June 30 2011: The Impossible and the Inevitable

Howard Hollem Lone Star August 1942
"Women from all fields have joined the production army. Miss Grace Weaver, a civil service worker at the Naval Air Base, Corpus Christi, Texas, and a schoolteacher before the war, is doing her part for victory along with her brother, who is a flying instructor in the Army. Miss Weaver paints the American insignia on repaired Navy plane wings"

---

The Automatic Earth
kindly requests your support.
Donate to our Summer Fund Drive

---

Ilargi: 39 airports, 850 ports, railways, motorways, sewage works, a couple of energy companies, banks, defence groups, thousands of acres of land for development, casinos and Greece's national lottery.

All these things are for sale in Greece. As part of the IMF/ECB/EU bailout deal Athens voted in this week, this wholesale firesale of what amounts to something close to an entire public economy, is supposed to bring in €50 billion ($72 billion). And what will Greece be left with afterwards? They’d better come up with something good, because estimates are that the firesale will fall short by some 75%. Kerin Hope, Ralph Atkins and Gill Plimmer in the Financial Times:

Greece faces 'fire sale' shortfall

The austerity measures call for an independent privatisation agency to be established within weeks to handle a programme of disposals, including the sale of strategic stakes in state- owned utilities and leases in state-owned property for tourist development. Independent research suggests, however, that Greece will struggle to raise much more than a quarter of the €50 billion it needs from the assets sales and privatisations unless it adds more prime land and cultural heritage to its sales list.

Only €13bn of assets are ready to sell, leaving a €37bn shortfall, says a study by the Privatisation Barometer, a Milan-based institute sponsored by Fondazione Eni Enrico Mattei and KPMG. This includes €6.6bn from offloading stakes in 15 listed groups and an "optimistic" €7bn from the sale of 70 unlisted groups, where the yields are more difficult to assess. "At this stage, no one really knows what Greece Inc is worth, but it’s clear that it will fall short," said Bernardo Bortolotti, a corporate finance professor at the University of Turin who produced the analysis.

Ilargi: Greece Inc. Put up for sale by a bunch of foreign governments and creditors and a government made up of domestic elites. Something here stinks. Did the IMF, ECB and EU really have no idea at all that the firesale sale profits would be far short of €50 billion? And if they did, which looks far more likely, what does that tell us? And what happens after that disppointing sale?

First, back to the reasons behind the expected firesale shortfall. Rupert Neate for the Guardian:

Debt-laden Greece finds no buyers in 'fire sale' of national assets

Nikos Stathopoulous, managing partner of BC Partners, which has invested more than €3.5bn in Greece, said investors are put off by bureaucracy, strong unions, corruption and a lack of transparency. "Even in the good times Greece is not a country that attracts investment. Foreign investors don't want to invest in a country where there is no flexibility in hiring and firing people," he said. "You don't want to invest in a country in which you wake up and a new law has been passed which totally undermines and destroys the value of the investment you've just made."

Stathopoulous said investors were finding it very hard to assess the risk of investing into Greece, which means assets "will be priced at lower than they are worth, lower than the Greek government, and even the European Union, expects". Aref Lahham, managing director and founding partner of Orion Capital Managers, said most private equity firms would not buy Greek assets because the "risks are too high". He added: "I think people will not buy those assets, that is the sad truth." [..]

Lahham said Greece's ambition to sell €15bn of assets by 2012 and the full €50bn by 2015 meant there was not enough time to carry out due diligence properly. "I simply do not believe the timescale. I'm afraid it is not going to happen within times - I'm afraid it is a fire sale."

Christodoulakis denied that the hastily arranged sell-off was a fire sale, preferring to describe it as a "professionally managed privatisation plan". "We may sell them cheaper than [during normal conditions] but we will devote the funds to buying back debt, that means we are going to buy it back when it is cheaper." When a fellow Greek interrupted to say the sell-off was "destroying our country", Christodoulakis said there was "no point crying over spilt milk" and told his countryman to "try and be optimistic".

Ilargi: Well, we stand corrected. It's not a fire sale, but a "professionally managed privatisation plan". Yeah, exactly. That's what stinks here. isn't it? That's where that familiar smell comes from. It has the fingerprints of the IMF all over it. All the way back to the economic warfare the institution initiated in South America, Asia, Eastern Europe, and everywhere it goes.

Greece has become the next chapter in Naomi Klein's The Shock Doctrine. Some of the faces at the IMF may have changed, but the blueprints for these kinds of operations are still the same; if anything, they've become even more perfected. Teams of economic hitmen and henchmen are sent into a country to sell everything that isn't nailed down to the highest bidder, but for the lowest price.

In order to achieve the last bit, all you need to do is write an agreement that is one on one contingent on an unrealistically high estimate of a group of assets, make sure their sale falls short of that estimate, and send in the hitmen again. And then you rinse and repeat until everything has been sold off. In Greece's case, it's all transport infrastructure first, because you know nobody really wants it, hence the sale price will be much lower than what the agreement called for, and in subsequent auctions you pick up the Acropolis and other national treasures.

