions.
Passing the IMF reviews will be important for Greece to secure loan disbursement from the IMF and European Union. The two entities are expected to release payments of 4.1 billion euros and 10.9 billion euros, respectively, at the end of May. If Greece doesn't meet review targets it faces a delay in receiving disbursements and a lack of cash to meet payments. Bloomberg data shows Greece faces redemption payments of 9.6 billion euros in May and 9.6 billion euros in July.
Disbursements must be unanimously approved by the EU, and recent elections in Finland saw 20 per cent of votes go to two opposition parties that are against financial assistance to neighbouring countries. "Social appetite for bailouts and adjustments programs will run very thin, both in countries besieged by the sovereign debt crisis and in the fiscally stronger neighbours," he said. "This will further exacerbate the challenges of managing the political dimension of the crisis resolution."
Greece Haircut for Bondholders Already Overdue
by Matthew Lynn - Bloomberg
No cakes, party games or music. As Greece last weekend marked the passing of the first year since it was forced to seek a bailout from its fellow euro members, the mood could hardly have been more somber. Bond yields soared to fresh highs. The cost of insuring against a Greek default rose to a record. The finance ministry started a criminal investigation into bank employees spreading rumors of an imminent restructuring.
In fact, Greece should have celebrated the anniversary of the rescue package in a different way -- by announcing it was repudiating some of its debts. The sooner Greece imposes a haircut, to use the financial market’s term for losses incurred in a default, the better it will be for everyone. Delay leads to bigger haircuts, and economic research suggests the bigger the haircut, the worse the pain that follows. The damage being inflicted on the Greek economy is too great. And once defaults within the euro area are accepted, a sensible conversation about how to fix the single currency can begin.
Over the last week, the prices in the market make it clear that most traders have already concluded that a Greek default is a done deal. The yield on two-year Greek debt rose higher than 22 percent at the end of last week. Only the most sharkish credit company charges those kinds of rates. Ten-year bond yields are now close to 15 percent. The cost of insuring Greek sovereign debt jumped to a record, with the prices of credit- default swaps now suggesting there is a 67 percent chance of default.
In reality, there isn’t much point in buying the protection. It’s like insuring yourself against the possibility it might rain in London in the next year. It’s going to happen; it’s just a question of when. Officials in Athens and Brussels are still insisting that default isn’t an option. They should quit pretending. Here’s why.
The markets portray defaults as catastrophic, mainly because the bankers and fund managers who provide most of the commentary stand to lose a lot of money. In fact, countries fail to pay back their debts all the time. What does make a difference, however, is the size of the haircut.
Future Punishment
A paper presented at the Royal Economic Society conference in London this month by Juan Cruces and Christoph Trebesch studied all the debt restructurings between countries and foreign banks and bondholders since 1970 -- a total of 202 cases in 68 nations. It found that "restructurings involving higher haircuts (lower recovery rates) are associated with significantly higher subsequent spreads (borrowing cost) and longer periods of capital market exclusion."
In other words, the worse the losses inflicted on the bondholders, the more the markets will punish you later on, and the longer it will be before you can access the capital markets again. Greece’s debt position is worsening. Delay isn’t an option. It would be better to impose a 40 percent or 50 percent loss on bondholders this year than a 70 percent or 80 percent loss in 2013.
Next, the damage being inflicted on the Greek economy right now is catastrophic. Unemployment is set to rise above 15 percent this year. The central bank estimates the economy will shrink by another 3 percent in 2011, even though the rest of the global economy is experiencing a sustained if modest recovery.
The government is still reducing spending -- another 22 billion euros ($32 billion) of cuts were announced this month -- which will only depress the economy further. There is very little sign yet that exports can make up for the fall in domestic demand. You can’t just cut your way out of this crisis. At some point, the Greek economy needs to start growing again. So far, no one has explained how that is going to happen.
Lastly, once Greece has defaulted, a serious conversation can begin about how to reassemble the euro area. Plan A was to rescue Greece, arrange a bailout, get the country back on track and stop the contagion. It’s as clear as day that it hasn’t worked. Greece isn’t showing signs of recovery, and both Ireland and Portugal have had to apply for bailouts as well. If that doesn’t persuade people to switch to Plan B, it’s hard to know what will.
Greece should bow to the inevitable, announce a 50 percent haircut on its debt and impose a three-year suspension of interest payments on what remains outstanding. Bondholders could be offered further payments, linked to economic growth, so that as Greece recovers, they get a bit more of their money back.
With the money saved on debt repayment, Greece could start restructuring its economy, putting demand back into the system, and focusing on creating the competitive export industries that are the only thing that will enable it to survive within the euro. The rest of Europe could stop fighting a losing battle to rescue Greece from default, and start concentrating instead on how to make the euro area work better.
There is no point in drawing out the agony any longer --and certainly not until the second birthday of the bailout package. It should be done by the end of May, and then everyone can move on.
The eurozone’s quack solutions will be no cure
by Wolfgang Münchau - Financial Times
I was uncharacteristically optimistic last week, and had planned to end my informal series on eurozone crisis resolution with a benign scenario. The eurozone would survive in one piece; there would be no blood on the streets, just a once-and-for-all, albeit reluctant, bail-out, accompanied by a limited fiscal union. But as several readers have pointed out, my scenario is prone to a very large accident. I accept that point. Last week, we caught a glimpse of how such an accident may come about. My benign scenario looks a lot less certain today than it did a week ago.
The week began with the strong showing of two parties in the Finnish election, which are advocating a partial Portuguese debt default as a condition for a rescue package. The results triggered a renewed outbreak of the financial crisis, as eurozone spreads rose to near record levels once again.
The most disturbing news, however, was a revolt within Angela Merkel’s increasingly fragile coalition. It looks as though the German chancellor is on the verge of losing her majority over the domestic legislation of the European Stability Mechanism (ESM), the long-term financial umbrella for the eurozone. She may have to rely on the opposition to ratify the ESM, which may come at a heavy political cost. The Bundestag already postponed the vote on the ESM until the autumn, hoping to keep it clear from the controversial decision to pass the Portuguese rescue programme in May.
As opposition to the ESM mounted, German officials fell over themselves to be quoted by various newspapers pronouncing that a Greek restructuring was inevitable. Even Wolfgang Schäuble, finance minister, talked about the possibility of default. Some wily speculators unleashed the rumour that Greece would spring a surprise debt restructuring. The rumours prompted a criminal investigation. Another week in the eurozone’s debt crisis!
A monetary union is at a natural disadvantage when it comes to the handling of crises. There is no central government that takes decisions, which makes communications hard to control. What is less forgivable is the serial incompetence of the eurozone’s decision-makers, as exemplified by the perpetual eagerness to declare the crisis over the very second financial market pressure subsides. Not only do they know little about financial markets, they have surrounded themselves with policy advisers who know little too. Their ignorance is an ideal breeding ground for quack solutions. One such is immediate default. German Christian Democrats and Finnish isolationists spent the last week trying to convince themselves that a Greek debt-restructuring would save them a lot of money.
That belief is premised on two false assumptions. The first is that a voluntary restructuring could solve the Greek debt problem. It can work in limited cases, but not when countries are insolvent. Greece, however, faces no short-term liquidity squeeze, because it is supported by the European Union and the International Monetary Fund. There is no need for any restructuring, voluntary or involuntary, right now. But Greece may need to impose a "haircut" in the future to ensure debt-sustainability. The ideal moment would be when the country achieves a primary surplus, probably in 2013.
The second wrong assumption is that the Greek banking sector would survive a restructuring unscathed. This is a conditional error. If you believe that a voluntary restructuring would be sufficient, then the Greek banking sector would indeed survive. But it would surely not survive a large and involuntary haircut. The European Central Bank would face a haircut on its direct investments of Greek government bonds, and, more importantly, much of the collateral posted by Greek banks would vanish. On my calculation, the cost of a Greek default to the German taxpayer alone would be at least €40bn ($58bn), including recapitalisation of the ECB. A bail-out would be cheaper.