Meanwhile, you raise taxes as much as you can, and then come back to do it again, while the public sector is gutted, along with health care, education and all those useless non-profitable parts of a society that benefit the people instead of the banks. Talking about banks, do we all still realize that all this is done to pay off debts to international banks that in many if not most cases would not even exist anymore if not for the tax revenues paid by the people of Greece, the rest of Europe, the US etc.? Or have we come to believe in "the recovery", do we now think it's real?

The reason the stock markets are up after the Greek austerity vote is that the IMF has managed yet another step in yet another step financial coup, and this one inside the European Union, no less. That offers great prospects for other weaker parts of Europe. If they can do it in Greece, they can do it in Ireland, Portugal, Spain, Italy. Unless people in one of these countries say NO, and a lot louder than the Greeks have done.

These things are set-ups. They have nothing to do with saving countries or their economies. They are plans to do the exact opposite: rape and pillage entire economies for the benefit of financial institutions. Read The Shock Doctrine, if you haven't yet, or re-read it if you have, and the patterns become grindingly clear.

The Lex team at the Financial Times may have put it best: Greece is -being- required to "carry out the impossible in order to stave off the inevitable". And it's required to do that on purpose. Thing is, Greece is by no means the first country where the Milton Friedman Chicago School's predatory "economic theories" wreak havoc and spill untold amounts of blood in the streets. It is the first in Europe, though. They're getting ever closer to what has always been the ultimate goal: remake America in the vein of their cannibalistic insanity.

---

Jim Puplava sits down with Nicole Foss for an in-depth two-part interview on the challenges she sees coming our way

Choose your favorite player to listen to the interview:

RealPlayer   WinAmp   Windows Media   MP3

James J Puplava CFP with Nicole M Foss, June 30, 2011

Nicole Foss joins Jim Puplava on Financial Sense Newshour in the first of a two-part interview to talk about peak oil, the next financial crash, and the challenges she sees coming our way.
Nicole is senior editor of The Automatic Earth, where she writes under the name Stoneleigh. She and her writing partner have been chronicling and interpreting the on-going credit crunch as the most pressing aspect of our current multi-faceted predicament. The site integrates finance, energy, environment, psychology, population and real politik in order to explain why we find ourselves in a state of crisis and what we can do about it.

---

Greece: reckoning postponed
by LEX - FT

The lights are still on in Athens. Greece’s parliament approved a proposal on Wednesday to pursue additional austerity and fiscal adjustment measures. The European Union and the International Monetary Fund can release €12bn of additional funding, enough to allow the government to repay debt maturing up to the end of August. The day of reckoning has been postponed.

The parliamentary vote was actually the second piece of good news on the Greek front this week. The first was that a French proposal to offer some private sector burden-sharing (with European banks reinvesting some maturing government bonds they hold in new, 30-year Greek paper) is gaining traction. If implemented, the proposal could see the potential cost to Europe’s banks of an eventual Greek default roughly halved from the widely accepted haircut figure of 70 per cent.

The French proposal is not policy, however, and will not amount to much if too few private sector investors sign up for it. And none of this week’s developments addresses the central issue of Greece’s insolvency. The success of Greece’s medium term fiscal strategy depends on an unlikely plan to sell €50bn of state assets. The government’s ability to implement the austerity measures must also be questioned: the vote in parliament was held to the sound of rioting and the smell of tear gas.

Throughout the eurozone crisis the EU has insisted that Greece carry out the impossible in order to stave off the inevitable. This approach cannot succeed indefinitely. Greece avoided an immediate and catastrophic default on Wednesday. But the problem of its enormous debt, and its inability realistically to finance itself for years to come, remain as intractable as ever. A default by Greece is likely regardless of what is done (or said). Policymakers and investors need to start planning for that uncomfortable fact.

---

Greece faces 'fire sale' shortfall
by Kerin Hope, Ralph Atkins and Gill Plimmer - Financial Times

George Provopoulos, the Bank of Greece governor, said the four-year austerity package to be voted on Wednesday by the Greek parliament puts too much emphasis on tax increases and not enough on spending cuts. Further questions have arisen, meanwhile, over sources of revenue for the state from its planned "fire sale" of assets – aiming to raise €50bn ($72bn) by 2015.

The austerity measures call for an independent privatisation agency to be established within weeks to handle a programme of disposals, including the sale of strategic stakes in state- owned utilities and leases in state-owned property for tourist development. Independent research suggests, however, that Greece will struggle to raise much more than a quarter of the €50 billion it needs from the assets sales and privatisations unless it adds more prime land and cultural heritage to its sales list.

Only €13bn of assets are ready to sell, leaving a €37bn shortfall, says a study by the Privatisation Barometer, a Milan-based institute sponsored by Fondazione Eni Enrico Mattei and KPMG. This includes €6.6bn from offloading stakes in 15 listed groups and an "optimistic" €7bn from the sale of 70 unlisted groups, where the yields are more difficult to assess. "At this stage, no one really knows what Greece Inc is worth, but it’s clear that it will fall short," said Bernardo Bortolotti, a corporate finance professor at the University of Turin who produced the analysis.

The Greek government has already privatised assets worth €25bn in banking, telecoms and energy since 1997, mostly in "salami-style" offerings of equity tranches in state-owned companies.

On Tuesday night, thousands of trade unionists gathered outside the parliament building on Syntagma Square, demanding withdrawal of the proposed privatisations. The Socialist government was struggling to rally dissident deputies with close ties to unions as debate on the measures continued ahead of the vote. Riot police used teargas against militants who attacked shops and set fire to rubbish bins in streets around the square as the unionists’ protest was breaking up.

A 48-hour walkout by public-sector workers shut down state-owned banks and government offices, city transport and most ferry services to the Aegean Islands. Work stoppages by air traffic controllers delayed dozens of international flights using Athens airport. The Indignant Citizens movement, running a Syntagma Square protest camp, asked supporters to stay in the streets throughout Tuesday and Wednesday.

Manolis, a civil engineering student, said: "This is the climax of a month-long protest against measures that are just too harsh for people to take ... We plan to be here nonstop." Theodoros Pangalos, deputy premier, said the next €12bn tranche from an international bail-out loan would not be disbursed unless parliament backed the new measures.

"If we don’t get the money, we face a terrible scenario ... a return to the drachma, with banks besieged by terrified crowds wanting to withdraw their savings," he said. "We will see tanks protecting banks because there won’t be enough police to do it."

---

Debt-laden Greece finds no buyers in 'fire sale' of national assets
by Rupert Neate - Guardian

While Greece erupted in protest again, representatives of the country's government were at Claridge's hotel trying to drum up international investors' interest in a "fire sale" of its national assets.

Up for sale are 39 airports, 850 ports, railways, motorways, sewage works, a couple of energy companies, banks, defence groups, thousands of acres of land for development, casinos and Greece's national lottery. George Christodoulakis, Greece's special secretary for asset restructuring and privatisations, said the sell-off would raise €50bn (£44bn) to help pay back the country's €110bn bailout debt.

The private equity bosses gathered in the hotel's ballroom for the parade of Greece's national treasures showed little interest in buying anything. Nikos Stathopoulous, managing partner of BC Partners, which has invested more than €3.5bn in Greece, said investors are put off by bureaucracy, strong unions, corruption and a lack of transparency. "Even in the good times Greece is not a country that attracts investment. Foreign investors don't want to invest in a country where there is no flexibility in hiring and firing people," he said. "You don't want to invest in a country in which you wake up and a new law has been passed which totally undermines and destroys the value of the investment you've just made."

Stathopoulous said investors were finding it very hard to assess the risk of investing into Greece, which means assets "will be priced at lower than they are worth, lower than the Greek government, and even the European Union, expects". Aref Lahham, managing director and founding partner of Orion Capital Managers, said most private equity firms would not buy Greek assets because the "risks are too high". He added: "I think people will not buy those assets, that is the sad truth."

Lahham said more than half of the assets up for sale comprises land for commercial or residential development, which is unattractive because of the difficulty of securing financing to build in Greece. His firm was attracted by the potential of Greek tourism but legislation made it difficult for foreign companies to develop the country's islands and beaches. "Greece is a fantastic tourism destination with very undeveloped infrastructure. There isn't a Four Seasons or a Shangri-La or a Peninsula or any of the major hotel chains in Greece," he said. "It's strange, they would love to be there and we would love to build it for them, but somehow regulations don't allow you to do so."

Lahham said Greece's ambition to sell €15bn of assets by 2012 and the full €50bn by 2015 meant there was not enough time to carry out due diligence properly. "I simply do not believe the timescale. I'm afraid it is not going to happen within times - I'm afraid it is a fire sale."

Christodoulakis denied that the hastily arranged sell-off was a fire sale, preferring to describe it as a "professionally managed privatisation plan". "We may sell them cheaper than [during normal conditions] but we will devote the funds to buying back debt, that means we are going to buy it back when it is cheaper." When a fellow Greek interrupted to say the sell-off was "destroying our country", Christodoulakis said there was "no point crying over spilt milk" and told his countryman to "try and be optimistic".

---

Greek government austerity measures
by BBC

The Greek parliament is debating the latest set of austerity measures, which it needs to pass to qualify for another payment under the bail-out from the European Union and the International Monetary Fund.

The five-year plan was changed last week to allow for more money to be raised through tax increases and less money to be saved through spending cuts. The plan involves cutting 14.32bn euros ($20.50bn; £12.82bn) of public spending, while raising 14.09bn euros in taxes over five years. These are some of the austerity measures planned.