A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.
Then there is the downgrade threat for French sovereign bonds. I recall asking a French official about this, and getting the smug answer that the rating agencies could hardly downgrade France if they maintained a triple A rating for the US. That was before last week. By extension, France must also now be in danger. A downgrade would destroy the logic of the European financial stability facility. It is built on guarantees by the triple-A countries. Without France, the lending ceiling of the EFSF would melt down further.
The list of potential accidents is long, but they share a joint theme – serial political crisis mismanagement. We saw another glimpse of that last week. If we go down the route of premature default, and allow the True Finns and the true Germans to run the show, the eurozone as we know it will be finished.
None Dare Call It Default
by Wall Street Journal
Better an orderly restructuring in Greece than a Lehman re-run.
For nearly a year, Europe's official refusal to acknowledge even the possibility of a Greek debt default has bordered on the comical. But with Greek two-year bonds yielding 20% and credit-default swaps priced as if a default is more likely than not, EU denial has gone from amusing to dangerous.
Media reports this week have cited Greek, German, EU and IMF officials anonymously admitting the obvious: Even if Greece meets the targets agreed in its bailout package, it will be saddled with a debt burden that is unsustainable, which makes a restructuring of those debts, now approaching 150% of GDP, inevitable. All these reports have so far been met with strenuous denials from spokesmen and other officials.
Behind these official denials lies a more sophisticated narrative that says a default or restructuring would hurt so many institutions that might need their own bailouts that relieving Greece of some of its burden will do more harm than good. According to this argument, it would be better for Greece to continue to muddle through for now on EU and IMF life support than to expose creditors, including Greek and other European banks, to potential losses on Greek debt. We could add a third argument, which is that openly discussing debt restructuring might make it inevitable, leading to capital flight.
None of this is persuasive. With debt yields on Greek bonds at record highs, the market has already priced in the likelihood that Athens will never make good on its obligations on time and in full. At this stage, it makes more sense to inform taxpayers, investors and governments about where the exposure and risks lie, which is why it's vital that Europe's current stress tests look carefully at sovereign-default scenarios. If Greece must restructure its debt—and that seems very likely—better that it do so in an orderly fashion than to wait until its hand is forced.
The conventional wisdom about the collapse of Lehman Brothers is that the worst of the financial panic could have been averted if only Lehman had been saved from going under. That wisdom is wrong. Lehman's collapse triggered a full-blown crisis in no small part because investors had little clarity about who was solvent and who wasn't, and who would be saved and who would be left to fail.
The way to prevent Greece from becoming Europe's sovereign-debt Lehman isn't to pretend that a restructuring can't happen, but to start explaining how such an event could be handled, together with much greater disclosure of who could be hurt and how. Banks that are vulnerable can then get their houses in order before it's too late. One lesson from September 2008 is that pretending that the all-but-inevitable is inconceivable doesn't make it impossible. But it will make a crisis that much more acute when it arrives.
US economy just a notch above Greece
by Sam Fleming - The Times
US finances are in almost as troubled a state as the worst-hit members of the euro zone, economists say, underscoring the pressing need for Washington to reach agreement on how to reduce the deficit.
A gauge of "sovereign risk" from economists at Deutsche Bank placed the United States just behind Greece, Ireland and Portugal among 14 advanced economies. The report, from economists led by Peter Hooper, warned that a failure to make substantial political progress on deficit reduction "would substantially raise the risk of a bond market crisis".
The warning comes days after Standard & Poor's said that it may lower its AAA assessment of the US, amid a political log jam over debt reduction in Washington, and will intensify market concerns about Western governments' debts. Last night George Papandreou, the Greek Prime Minister, strongly criticised credit rating agencies, saying that they were "seeking to shape our destiny and determine the future of our children".
The Finance Ministry in Athens has asked prosecutors to look into an e-mail sent by a London-based Citigroup trader that referred to market rumours of a restructuring of Greek debt as soon as this weekend. Citigroup has denied any wrongdoing.
Insurance contracts linked to Greek bond swaps suggest that the country has a 67 per cent chance of defaulting within five years, even after accepting a 110 billion euros ($149bn) emergency loan. This week the implied cost of borrowing on its ten-year bonds rose to 15 per cent, while yields on Irish ten-year government bonds hit 9.8 per cent and yields on their Portuguese equivalents rose to 9.22 per cent.
Greece is one small element of wider sovereign debt concerns that have begun to encompass the US, the world's biggest economy. Capitol Hill has been consumed with political wrangling over whether to increase a $US14.3 trillion ($13.3 trillion) debt ceiling that is due to be breached next month. If the US national debt hits that level, it would trigger a default.
Deutsche Bank's analysis acknowledged that the risk attached by financial markets to US debt remained very low, as demonstrated by the country's modest borrowing rates. That was in part due to the US dollar remaining the premier reserve currency for world governments. However, the report noted: "Reputation and reserve currency status can be lost, and failure to move US fiscal policy off its currently unsustainable path would certainly increase the risk."
For the time being, though, Democrats and Republicans have been mired in mudslinging over the debt ceiling. The White House yesterday accused Republican congressmen of risking a global recession by refusing to agree to raise the debt ceiling unless the move was paired with deep spending cuts.
Even if a deal is struck on time, that will not eradicate the risk of political deadlock over longer-term fiscal problems, such as spiralling healthcare spending. Projections from the Congressional Budget Office suggest that the national debt could rise from 62 per cent of GDP to 100 per cent in 2025 and 200 per cent by 2040, compared with its 1946 high of 122 per cent.
Bill Black: There’s Another Crisis Coming as Long as Banks Remain Above the Law
by Peter Gorenstein - Daily Ticker
A federal jury convicted Lee Farkas, the former Chairman of Taylor, Bean & Whitaker Mortgage Corp., Tuesday for his role in a $2.9 billion fraud that led to the fall of his company and that of former Top 50 bank Colonial Bank. Farkas was found guilty on all 14 counts of conspiracy and bank, wire and securities fraud. He now faces life in prison.
More than two years after the financial crisis, Farkas is arguably the only major player in the mortgage industry to face criminal charges. William Black, professor of economics and law at the University of Missouri-Kansas City School of Law, calls the lack of prosecutions a disgrace, and he blames policymakers.
It's a matter of "unofficial" policy, he claims. "The de facto policy right now is elite frauds go free if they're in banking because the whole sector is too fragile. That is significantly insane. It will produce the next crisis." Essentially he's saying officials think it's more important for the banking sector to make money than it is for them to follow the law.
In the accompanying interview with Aaron Task, he notes that Treasury or White House officials are fully aware of the fraud, citing FBI testimony as far back as 2004 about rampant fraud in the mortgage market. In fact, Black says the problems banks are now facing with foreclosure paperwork are simply a result of the foreclosure frauds that were never addressed. "Every time you fail to root out the frauds, the fraud simply migrates. It migrates from the lending process to the foreclosure and servicing process."
IMF bombshell: Age of America nears end
by Brett Arends - MarketWatch
The International Monetary Fund has just dropped a bombshell, and nobody noticed. For the first time, the international organization has set a date for the moment when the "Age of America" will end and the U.S. economy will be overtaken by that of China.
And it’s a lot closer than you may think. According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now. Put that in your calendar.
It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.
According to the IMF forecast, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy. Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.
But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates. That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets.
The comparison that really matters
The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using "purchasing power parities." That compares what people earn and spend in real terms in their domestic economies. Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and is rising. Just 10 years ago, the U.S. economy was three times the size of China’s.
Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.
This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, "We are witnessing the end of America’s economic hegemony." We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back. And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.