Taxation

• Taxes will increase by 2.32bn euros this year, with additional taxes of 3.38bn euros in 2012, 152m euros in 2013 and 699m euros in 2014.
  
• A solidarity levy of between 1% and 5% of income will be levied on households to raise 1.38bn euros.
  
• The tax-free threshold for income tax will be lowered from 12,000 to 8,000 euros.
  
• There will be higher property taxes
  
• VAT rates are to rise: the 19% rate will increase to 23%, 11% becomes 13%, and 5.5% will increase to 6.5%.
  
• The VAT rate for restaurants and bars will rise to 23% from 13%.
  
• Luxury levies will be introduced on yachts, pools and cars.
  
• Some tax exemptions will be scrapped
  
• Excise taxes on fuel, cigarettes and alcohol will rise by one third.
  
• Special levies on profitable firms, high-value properties and people with high incomes will be introduced.

Public Sector Cuts

• The public sector wage bill will be cut by 770m euros in 2011, 600m euros in 2012, 448m euros in 2013, 300m euros in 2014 and 71m euros in 2015.
  
• Nominal public sector wages will be cut by 15%.
  
• Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses.
  
• All temporary contracts for public sector workers will be terminated.
  
• Only one in 10 civil servants retiring this year will be replaced and only one in 5 in coming years.

Spending Cuts

• Defence spending will be cut by 200m euros in 2012, and by 333m euros each year from 2013 to 2015.
  
• Health spending will be cut by 310m euros this year and a further 1.81bn euros in 2012-2015, mainly by lowering regulated prices for drugs.
  
• Public investment will be cut by 850m euros this year.
  
• Subsidies for local government will be reduced.
  
• Education spending will be cut by closing or merging 1,976 schools.

Cutting Benefits

• Social security will be cut by 1.09bn euros this year, 1.28bn euros in 2012, 1.03bn euros in 2013, 1.01bn euros in 2014 and 700m euros in 2015.
  
• There will be more means-testing and some benefits will be cut.
  
• The government hopes to collect more social security contributions by cracking down on evasion and undeclared work.
  
• The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions.

Privatisation

• The government aims to raise 50bn euros from privatisations by 2015, including:
  
• Selling stakes this year in the betting monopoly OPAP, the lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water.
  
• It has agreed to sell 10% of Hellenic Telecom to Deutsche Telekom for about 400m euros.
  
• Next year, the government plans to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATEbank as well as ports, airports, motorway concessions, state land and mining rights.
  It plans further sales to raise 7bn euros in 2013, 13bn euros in 2014 and 15bn euros in 2015.

Sources: Reuters, Greek Ministry of Finance Economic Policy Programme Newsletter

---

'Revolution is the only solution - in Greece nobody has a future'
by Damian Mac Con Uladh - Irish Times

Violence in Athens marred the start of an unprecedented 48-hour general strike in Greece, as the country’s MPs began a two-day debate on a fresh round of austerity measures yesterday. A total of 158 MPs have registered to speak in the debate ahead of tomorrow evening’s vote on a €28 billion austerity plan and €50 billion privatisation programme, the first of two knife-edge votes for Greek prime minister George Papandreou this week.

The second vote, on Thursday, concerns a law to implement the measures, which have sparked fury among the Greek public. Greeks will see their tax bill increase significantly under the new tax regime. A couple with two children and earning €20,000 a year, for example, will pay €840 more in taxes and levies – €640 of which represents income tax hikes and €200 the first payment in a three-year special levy that will be docked from salaries.

Property taxes are also set to increase, with the owners of houses worth more than €300,000 to pay a new €200 tax. Road duty is also to go up by 10 per cent. As the parliament argued over the new austerity programme, thousands of Greeks took to the streets of the capital in protest at the measures, following a call from the country’s private and public trade union federations.

"Everyone has to demonstrate because in Greece nobody has a future," said 37-year-old protester Elena Priovolou. "I think revolution is the only solution, not just in Greece but in the European Union," continued the unemployed film editor, who says she receives no state benefits.

The demonstrations remained generally peaceful until about 2pm, when scores of koukouloforoi, a Greek term for hooded rioters, began showering riot police with stones and bottles on Athens’s central Syntagma Square. Police lines responded with tear gas and, in cases, stones. Rioters, clad in gas masks and helmets, set dumpsters alight and rounded on a mobile telecommunications van which went up in flames. A number of journalists, cameramen and photographers were also confronted by the rioters, who also attacked peaceful demonstrators.

After night fell, thousands of peaceful demonstrators returned to Syntagma Square to chant insults at parliament, as they have done every night for more than a month. A large group listened to a concert in the centre of the square while, in the side streets, gangs of rioters continued to hurl rocks at police, who responded sporadically with tear gas. Mr Papandreou’s European counterparts have warned that the payment of the next €12 billion tranche under Greece’s existing bailout mechanism, as well as the setting up of a new bailout package worth €120 billion, is conditional on both pieces of legislation being passed.

"They must be approved if the next tranche of financial assistance is to be released," said EU economics and monetary affairs commissioner Olli Rehn as the Greek debate got under way. "To those who speculate about other options, let me say this clearly: there is no Plan B to avoid default," he continued.

Although in recent days four MPs from Mr Papandreou’s ruling Socialist Pasok Party opposed the new austerity and privatisation measures, intense pressure has been brought on them to fall into line by Greece’s new finance minister Evangelos Venizelos. Yesterday, one of the wavering Pasok MPs indicated that he might vote for the package. Another, who objects to the partial privatisation of the country’s electricity company, hinted he may also return to the Pasok fold if the government makes some minor concessions.

Despite appeals from his European conservative counterparts and from Mr Papandreou, Antonis Samaras, the leader of the Conservative New Democracy party, is maintaining his opposition to the austerity legislation. However, due to the unbundling of the implementation law, to be passed on Thursday, into separate components, Mr Samaras’ party may vote for aspects that it agrees with, such as the privatisation of state-run industries.

---

Greek Relief May Be Short-Lived
by Richard Barley - Wall Street Journal

Global markets have dodged a bullet. Greece has voted "yes" to more austerity, paving the way for the disbursement of €12 billion ($17 billion) in bailout loans and avoiding a messy default. The vote in the end was relatively comfortable, with 155 Greek lawmakers in favor, including some who previously had vowed to vote against, and 138 against. But investors can't breathe easy yet. Greece still is a source of risk, and the global picture is gloomy.

For Greece, the focus will move to implementation, with another vote due on Thursday. Meanwhile, the French plan to roll over Greek debt falls far short of being a Brady-style solution for Greece and has yet to receive the ratings firms' blessings. Further negotiations with the euro zone and International Monetary Fund aren't likely to be easy. That might mean a continued twin shortfall on both Greek overhauls and funding.

At the same time, there is a body of evidence that the global economy is slowing. Chinese manufacturing is close to stagnating, the HSBC Purchasing Managers Index shows; even the purring motor of the German economy has shifted down a gear. Southern Europe is crawling along. In many developed countries, fiscal policy is being tightened to repair strained balance sheets. In many emerging economies, interest rates are rising to contain inflation. The Federal Reserve's second bond-purchase program, known as quantitative easing, is winding down, potentially removing support for risky assets as net Treasury bond supply picks up. The market now expects Fed policy to remain on hold well into 2012. The Bank of England has dropped hints of more quantitative easing.

Yet compared with the end of the first quarter, when the outlook for the global economy was brighter, many asset prices have remained resilient. The S&P 500-stock index is down just 1.9%, the Stoxx Europe 600 has fallen 3.5%. Corporate bond spreads in the U.S. and Europe are only modestly wider. The most obvious signs of tension from the Greek crisis may ease. The Swiss franc may fall against the euro; safe-haven German, U.S. and U.K. bond yields should rise; and yield spreads for Spanish and Italian bonds should compress. But until investors are sure that the slowdown in growth is just a soft patch rather than something more sinister, risk assets more broadly may struggle to make much headway.

---

German Banks Agree to Greek Aid Deal
by Ulrike Dauer and Patrick McGroarty - Wall Street Journal

Germany's major banks have agreed to take part in a new aid program for Greece by accepting longer maturities on some €2 billion ($2.9 billion) in bonds that currently fall due in 2014, Finance Minister Wolfgang Schäuble said Thursday. The agreement, which follows a French plan reached last weekend, comes in time for euro-zone finance ministers discuss the aid program at a meeting in Brussels on Sunday.

Speaking to reporters alongside Deutsche Bank AG Chief Executive Josef Ackermann, Mr. Schäuble said German banks hold some €10 billion in Greek government bonds but about 55% of them aren't due to mature until after 2020. The smaller portion due by 2014, around €2 billion, would be the focus of this agreement, he said.

Mr. Schäuble said the agreement, based on a similar proposal put forward in France, would help euro-zone finance ministers determine the broad outlines of a new aid package for Greece. The so-called Eurogroup of euro-zone finance ministers meets Sunday in Brussels. Mr. Ackermann said he recognizes that banks and euro-zone governments need to cooperate on a "quantifiable, sustainable solution." "We are certain that Greece needs to be helped with further aid," he said.

Greece has €64 billion of bonds maturing by 2014. It will need more aid on top of the €110 billion program it received from its euro-zone partners and the International Monetary Fund to meet future commitments. Belgian Finance Minister Didier Reynders Thursday said that progress on talks between European governments and private-sector creditors is pushing forward a plan to solve Greece's most urgent debt problems. "We try in different capital cities to discuss with banks, insurance companies and pension funds to manage it on a voluntary basis," Mr. Reynders said in Paris. "We've seen some progress in the private sector."