Victor Cha, senior advisor on Asian affairs at Washington’s Center for Strategic and International Studies, told me China’s neighbors in Asia are already waking up to the dangers. "The region is overwhelmingly looking to the U.S. in a way that it hasn’t done in the past," he said. "They see the U.S. as a counterweight to China. They also see American hegemony over the last half century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don’t see it as a benign hegemony."
The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and food stuff supplies — from South America to China and elsewhere.
This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.
"There are two systems in collision," said Ralph Gomory, research professor at NYU’s Stern business school. "They have a state-guided form of capitalism, and we have a much freer former of capitalism." What we have seen, he said, is "a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the US and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages."
The next chapter of the story is just beginning.
U.S. spending spree won’t work
What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.
Equally to the point here is what this means economically, and for investors. Some years ago I was having lunch with the smartest investor I know, London-based hedge fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, "paradigm" shifts — whether that be the rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.
The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10 Year Treasury bond is the "risk-free rate" on money. And so it has been for more than a century. But that’s all based on the Age of America. No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old Deutschemark. If it’s just the Greek drachma in drag ... not so much.
The last time the world’s dominant hegemon lost its ability to run things single-handed was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.
US states face $1.26 trillion shortfall in funds to pay retiree benefits
by Michael A. Fletcher - Washington Post
The state funds that pay pension and health-care benefits to retired teachers, corrections officers and millions of other public workers faced a cumulative shortfall of at least $1.26 trillion at the end of fiscal 2009, according to a new report.
The study, to be released Tuesday by the Pew Center on the States, found that the pension and health-care funding gap increased by 26 percent over the previous year. Pew officials said the growing shortfall was driven by inadequate state contributions, an aging population and market losses that accompanied the recession.
Although investment markets have recovered substantially since the period covered by the report, its authors warn that states still face an increasing burden from retiree costs that are beginning to crowd out critical services. "In many states, the bill for public-sector retirement benefits already threatens strained budgets and is competing for resources with other critical needs, including education, infrastructure and health care," said Susan Urahn, managing director of the Pew Center on the States.
The report, which is based on state financial reports, found that states faced a $660 billion pension funding gap. Meanwhile, retiree health-care liabilities — which most states handle on a pay-as-you-go basis — totaled $604 billion, the report said. Even as they face increasing liabilities, the report said, many states are not making pension contributions in amounts recommended by their actuaries as they juggle retiree and other costs against a backdrop of weak revenue.
In making its calculations, Pew used the states’ assumptions for what their pension funds would earn in annual investment returns, typically 8 percent — a figure that states have mostly met in recent decades but that some analysts think is now overly optimistic. If states calculated their investment returns the same way that private firms are required to for their pensions, their obligations would balloon to $1.8 trillion, the report said. If states pegged their returns to 30-year Treasury bonds, an even more conservative standard, the liability would be $2.4 trillion.
Concern about underfunded pensions has prompted at least 29 states to either reduce pension promises to new employees or require workers to contribute more toward their retirement benefits, according to a separate report by Pew.
Three states — South Dakota, Minnesota and Colorado — have moved to reduce cost-of-living increases for current retirees, but those moves are facing court challenges. The cost of pension plans and the benefits earned by the approximately 17 million state and local government workers have come under heightened scrutiny in recent years, as private-sector pensions grow increasingly rare and governors struggle to contain costs and, in many instances, reduce taxes.
Government employee union leaders, meanwhile, say the problems plaguing public pension plans are largely overstated. "While individual investors are still struggling to grow their retirement portfolios to sufficient levels, pension funds have shown remarkable resilience," said Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees. "These funds are not only persevering but are well on their way to full recovery."
McEntee added that retirees who were AFSCME members earn average pensions of approximately $19,000 per year, of which member contributions and investment returns cover 70 to 80 percent. "They earn modest benefits after a career of service," he said.
Bill Gross Battles Dealers on Outlook as Treasuries Gain
by Daniel Kruger and Wes Goodman - Bloomberg
The world’s biggest bond dealers dispute Bill Gross’s assertion that the $9.13 trillion market for U.S. Treasuries offers little value. While Gross, who runs Pacific Investment Management Co.’s $236 billion Total Return Fund, is betting against government debt, the 20 firms that trade with the Federal Reserve predict yields on the benchmark 10-year Treasury note will hold below 4 percent for a third straight year for the balance of 2011.
"I could join the dealers and say the 10-year’s not going to go to 4 percent, so what am I left with?" Gross said in a telephone interview April 20. "I’m left with an under-yielding, less-than-inflation security. I have better choices. As a firm we’re not going to put up with it."
So far, Goldman Sachs Group Inc., Credit Suisse Group AG and the rest of the primary dealers are proving right. U.S. bonds of all maturities are generating their best returns since August, gaining 0.49 percent this month. Optimism Congress will cut spending, slower growth and rising demand from banks meeting tighter risk standards governing the capital they must hold to cushion against losses are supporting bond prices.
Yields on 10-year notes ended last week at 3.39 percent, down from this year’s high of 3.77 percent on Feb. 9, even as Standard & Poor’s cut its outlook for the U.S.’s top AAA credit rating to "negative" from "stable." S&P said the move indicates a one-in-three chance of a downgrade.
‘Significant Demand’
"What’s telling is the significant volume of buying when 10-year yields were above 3.50 percent and 30-year bond yields were around 4.65 percent," said William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. "There’s still significant demand for long-end Treasury paper at those levels and I don’t think Bill Gross is going to make that demand disappear."
Demand at Treasury auctions has risen to record levels this year, with investors submitting $3 in orders for every $1 of debt offered, data compiled by Bloomberg show. At this month’s auctions of three-, 10- and 30-year bonds, the so-called bid-to- cover ratio exceeded the average of the previous 10 sales. RBS forecasts yields will fall to 3.25 percent by June 30, before ending the year at 3.6 percent. Goldman Sachs, the most accurate bond forecaster in the 13 quarters ended March 31 based on data compiled by Bloomberg, sees them at 3.5 percent in June and 3.75 percent in December.
"Increased downgrade risk doesn’t necessarily imply increased Treasury yields," Goldman Sachs economists led by Jan Hatzius in New York wrote in an April 19 report. "A significant push toward fiscal austerity would lead to lower growth and lower growth would lead to easier monetary policy for longer."
Fed policy makers, who meet this week, will likely keep their target interest rate for overnight loans between banks in a record low range of zero to 0.25 percent through year-end, according to the median estimate of more than 75 economists surveyed by Bloomberg. A separate poll show the economists reduced their 2011 growth estimates to 2.9 percent from 3.2 percent in February.
Ten-year yields fell almost two basis points, or 0.02 percentage point, last week, according to Bloomberg Bond Trader prices. The 3.625 percent security due February 2021 rose 3/32, or 94 cents per $1,000 face amount, to 101 28/32. The yield fell one basis point to 3.39 percent today at 7:43 a.m. in New York.
Competing Proposals
The split between Gross and the dealers comes as President Barack Obama and Republicans in Congress debate competing proposals to reduce the $1.4 trillion budget deficit. Obama has proposed $4 trillion in spending cuts within 12 years through a combination of reduced expenditures and tax increases. The Republican-controlled House passed a budget April 15 that would trim spending by more than $6 trillion over a decade and slash government support of Medicare and Medicaid.
With the supply of marketable Treasuries outstanding having more than doubled to $9.1 trillion since the start of the financial crisis in August 2007, the political moves are so far insufficient for Gross. "This no Treasury thing is simply a demonstration of vigilance on the part of Pimco that says these bonds aren’t worth what others appear to think they’re worth, and we prefer another menu, that’s all," Gross said.