Mr. Reynders also said that although it is possible that the Eurogroup meeting of euro-zone finance ministers on Sunday won't iron out all the plan's details, it may produced a go-ahead for the next tranche of Greek aid worth between €11 billion and €12 billion to be paid by mid-July.

European Central Bank President Jean-Claude Trichet Thursday said it is in "Greece's interest" and in the interest of all of its neighbors to find a solution to the country's debt crisis. "I hope we can conduct this debate in a more serious way than hitherto," he said. He stressed that he is against any involvement of the private sector in a "debt action" for Greece that isn't purely voluntary. He said that adjustment for Greece "is the first priority," adding that privatization is important for the embattled Hellenic Republic.

ECB Governing Council Member Ewald Nowotny called the French proposal on private-sector involvement "a very, very interesting step for some countries." However he said it is important that there is a common European solution, adding that discussions were taking place.

---

Better Save Some of That Tear Gas for Portugal, Spain, Italy
by Mark Gongloff - Wall Street Journal

We’re all mesmerized — though apparently not the least bit bothered — today by the images of rioting in Greece as politicians there struggle to hammer out austerity plans that will get the country its next bit of methadone, er, bailout money.

But developments elsewhere in Europe threaten to steal the spotlight back from Greece ultimately and add to the degree of unhappiness. March Chandler at Brown Brothers Harriman reports, you decide:

First, note that Portugal’s Q1 budget deficit came in at 8.7% of GDP. This year’s target is 5.9% (2010=9.2%). New austerity measures will likely be forthcoming shortly. Recall that the old government collapsed when the opposition balked at the extreme austerity. The EU/IMF softened the terms under the aid package, but the new government now has to dust off those proposals that it previously blocked. This is a subtle example of the political instability that the IMF/EU plan seems to generate.

Second, political problems are coming to the fore in Spain. The minority Socialist government (seven seats shy) will need the opposition support for next year’s budget. The Catalan Party yesterday indicated it will not support the government’s budget. Neither will the main opposition party. The budget will not come up for a parliamentary vote until September. Even through Spanish law allows for a reversion to the previous year’s budget, tradition requires an election. The risk is that Prime Minister Zapatero does not complete his term that expires March 2012.

Moody’s has expressed concern about the regional fiscal slippage. The region’s account for 1/3 of the government spending and half of the public sector workers. Total debt regional debt was 11.4% of GDP in Q1 11 up from 10.8% in Q4 10. Austerity measures are not being shared equitably between the central government and the regions. The central bank warned a couple weeks ago that regional finances are worsening. Despite the passage of some labor reforms, the IMF has has urged Spain to accelerate its efforts to overhaul the economy.

Third, Italy is likely to announce additional austerity measures as early as tomorrow. S&P warned in May and Moody’s in June about the outlook for Italy’s credit worthiness. Prime Minister Berlusconi has had a number of setback already this year at the hands of the public, but his most pressing challenge is within his government. Coalition partner Northern League may not support the 2012 budget and appear to have increased pressure on Finance Minister Tremonti to resign.

Despite all of these warnings of future rioting in the streets and anxious vote-watching, peripheral bond spreads are narrower, and the euro is higher, today on Greek relief. That relief may not be long-lasting.

---

'EU more worried about Spain than Ireland'
by Brendan Keenan - Independent.ie

European leaders believe they can avoid a debt crisis in Ireland and Portugal, but are concerned that Greece could trigger problems in larger economies such as Spain, Finance Minister Michael Noonan said [Sunday]. His comments came as billionaire investor George Soros said the departure of Greece from the euro was "inevitable."

"The European authorities are more worried about countries like Spain than they are about Ireland and Portugal," Mr Noonan said on RTE radio. "The authorities I have spoken to believe they can prevent contagion spreading to Ireland and Portugal but they have some concerns about the bigger European countries, and they are going to draw the line there. "I presume they will bring other policy instruments forward as necessary."

Earlier, Mr Soros said it's "probably inevitable" that a mechanism will have to be put in place to allow weaker eurozone economies to exit the single currency. "We are on the verge of an economic collapse which starts, let's say, in Greece, but it could easily spread," Mr Soros said at a discussion in Vienna on whether liberal democracy is at risk in Europe.

"I think most of us actually agree that (Europe's crisis) is actually centred around the euro.'' He added: "The authorities are actually engaged in buying time. And yet time is working against them." European leaders have vowed to stave off a Greek default provided Prime Minister George Papandreou pushes through his €78bn reforms package.

---

Bank of Ireland cancels bond swap amid pensioner protests
by Harry Wilson - Telegraph

Bank of Ireland has been forced to cancel a bond exchange plan that would have seen investors receive just 20pc of their money back. In a statement yesterday, Bank of Ireland said it had withdrawn an exchange offer for £75m of bonds issued by its Bristol & West subsidiary because of "procedural difficulties" some holders were having.