Gross eliminated Treasuries from his fund in February and then, in March, bet that the debt will lose value, according to the firm’s holdings statement released April 11. The Total Return Fund has averaged an 8.65 percent gain the past five years, beating 99 percent of its peers, Bloomberg data show. While Pimco’s $1.24 trillion in assets under management commands the attention of investors, foreign central banks and sovereign wealth funds exert a bigger day-to-day pull on Treasury yields, said John Fath, who manages $2.5 billion at BTG Pactual in New York.
"Gross’s point is well-taken and ultimately I think he will be right," said Fath, former head of Treasury trading at primary dealer UBS AG. Even so, "if these guys are willing to hold these securities at these levels, it’s going to be hard to see rates go up," he said in reference to overseas investors. Foreign holdings of Treasuries jumped $36.4 billion to $4.47 trillion in the first two months of the year, according to the Treasury. U.S. financial markets should be stable over the long term, even after S&P’s warning, Xia Bin, an adviser to the Chinese central bank, said last week.
Increasing Holdings
Banks have increased their holdings of Treasuries and agency securities by $49.1 billion to $1.67 trillion since the end of last year, according to Fed data. The Basel Committee on Banking Supervision, appointed by the Swiss government, proposed rules in October requiring banks to increase available capital under the so-called Basel III rules. While commercial and industrial loans rose to $1.25 trillion this month from $1.21 trillion in September, they remain below the peak of $1.62 trillion in October 2008, Fed data show.
Banks may boost their purchases as they reinvest the proceeds of maturing loans and non-government bonds, according to Laurence Fink, chairman and chief executive officer of New York-based BlackRock Inc., which manages $3.65 trillion. "Banks are going to have their C&I loans and their structured bonds rolling off to the tune of $2 trillion," Fink said April 19 on Bloomberg Television’s InsideTrack with Erik Schatzker. "Banks may be a big buyer of Treasuries."
End of QE2
The end of the Fed’s second-round of so-called quantitative easing may not be enough to spark a sell-off. The $600 billion bond-purchase program wraps up in June, and the Fed is likely to signal at the conclusion of this week’s meeting it will continue to reinvest the proceeds of maturing mortgage securities in Treasuries, said Neal Soss, chief economist at Credit Suisse. "We do not view the end of QE2 as a reason for rates to spike," Nomura strategists led by George Goncalves wrote in a report published April 19. "If the markets behave according to prior QE experience, we should see the curve flatten and rates stay in check."
A flatter yield curve would mean a smaller difference between short- and long-term bond rates. Ten-year notes yield 2.73 percentage points more than two-year securities, compared with the mean of 1.16 percentage points since 1991. In its first round of bond purchases the Fed bought $1.7 trillion of mortgage and Treasury securities in 2009 and the first quarter of 2010. Within three months of that program ending, 10-year yields fell to 2.93 percent from 3.83 percent.
HSBC Holdings Plc has the most bullish year-end yield forecast among the primary dealers at 3.4 percent, followed by Societe Generale at 3.5 percent, according to a survey by Bloomberg News. Jefferies Group Inc. has the most bearish call at 5 percent, followed by BNP Paribas’ 4.25 percent.
Bumbling Gordon Brown does the world a favor
by David Marsh - MarketWatch
Europe’s time to lead the IMF is over
Timing is everything. Gordon Brown, the former British Labour Party leader, chancellor of the exchequer and prime minister, is pondering ruefully this essential fact as he surveys the wreckage of his attempt to become managing director of the International Monetary Fund.
The incumbent, French politician-turned-monetary-superstar Dominique Strauss-Kahn, will probably give up the post this summer a year ahead of expiry of his five-year term to oppose Nicolas Sarkozy in the forthcoming French presidential election. Not only Strauss-Kahn’s vaunting ambition to rule from the Elysée Palace rather than from the Potomac, but also the painful prospect of a Greek debt restructuring on his watch are probably prompting Strauss-Kahn to return to the Seine.
If Brown had been capable of winning bipartisan support, the job would have been his for the asking — even though he is arguably not the best candidate. He gets on well with Sarkozy and German Chancellor Angela Merkel. President Barack Obama would probably not have turned down a British overture. The Brits have never had the IMF job in 65 years. However, the Brown bid was dead in the water as a result of long-standing enmity between him and David Cameron, his successor.
Last week in a BBC radio interview, Cameron unceremoniously bundled the Brown candidature off the agenda by saying any new IMF leader had to be "extraordinarily competent and capable." His predecessor comprehensively was not that person. "If you have someone who didn’t think we had a debt problem in the U.K. when we self-evidently do have a debt problem, then they might not be the most appropriate person to work out whether other countries around the world have debt and deficit problems." Fairly clear, then.
In the poisoned political world of today, British pragmatism and bipartisanship when it comes to occupying top international financial jobs are clearly not on show. In this case, that’s good for the U.K. and for the rest of the world. With his disastrous three-year prime ministership under his belt, Brown was evidently thirsting for fresh triumphs. He is now too old and too insecure to make a success of the IMF post. Far better to give it to a candidate from the up and coming developing counties, breaking with the long tradition that the managing directorship should go to a European.
An earlier indication of the efforts the Europeans make to get the top job came in 1999 with the nomination of Germany’s Horst Köhler — although he too left early, in 2004, to become federal president in Berlin, a task that ended in a shambles when he stood down last year. The then-Chancellor Gerhard Schröder pushed through a German candidate in 1999 against initial American resistance. The first German proposed by Schröder was Caio Koch-Weser, a German official with considerable international experience, but the United States didn’t like him and said, "no."
The second candidate was a surprise. Hans Tietmeyer, up to August 1999 president of the Deutsche Bundesbank, who was offered the job in a discreet intervention by former Chancellor Helmut Schmidt. Tietmeyer thought about it for 24 hours, then turned it down because, at 68, he was too old. The third attempt with Köhler (then at the East European development bank) was accepted — with the results that we know now.
Don’t feel sorry for Brown. His big chance was in 2007 when, as the then all-powerful British chancellor of the exchequer, he could have walked into the IMF job to take over from Köhler’s successor, Spain’s Rodrigo de Rato. But Brown decided instead to stay in London and become prime minister when Tony Blair gave up the job. A huge political and personal miscalculation.
Timing is everything. Brown was inept in not checking his IMF scheme with Cameron, who could have told him not to bother. But bumbling Brown has done something for humanity by conceivably paving the way for the developing countries to take over IMF leadership — if they can find the right candidate.
Builders of New Homes Seeing No Sign of Recovery
by David Streitfeld - New York Times
In this distant Chicago suburb, a builder has finally found a way to persuade people to buy a new house: he throws in a car.
Kim Meier’s spring promotion, which includes a $17,000 credit at a nearby General Motors dealer, has produced seven sales since the beginning of March, a veritable windfall of business for a builder who sold only 20 houses last year. "We needed to do something dramatic," said Mr. Meier. "The market’s been soft."
That is one way of putting it. The recession hurt a lot of industries, but it knocked the residential construction market to the mat and has kept it there, even as the broader economy has started to fitfully recover. Sales of new single-family homes in February were down more than 80 percent from the 2005 peak, far exceeding the 28 percent drop in existing home sales. New single-family sales are now lower than at any point since the data was first collected in 1963, when the nation had 120 million fewer residents.
Builders and analysts say a long-term shift in behavior seems to be under way. Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible. That often means buying a home out of foreclosure from a bank.
Four out of 10 sales of existing homes are foreclosures or otherwise distressed properties. Builders like Mr. Meier who specialize in putting up entire neighborhoods on a city’s outskirts — Richmond is some 50 miles northwest of downtown Chicago — cannot compete despite chopping prices.
Chicago was not an epicenter of the housing boom with the sort of overbuilding found in Arizona or Florida, but new-home sales in the metro area are down 90 percent. There are about 65 sales a week for a region of 10 million people. Several factors have combined to make the Chicago market so weak. There were more subprime loans here, which meant more defaults, which in turn left more distressed homes for buyers to choose from.
Most of the construction here was done by private builders. Unlike the national firms, they did not have the resources to survive a prolonged downturn. "Some of the private builders just evaporated, and some said the hell with it," said Tracy Cross, a consultant who tracks the local market. Only a few remain, including Mr. Meier’s KLM Builders.
Construction of new single-family homes usually surges after a recession because of lower rates and pent-up demand. But the Census Bureau said this week that while multi-unit construction had picked up strongly in the last year, single-family home construction fell 21 percent to an annual rate of 422,000. One consequence of the anemic pace: more than 1.4 million residential construction jobs have been lost in the last five years.
Robert Barycki is one of a handful of buyers keeping the market from drying up completely. He’s 30, a partner in a hardware store, and currently living with his parents. He was drawn by the new-car offer to the biggest of KLM’s four active developments, called Sunset Ridge Estates. "My money was in the bank, collecting very little interest, so I thought I might as well take a little gamble," said Mr. Barycki, who is paying $182,000 for a three-bedroom. "Eventually, home-owning will come back."
Eventually, no doubt. But in the meantime, sentiment might still be souring. Executives at Equity LifeStyle Properties, a Chicago firm that sells properties in resort communities, said this week they were seeing "a psychological change": potential customers wanted to preserve their capital rather than risk it in real estate.
Bill McBride, who runs the popular financial blog Calculated Risk, said this might be the moment when people decisively started to turn on home ownership. "I’m starting to feel the hate," he wrote.
In such an atmosphere, every new home built and sold represents a victory. One of the few segments of the market that has shown signs of life is urban townhomes. Lennar, a national builder, has one of these developments under way in the upscale community of Arlington Heights, about 20 miles from downtown Chicago. Then Pulte, another national builder, started construction on its own townhouse community a few miles away, even as it was recording a 2010 third-quarter loss of a billion dollars. In the meantime, Lennar cut its prices by another 10 percent, but sales in the fourth quarter barely budged.
Lennar says its sales have picked up and it is drawing customers from people who looked at Pulte’s project and passed. Pulte says the same thing about Lennar. "It’s brutal out there," said Mr. Cross, the consultant. "You have to put on your boxing gloves."
Some victories may be brief. Builders say buyers have been acting ahead of a small rise in mortgage insurance premiums from the Federal Housing Administration, which backs many purchases. That mini-rush to lock in a deal might lift March sales figures for new homes, which are due out Monday, analysts say. Mr. Meier, who has been building in this stretch near the Wisconsin border for 25 years, hopes the car promotion will put a floor under his market. In flush times, he would sell about 100 houses a year to a diverse group of buyers, from empty nesters to commuters.
Richmond bills itself as a "Village of Yesteryear," which has come true in another way as house prices roll back to the mid-1990s. But some KLM buyers look for more, choosing to skip the car and put the $17,000 into the house instead.
That is what Wayne and Doris Powrozek, who are paying $193,000 for a three-bedroom, did. "If it’s free, it’s for me," said Mr. Powrozek, who recently retired from AT&T. The Powrozeks bought because they were worried prices were going up. Mr. Meier says he thinks they must — the cost of raw materials is rising. But with the price of existing homes continuing to fall, and the prospect of more foreclosures, he could again price himself out of the market.
Like nearly all those in real estate, Mr. Meier is determinedly optimistic. "Everybody wants in at the top, no one wants in at the bottom," he said. "People are paralyzed by their fear."
Last year, KLM told buyers it would match the government’s $8,000 tax credit. The car promotion more than doubles that. If the market still does not turn around, what could be their next promotion? "Buy one, get one free," his wife, Sally, suggested. They had a good laugh over that.
Stimulus by Fed Is Disappointing, Economists Say
by Binyamin Appelbaum - New York Times
The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.
But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.
As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise. "It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power," said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.
Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds. "These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy," Mr. Bernanke said in a February speech, an argument he has repeated frequently.
But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next. The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.
The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially.
A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases. "I wasn’t a big fan of it in the first place," said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. "I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind."
The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle. The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.
As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.
But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return. "Such purchases seem likely to have their largest effects during periods of economic and financial stress," he said.
The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.
But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.
A study published in February found that interest rates decreased, but only for companies with top credit ratings. "Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy," wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.
Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string. "What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar," said Mickey Levy, Bank of America’s chief economist. "But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?"
Our Debt Binge Is Ending — And The Middle Class Will Get Clobbered
by Henry Blodget - Daily Ticker
The world is coming to the end of a 50-year debt supercycle, John Mauldin says, and the austerity required to put us back on solid financial footing will hammer ordinary Americans. Mauldin, a financial analyst and the author of ENDGAME: The End Of The Debt Supercycle And How It Changes Everything, thinks that the the US will soon be forced to confront the fact that it has borrowed way too much in the past few decades and must severely cut back.
The US's $1.6 trillion-a-year deficit, Mauldin believes, must quickly be cut to about $300 billion a year, or the US will face a debt crisis. And given that our current government can barely find ways to chop $30 billion of spending from the 2011 budget, these cuts are going to be painful.
What will the forced austerity mean for ordinary Americans? Higher taxes and significantly reduced Medicare and Medicaid spending, for starters, Mauldin says. And then cuts to almost everything else in the budget, including military spending and education. In other words, as has so often been the case in the past couple of decades, the middle class will bear the brunt of the impact.
A Crack in Wall Street’s Defenses
by Gretchen Morgenson - New York Times
Two individual investors just scored a remarkable win against Citigroup.
A few weeks ago, the pair was awarded a total of $54.1 million in a securities arbitration case against the Smith Barney unit of the company — the largest amount ever awarded to individuals in such a case, according to the Financial Industry Regulatory Authority.
This legal dust-up involved supposedly conservative municipal bond investments that Smith Barney had peddled to its wealthiest clients. The investments, which were big money-makers for Smith Barney, turned out to be anything but safe for the firm’s clients: various portfolios lost between half and three-quarters of their value during the financial crisis.
Arbitrators rarely, if ever, discuss such cases, and the materials turned over by both sides are kept under wraps. But the outsize award, which included $17 million in punitive damages, is not the only thing that is noteworthy. The arbitrators appeared to reject — resoundingly — three defenses that Wall Street often employs when clients sue:
No. 1: We didn’t blow up your portfolio. The financial crisis did.
No. 2: If you’re wealthy and sophisticated, you should have understood the risks.
And, No. 3, the most common defense of all: The prospectus warned that you could lose your shirt, so don’t come crying to us if you do.
The investors who prevailed here are Gerald D. Hosier, 69, a wildly successful intellectual-property lawyer, and Jerry Murdock Jr., 52, a prosperous venture capitalist. Mr. Hosier and a trust he set up for his adult children received $48 million. Mr. Murdock got about $6 million.
The men, neighbors in Aspen, Colo., suffered $27 million in out-of-pocket losses on their investments. The big clunker was a municipal bond arbitrage strategy that their Smith Barney broker had characterized as safe, according to the men’s complaint. The deal was supposedly designed to eke out more income than a simple portfolio of bonds would generate.
Not only did the men recover all their losses in the award, they also received damages. Mr. Hosier was awarded $15 million in punitive damages and $6.3 million in market-adjusted damages. The arbitrators also awarded $3 million for the men’s legal fees.
Alexander Samuelson, a Citigroup spokesman, said: "We are disappointed with the decision, which we believe is not supported by the facts or law." He noted that the bank had won a number of arbitrations involving such leveraged municipal bond strategies and said that the bank was considering its legal options in this case.
Mr. Hosier invested in the bank’s municipal arbitrage strategy from 2002 through 2007. Requiring a minimum investment of $500,000, the deals employed the wonders of leverage, borrowing 8 to 10 times the value of the municipal bonds in an underlying portfolio to generate higher income. Calling the strategy conservative and ideal for investors’ safe money, Smith Barney sold the trusts to wealthy investors.