Investors included many pensioners who were dismayed by the writedown they were being asked to take, and the offer had been due to face a legal challenge in the High Court today.
Albert Kempster, a 73-year-old farmer, branded the terms being offered "unfair" and had mounted a legal challenge against the bank's attempt to force a "haircut" on investors.
The court hearing has been postponed in the wake of the cancellation of the offer, however.
Bank of Ireland is 36pc- owned by the Irish state and is currently attempting to raise new money through a rights issue as well forcing through "haircuts" on its debt that are expected to free up €2.6bn (£2.3bn) in capital.

Just 12pc of the Bristol & West bondholders had accepted the exchange offer at the end of last week, compared with an overall acceptance level for its debt reduction plan of 74pc.
About 2,400 retail investors, including many pensioners, are affected by the offer.

---

Up to 15 EU banks to fail stress test
by Marc Jones and John O'Donnell - Reuters

Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. The result, which the European Central Bank and others hope will persuade investors the European Union was finally coming clean about the extent of banks' problems, will pressure reluctant states to prop up lenders that cannot raise money.

Euro zone sources said the European Banking Authority was set to announce within weeks that 10-15 of 91 banks being scrutinized had failed, with casualties expected in Germany, Greece, Portugal and Spain. The checks will provide the first picture of the health of EU banks since a previous round a year ago was deemed too lax. In that round, Irish banks were all given a clean bill of health months before their difficulties drove the country to seek an international bailout.

The new checks will measure how well the core capital that banks rely on to absorb losses such as unpaid loans holds up when exposed to an economic dip or fall in property prices. They also gauge the impact on banks should government bonds they own, issued by states such as Greece, lose value. But the tests stop short of assessing the full impact of a country defaulting, including the likely resultant freeze in interbank lending.

In the drive for credibility, the EBA, which runs the tests and the ECB, which sets the economic scenarios, have pushed for more banks to fail than last year's seven. "How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source.

The EBA wants the number of banks that do not pass the tests to be around that level to show the examinations were serious, said a second source, adding the authority did not want to push for more, for fear it could spark panic. "In order to demonstrate that it is credible, the EBA would need to show that the number of bank failures is significant, without being substantial," said the source. "A number in the teens is about right." A spokeswoman for the EBA said testing was still under way and declined to comment on speculation about the outcome.

Technical and Political
The tests are technical, as well as political. While the EBA and ECB want to show up the failures, national regulators want to stop their banks appearing on the list, concerned they would look incompetent for not having spotted problems themselves.

EU authorities want to expose laggard groups around the EU, said the second source, avoiding too many problems in weak countries, such as Spain, as that could prompt international lenders to shun the country and its banks. "They are going to find a way of preventing one center ... from sticking out," said the source. "If it were to be Spain, it would be very bad news. Failing German banks in a stress tests would be much safer."

The EBA, due to announce the results in mid-July to coincide with a meeting of EU finance ministers, also faces pressure from governments wanting to avoid flops that may force them to come up with financial support. One EU official said disagreement with Germany over how to apply the stress-test criteria had delayed the conclusion of the bank checks by some weeks, until July.

German regulators, who privately deny they upset the timetable by refusing to apply the criteria agreed, blame imprecise EBA templates and say the stress tests could be delayed again beyond the middle of July. "Every national regulator will be fighting for none of their banks to be on the list," said the source. "It is a mark of incompetence. It is a reputational issue and it is an issue of money."

High-level officials from European finance ministries are now working on how to help those given a failing grade. Andrea Enria, head of the EBA, last week called on governments to put plans in place to help banks that failed or were shown to be vulnerable.

On Tuesday, a spokeswoman for the EBA said governments must not be slow to plug any capital holes exposed in the checks. "It is important that concrete and decisive actions by the banks and authorities are taken following the results, including ensuring that credible capital plans ... are taken to address deficiencies."

Although the EBA is insisting on the publication of each bank's sovereign debt holdings by maturity as well as size, it is ultimately the number of banks which fail that will establish the credibility of the checks. "If it was the same as last time when seven failed, next to nothing, then no one would believe it," said one source. "But you cannot fail 50, or the banking system would collapse."

---

US home prices drop 4% in April
by Shannon Bond - Financial TImes

The kick-off of spring buying helped support the US housing market in April, but home prices dropped 4 per cent from the same period a year earlier as falling sales and a weak labour market weighed on the sector. Meanwhile, US consumer confidence fell to a seven-month low as Americans worried about high unemployment.

Prices of single-family houses in the 20 largest US cities sank 4 per cent from April 2010, the steepest drop since November 2009, according to the S&P/Case-Shiller home price index. The yearly fall was in line with expectations, following a 3.8 per cent decline in March. Prices in the spring and early summer of 2010 had been boosted by the government’s first-time homebuyers’ tax credit.