But Smith Barney and its brokers were the prime beneficiaries of the strategy, which generated fees not only on the money that had been borrowed to juice the returns but also through the life of the investment. Clients paid 0.35 percent annually on the portfolios, plus a fee of 20 percent of all income earned by the investors above a 5.5 percent threshold each year.
Smith Barney’s sales representatives kept 40 percent of the total fees paid by their investors, far exceeding what they would have earned selling ordinary municipal bonds. This arrangement encouraged Smith Barney to lever up the portfolios, Mr. Hosier’s lawyers argued, putting the interests of their clients and those of Smith Barney at odds.
Investors who bought these deals agreed to lock up their money for two years and had to pay a substantial fee if they redeemed their holdings during the next three years. Mr. Hosier was the single biggest buyer of Smith Barney’s municipal arbitrage deals, with $26 million invested over time. But four different portfolios in which he invested raised almost $2 billion from all investors. All of the portfolios performed badly.
"Citigroup mismarketed this product to high-net-worth investors as an alternative to municipal bonds with a slightly higher return," said Philip M. Aidikoff, a lawyer at Aidikoff, Uhl & Bakhtiari in Beverly Hills, Calif., who represented Mr. Hosier and Mr. Murdock. "Our clients never knowingly agreed to risk a significant loss of principal for a few extra points of interest."
As for Citigroup’s three defenses, Mr. Aidikoff, along with the co-counsel Steven B. Caruso, at Maddox, Hargett & Caruso in New York, demonstrated that municipal bonds did not suffer catastrophic losses during the period. This squelched the bank’s argument that the financial crisis did in the strategy. Regarding their clients’ sophistication and wealth, the lawyers agreed that both men were comfortable taking risks in certain circumstances, but not with the money they had given to the bank. "Citigroup misled their wealthiest clients and then tried to blame them for relying on what they were told," Mr. Caruso said.
Arguing that the risks were laid out in the prospectus also seems to have run into a stone wall. Mr. Hosier’s lawyers produced seven different notices on the topic published by Finra and its predecessor regulator since 1994, including a notice from 2009 that states: "Providing risk disclosure in a prospectus or product description does not cure otherwise deficient disclosure in sales material, even if such sales material is accompanied or preceded by the prospectus."
Mr. Hosier’s victory is particularly noteworthy, given the nominal amounts typically extracted by regulators in cases against major banks. The punitive damages awarded to Mr. Hosier, for example, are more than triple the $4.45 million penalty levied against Wachovia Securities by the Securities and Exchange Commission this month in a suit that the S.E.C. settled with the bank. The S.E.C. accused the bank of selling about $10 million of mortgage-related securities to investors at above-market prices and at excessive markups. Wachovia, now part of Wells Fargo, neither admitted nor denied wrongdoing in the settlement.
The arbitrators in Mr. Hosier’s case seemed keen to hold Wall Street accountable. And his win against Citigroup does not appear to be an anomaly. Since April 2010, his lawyer, Mr. Aidikoff, has argued 16 other arbitrations involving the same type of investment. Mr. Aidikoff and the lawyers who assist him have won every one.
In an interview, Mr. Hosier said the experience had opened his eyes to the disturbing ways of Wall Street. "Instead of the financial world being the lubricant for business, they are out there manufacturing products with no utility whatsoever except for generating fees," he said. "Somebody’s got to do something about Wall Street. It is destroying the country."
Citigroup considers plea to stop funding TransCanada pipeline
by Meagan O'Toole-Pitts - Jacksonville Daily Progress
After a meeting with Citigroup officials in New York City Thursday, Winnsboro landowner David Daniel said he’s hopeful that the conglomerate will stop funding TransCanada.
"It’s one of the world’s largest banks and I really didn’t know what to expect but when I was done speaking the shareholders showed their support through a round of applause and in support of the concerns," said Daniel, founder of STOP (Stop Tarsands Oil Pipelines). "I was really taken back by that."
Daniel was accompanied at Citigroup’s annual stockholders meeting by Brant Olson, campaign director of the Rainforest Action Net-work, and Alex Moore, dirty fuels campaigner at Friends of the Earth. The Rainforest Action Network is a Citigroup stockholder, Daniel said, which allowed him to speak at the meeting. "I was able to give examples of eminent domain abuse and our safety concerns," he said. Daniel said Trans-Canada pushed him into signing a contract for a temporary easement of his land.
TransCanada has ac-quired land throughout East Texas and Okla-homa to build its Key-stone XL pipeline, an extension that will en-able oil producers in Alberta, Canada to ship to refineries in Texas’ Gulf Coast. "I didn’t know anything about the project until my neighbor called me and said someone was trespassing," Daniel said. "Then a month later I got a letter asking to survey my land. I didn’t write back or grant permission to survey. Then I got a letter from a Houston attorney threatening to apply eminent domain."
TransCanada has not yet received a presidential permit from the U.S. Department of State to begin construction. Landowners along the proposed 1,700-mile pipeline have filed suit against TransCanada for using deceptive trade practices. "They’ve told land-owners they have all the permits they need when they don’t, so they’re really opening up doors for themselves in terms of litigation," said STOP Coordinator Brittany Dawn McAllister.
Citigroup has raised more than $5.8 billion for TransCanada and its related companies since 2007. In September 2010, Citigroup managed a $1 billion bond for Trans-Canada, purchasing $295 million of notes issued.
After meeting with Valerie Smith, Citi-group’s vice president of corporate sustainability, for two hours after Thursday’s meeting, Daniel said Citigroup took his concerns seriously. "I asked the chairman and the CEO and the shareholders if they would look into this and their response was ‘We will look into it’ and they wanted me to talk to their attorneys and provide information to their attorneys so we’re in the beginning stages," Daniel said. "Hopefully they’ll be able to make a better, well-informed decision. They haven’t made a decision yet."
Daniel said it’s important that Citigroup is made aware of Trans-Canada’s bad business practices. "We were letting them know why we think they should question the integrity of this company that they’re be financing," he said. "It’s a financial hazard to them and we wanted to ex-press those concerns." Citigroup officials will continue to talk to Daniel about the issues, he said.
TransCanada representative Shawn Howard said he didn’t know how TransCanada would be impacted if Citigroup stopped funding the corporation. "There could be any number of groups that provide money to us at any given time," he said. "It just depends on what deals are going on."
China broadens stress tests for banks
by Jamil Anderlini - Financial Times
China has ordered its banks to conduct stress tests to see how they would be affected if property prices fell by up to 50%, in a sign of growing official unease about the overheated real estate market. The tests are more stringent and factor in a larger drop in prices than earlier ones conducted in the past two years. This comes after predictions from prominent Chinese analysts of 20-30 per cent property price declines this year.
Analysts said previous tests looked only at the effect of housing price declines on loans to developers and mortgage borrowers, and disregarded the effect on loans collateralised by land and real estate. This resulted in an overly optimistic assessment of their exposure to a serious property market correction. "If property prices drop 50 per cent we would be in big trouble; it would mean a hard landing for the economy," according to Wang Tao, chief China economist at UBS Securities.
UBS recently described the Chinese property market as the single most important sector in the entire global economy because of the overwhelming importance of real estate construction to China’s growth model and, by extension, global commodity demand. Ms Wang said a crash in the real estate market could have a huge effect on developers, cement companies, steel producers and consumer purchases of items such as cars and appliances, which are closely correlated to property sales.
For now, prices are still rising in China despite more than a year of government policies to cool the sector and bring down prices that are well out of reach of most of the population. Property transaction volume across the whole country increased in the first quarter of the year from the same period a year earlier but a closer look at data shows a steep decline in March in the 10 largest cities, which often lead the rest of the country.
Transaction volume collapsed 40 per cent from a year earlier in China’s 10 largest cities in March following a 33 per cent increase in the first two months, according to Du Jinsong, a real estate analyst at Credit Suisse. Mr Du forecasts a 5-10 per cent decline in real estate prices in China this year, accompanied by a 15 per cent fall in transaction volume but he said most Chinese analysts were predicting a 20-30 per cent decline in prices this year.
Officials say about 20 per cent of all Chinese bank lending has gone directly to mortgage borrowers or property developers but a huge proportion of loans to other borrowers are backed by land as collateral. China’s banking regulator said it had asked banks to test the effect of 50 per cent price drops in cities with the fastest price increases, but in cities where prices had not risen as much banks were required to test for price drops of 40 per cent, 30 per cent or less.
Officials were quick to point out the stress tests were not a prediction by the regulator or an indication of the government’s expectations. Beijing has introduced a series of measures since last year to slow soaring prices, including raising interest rates, raising down-payment requirements, directly restricting home purchases, imposing price control targets and levying a trial real estate tax in Shanghai and Chongqing, two of China’s biggest cities.
Quake Hits Toyota, Nissan, Honda Domestic Output
by Yoshio Takahashi - Wall Street Journal
A disruption to parts supply chains following the earthquake and tsunami in Japan last month resulted in domestic production at Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. plummeting by more than half in March.
Although March is usually the biggest production month—as book closing usually prompts dealerships to make a last-ditch effort to sell as many vehicles as possible—this didn't prevent a sharp fall in output. According to figures released Monday, Toyota's domestic output fell by 63% from a year earlier, Nissan's production dropped 52%, and Honda's fell 63%.
The problems with procuring parts also saw a reduction in exports from Japan. This, combined with the inability of overseas factories to maintain output because of the parts shortage, raised concerns about whether the car giants would be able to sustain vehicle supplies to dealerships abroad.
Although the car companies restarted all of their domestic plants by mid-April in the immediate aftermath of the disaster, the expectation is that output won't be restored to normal any time soon as some parts suppliers are still struggling to restore production. In addition, the government has warned of a likely power shortage this summer in eastern Japan, where some auto factories are located and more than 500 parts makers operate plants.
Japan's top three car manufacturers are currently operating their domestic factories at half of planned or normal production rates. The ongoing difficulties with parts supplies means it's hard for them to make any certain long-term predictions about when the situation will improve.
Honda, Japan's third-biggest car maker by volume, said Monday its plants in Japan will remain at 50% of its pre-quake production plan until the end of June, and output levels after July are uncertain.
The car maker only said it expects its production at home to return to its initially planned level by the end of the year. That follows the outlook outlined by Toyota last Friday that its output won't be back to normal at least until November.
"We are restoring operations. But continuing aftershocks sometimes undo our work. We are repeating this over and over again. That makes it hard to foresee" accurately when operations will return to pre-quake levels, Toyota President Akio Toyoda said at a press conference last Friday. Toyota is still unable to source 150 types of parts from quake-hit plants more than a month after the quake hit March 11.
The protracted output disruption threatens Toyota's status as the world's biggest car maker, which it could lose to General Motors Co. It may even fall behind Volkswagen AG, according to Mamoru Kato, an analyst at Tokai Tokyo Research Center. The reduced vehicle production in Japan dented the industry's March sales, which fell by 37% from a year earlier, the largest fall since May 1974, the Japan Automobile Dealers Association said earlier this month. Credit Suisse estimates that Japanese auto makers' global production could drop 37% in the first half through September from a year earlier and 19% for the full fiscal year.
The latest announcement about the country's auto industry comes a few days before Japanese car makers start reporting their latest earnings, in which they are expected to provide grim forecasts for the current fiscal year that started this month. Toyota said its domestic production tumbled 63% in March from the same month last year to 129,491 vehicles and exports dropped 33% to 107,751 vehicles in the month.
Nissan, Japan's second-biggest car maker by volume, said its output in Japan sank 52% to 47,590 vehicles and exports dropped 13% to 41,746 vehicles while Honda said its output at home sagged 63% to 34,754 vehicles and exports were down 26% at 20,699 vehicles. Among smaller Japanese car makers, Suzuki Motor Corp. said its production tanked 60.2% to 41,790 vehicles, Mazda Motor Corp.'s output slipped 53.6% to 39,887 vehicles and Mitsubishi Motors Corp.'s had a 25.7% drop in production to 49,434 in March.
Japanese government considers underground wall to contain Fukushima radiation
by The Yomiuri Shimbun
The Japanese government is considering building an underground barrier near the Fukushima No. 1 nuclear power plant to prevent radioactive material from spreading far from the plant via soil and groundwater, a senior government official said. Sumio Mabuchi, a special adviser to the prime minister, revealed the plan Friday at the Japan National Press Club building in Tokyo. The plan is the first attempt to address the risk of contaminated water spreading far from the plant through soil.
According to Mabuchi, the barrier would extend so far underground that it would reach a layer that does not absorb water. The wall would entirely surround the land on which reactors No. 1, 2, 3 and 4 stand. Mabuchi is a member of the unified command headquarters set up by the government and Tokyo Electric Power Co. to deal with the nuclear crisis. He serves as the head of government representatives on a team dealing with medium- and long-term issues, including how to contain the spread of radioactive materials from the plant.
The process of filling the containment vessel of the Fukushima power plant's No. 1 reactor with water is progressing steadily, according to Tepco. Tepco plans to continue injecting water into the containment vessel until the fuel rods inside are fully submerged in what the power company has called a "water coffin."
At a press conference held Friday, Tepco said it believed pressure suppression pools at the bottom of the No. 1 reactor's containment vessel were full of water, and that the top section of the containment vessel was about half full. Under normal circumstances, the pressure suppression pools are about 50 percent full with water. The pressure suppression pools help control the air pressure inside the reactor's pressure vessel. Operators can open valves to release steam from the vessel into the suppression pools, where it is cooled and condensed to water.
According to Tepco, it has poured about 7,000 tons of water into the No. 1 reactor's pressure vessel. The company said it believes almost all of that water is still inside the pressure vessel and the containment vessel. However, the firm said it has injected about 14,000 tons of water into the No. 2 reactor and 9,600 tons of water into the No. 3 reactor since cooling operations began. In both cases, the amount injected exceeds the about-7,000-ton capacity of the reactors' containment vessels.
Tepco believes considerable amounts of water leaked from those reactors' containment vessels into their turbine buildings through cracks in pressure suppression pools and other routes. Meanwhile, at the No. 4 reactor, Tepco has attached cameras and other equipment to a concrete pump used to inject water into the pool containing spent nuclear fuel rods to monitor the water and radiation levels around the clock.
According to the company, water in the pool was 91 C (196 F) on Friday, and the water level was about 2 meters (about 6.5 feet) above the spent fuel rods. Those readings were about the same as those taken by the company on April 12, Tepco said.
Fukushima 50 criticise 'inconsistent' information
by Danielle Demetriou - Telegraph
The Fukushima 50, emergency nuclear plant workers in Japan, have accused the government of inconsistent handling of data in relation to radiation exposure. Workers at Fukushima Daiichi nuclear plant claim to have been risking their health to battle around the clock in order to regain control following severe damage caused by the March 11 earthquake and tsunami.
However, concerns have been raised over the fact that the Japanese government took a "special measure" to raise radiation exposure levels from the normal total of 100 millisieverts up to 250 millisieverts in order to deal with the current crisis. There were further claims that some workers were not being required to register their radiation exposure, which they feared could create future issues if health problems arose. "In the end, we are the workers who are exposed," one emergency worker told the Mainichi newspaper.
Another nuclear industry source added: "If the radiation data is handled vaguely, workers may not be able to have proof of their exposure to radiation if they need to fight court battles." Patience among residents of northeast Japan who have been evacuated from their homes as a result of the nuclear crisis was also running increasingly thin this week.
On Friday, families criticised Masataka Shimizu, the head of Tokyo Electric Power Co (TEPCO), the plant operators, as he visited an evacuation centre 30 miles from Fukushima Daiichi. As he bowed deeply in apology to the displaced families, a growing number of evacuees expressed their growing frustration by questioning the actions of the company. Among them was an elderly woman who asked him: "TEPCO has always said 'It's all right, it's all right'." Another demanded: "You've got to bring this back to normal as soon as possible."
218 comments:
«Oldest ‹Older 201 – 218 of 218You win or you lose
So why sing the blues?
Make your choice take the ride
Bet it all or go hide
You got seeds and a hoe
But the others don't know
That the trains movin' fast
And this trip is the last
(chorus)
Oh daddy be good
You done all that you could
Oh momma be kind
You may wake up and find
All your children are gone
In a pitiless dawn
And you're now all alone
In a world cold as stone
The money's now trash
And you can't eat your cash
The jobs gone away
But the debt's here to stay
You gotta by bread
Or your children are dead
You win or you lose
But you don't get to choose
(chorus)
Someday change gonna come
But I can't saw where from
Better times just might be
But they won't be for me
Still I'll sow and I'll reap
Got a promise to keep
Try to do what is best
Till I go to my rest
(chorus)
@DBS..U.S District Judge Stephen N.Limbaugh Jr ruled Corps has the right to breach the levee to prevent flooding Cairo,Illinois. Decision was based on a 1928 law as you said. Let's hope such an action will not be necessary.
@Greenpa, I don't want to load the board with gender politics so to speak howver when I first encountered a foreign language I was amazed to discover gender designations. One is from a Fatherland or a Motherland, ships are universally Mothers, on and on. I am most curious as to how there came to be societal agreement as to what is feminine and what is masculine.Pronouns are interesting:)
@scandia
(regarding the arcane language of Royal Weddings and the like)
It's basically the old lingusitic 'Chicken Or Egg' problem.
Does the lack of a gender neutral word on a par with 'man' lead us further into sexual bias, or does sexual bias preclude the existance of such a word in our language?
I propose a solution:
Henceforth, the word 'man' will signify either male or female, interchangeably, and a new word will be coined to serve in its vacated position in the lexicon; "heman."
'Woman' will denote female, 'heman' will denote male and 'man' will foreverafter be the gender neutral term for a plain old human being of either ( or both ) stripe.
To make that work we have to re-engineer the word 'male,' too, I suppose.
So, 'male' becomes the gender neutral word for either sex of a sexual species. 'Female' stays just as it is now, and to fill in the gap we coin 'Duhmale' to mean the cognitively challenged gender of the humankind.
@TAE Summary
You just hit it outta of the park, a real Homer.
@ TAE Summary
Got it! Copied and pasted.
ps. I just checked your profile and just realized that you have a "TAE Summary" sitting in the cloud.
Put your latest effort in it as well.
To the lurkers who have similar skills ... submit something.
For inspiration for some creative work. A topic.
Catching a Falling Cloud!
Knowledge is embedded in a cloud.
It can be extracted by using magnetism and electricity.
The clouds have/are physical electronic components which can be dug up from the ruins of the ancients.
Where are the clouds hiding?
How do you make the clouds whisper/reveal/talk to you?
What will they think/do when they encounter the ghost wisdom of the ancients such as us?
jal
Well, I have a little test running. Over on the NYT Green Blogs, Matthew Wald, pretty much the NYT nuclear expert, has a post on the NRC's updates on Fukushima.
http://tinyurl.com/3wdbrmu
Which, surprise, are a LOT less informed/informative than what we got here via Nicole and Arnie.
I'm a mainstay commenter on the Green Blogs; almost never have they refused to post my comments, even several that have been quite rude (but authoritative.) :-)
But; I entered a comment to that post; and gave the link to Arnie Gundersen's vid on prompt criticality- and; 18 hours later, it is not there. Oh, and I mentioned "pieces of fuel rods 2 miles away".
2 primary options occur to me; Wald is busy checking Gundersen out; or; he's just round-filed my commment- for reasons we must guess at. This post was NOT rude, particularly.
If my comment doesn't show up in the next 12 hours; it's #2.
TAE Sumerian; yes, but- do you have tune in mind? I need to know. We're always looking for good work songs, out in the fields. :-)
Hello,
To say that the word "Sir" is gender free is, I am sorry to say, nonsense.
Turn the tables. How many men would accept to be called "Madam" because someone, somewhere, decided that the word was gender free?
Not many.
We need new words and they are not forthcoming because mindsets are running far, far behind current ideas and even simple justice. That is typical, perhaps normal for humans, whether in Yemen, France, the U.S. or China. Unfortunately, I fear that the coming shocks will not be conducive to progress in this field. We will most likely fall back into the old, old, old patterns of thought.
Ciao,
FB
FB said...
Hello,
To say that the word "Sir" is gender free is, I am sorry to say, nonsense.
Hey it works on Star Trek! what better recommendation could there be?
:-)
Quite true; of course, Sir is not gender free right now; but- the usage in the future tense is one that several sci-fi writers have suggested; and within that context, once you get past the initial "what?!" lots of people find it quite satisfactory.
And THIS discussion is definitely going to solve a lot of the world's biggest difficulties. :-)
@Greenpa,
Did you try posting it again? I would imagine they wouldn't be that authoritarian about comments in a Green blog section, but I'm not familiar with this Wald guy, so I could be wrong.
Wald said...
But a continuing problem, Mr. Borchardt said, is that many of the monitoring instruments are giving inaccurate readings or have failed completely.
Yeah, that only deserves a quick mention at the end of the article. Don't worry, even though the situation isn't "quite stable" now, it also isn't as "highly dynamic".
@ TAE Summary - Excellent!
Thank you!
Regarding gender issues: you either see through the archetypes or you don't. Words point at the moon.
Hisself
Herself
Oneself
The male form is pronounced:
Hiss elf
You know, like some people resemble their dogs, some gender words resemble their gender.
Also, I know some English major types who have a fit with Oneself even though it's a nice gender neutral word. (a reflexive form of the indefinite pronoun one, sometimes two words: one's self)
Uses of:
"A person's own self: "it is difficult to wrest oneself away".
One often hurts oneself accidentally
One can teach oneself to do this
You can also pronounce it;
One's Elf
You know, so you can get in touch with your Inner Mythic Child.
Don't even try to make gender sense of Elf.
_
@ Ric
Sorry, I disagree.
Symbols point to the moon when you are educated in symbols. The symbol is the moon when you are not.
Words shape the world view and define how we see the moon.
Ash: "Did you try posting it again? I would imagine they wouldn't be that authoritarian about comments in a Green blog section, but I'm not familiar with this Wald guy, so I could be wrong. "
The NYT has a confirmation process; pretty sure it got there. I HAVE had several occasions where it took 24 hours for them to decide to stick one of my sticky comments up. He's put up other comments from me, on other posts. Thing is; do you see the NRC, or the NYT, quoting Arnie Gundersen? I haven't. His expertise is pretty unquestionable; but, his attitude may have gotten him blackballed somewhere/somehow. He actually QUESTIONS the received wisdom about nukes. Horrors.
It seems that Ilargi forgot to create a new-post-up comment. I can fix that.
April 29 2011: Who's Right, Americans or Economists?
I am most curious as to how there came to be societal agreement as to what is feminine and what is masculine.
Scandia,
I speak, or have studied, languages with genders - French, German and Norwegian. Some time ago, I realised that the gender and sex are almost completely disconnected. It is only people with few genders in their languages who use sex as an indicator.
If you were to come up with a brand-new word and introduce it into French, German or Norwegian 95% of the people would "know" what gender it should be - because it sounds right. The sex of the object would come way down the list. Obviously, if the object was clearly female and the word did not sound "right", it would never catch on.
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