On a seasonally adjusted basis, prices were 0.1 per cent lower than in March, better than a forecast 0.2 per cent monthly dip, but it was the 10th straight month of price declines as the housing market continues to struggle amid a lacklustre recovery.

"The seasonally adjusted numbers show that much of the improvement reflects the beginning of the spring-summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather," said David Blitzer, chairman of the S&P’s index committee. "For a real recovery we would need to see several months of increasing home prices, large enough to shift the annual momentum to the positive side."

New home sales have fallen 13.6 per cent from January to May, and last month the supply of new houses on the market fell to a record low. Meanwhile, the inventory of existing homes, many of which are prices at steep discounts, has continued to rise as banks work through a growing backlog of homes in foreclosure. The oversupply of distressed properties has been a drag on home values, discouraging many homeowners from selling and prompting American households to rein in consumption.

"It’s hard to sell when buyers have the leverage and foreclosures continue to create a gap between distressed sale prices and non-distressed sale prices," said Jonathan Basile, director of economics at Credit Suisse. "Homeowners’ unwillingness to sell remains high given the widespread declines in prices – 92 per cent of homeowners said it was a bad time to sell their home in May, according to the Thomson Reuters/University of Michigan Surveys of Consumers."

Tuesday’s figures showed that prices fell over the year in 19 of the 20 cities, led by Minneapolis’s 11.1 per cent annual plunge. Washington was the only city where prices rose, climbing 4 per cent. On a monthly basis, unadjusted prices rose in 13 cities, led by Washington, but prices fell to new lows in Charlotte, Chicago, Detroit, Las Vegas, Miami and Tampa.

Separately, the Conference Board’s index of consumer confidence fell again in June, dropping to 58.5 from May’s upwardly revised 61.7. Economists had predicted the reading would tick up to 61.0 from last month’s originally reported 60.8.

Rising pessimism was driven by a gloomier assessment of current conditions and a more negative short-term outlook, said Lynn Franco, director of the Conference Board. "Given the combination of uneasiness about the economic outlook and future earnings, consumers are likely to continue weighing their spending decisions quite carefully," she said.

Consumers’ evaluation of present conditions decreased to 37.6 from 39.3 in May, while expectations for the next six months fell to 72.4 from 76.7. More people said jobs were "hard to get," while fewer respondents said they expect more jobs in the months ahead. Consumers were also less optimistic that their incomes would grow in the second half of the year.

The drop in confidence in the labour market was likely a reflection of May’s grim non-farm payrolls report, Credit Suisse’s Jill Brown noted. Private-sector jobs grew by just 83,000 in May and the unemployment rate climbed to 9.1 per cent.

---

UK bank chief warns of wave of home repossessions if rates rise
by Jill Treanor - Guardian

Britain is facing a 'tsunami' of house repossessions as soon as interest rates start to rise, one of the country's leading bankers has warned. Richard Banks, the chief executive of UK Asset Resolution (UKAR), the body that runs the £80bn of mortgages bailed out by the taxpayer during the banking crisis, also said in an interview with the Guardian that the Labour government's pleas at the start of the crisis for lenders to keep families in their homes was forcing some homeowners further into debt.

In a warning that the industry may have been too lenient with some of its customers, he said he believed a policy of "tough love" would be fairer to people facing long-term difficulty in keeping up payments on loans taken out when house prices were at their peak and personal incomes on the rise. His warning came the day after the international bank regulator said the Bank of England, which has kept rates at 0.5% for more than two years, would have to raise rates shortly to curb inflation.

The Bank of International Settlements said the policy of the Bank of England, whose rate-setting committee is split over whether or not to increase borrowing costs, was "unsustainable". With 750,000 customers, UK Asset Resolution, set up to run the nationalised mortgages of Bradford & Bingley and parts of Northern Rock, is the country's fifth largest mortgage lender. But 23,000 of those mortgage holders are more than six months behind with payments and Banks admitted the projections for the number of people falling behind on payments could get "scary" if lenders did nothing to prepare for higher rates.

"You can see if you don't do something about it, you can see a tsunami," he said. "If you don't get into the hills you could get drowned by this. If you don't manage this properly it could get very messy."

He regards it is an industry-wide problem, albeit one that might be concentrated at UKAR as its customers include buy-to-let landlords and so-called self-certified borrowers – those without salaried income. UKAR, through three calls centres in Crossflatts, West Yorkshire, Gosforth, Newcastle, and Doxford, Sunderland, has begun cold-calling customers it believes are at risk of falling behind on payments in an attempt to keep their mortgage payments on schedule. The bank is also trying to tackle customers behind with payments for six months or more and at risk of repossession.

His concern about a surge in repossessions is partly the result of moves by the industry early in the 2008 crisis to grant so-called forbearance to help customers stay in homes by, for example, reducing monthly interest payments. "We as an industry, as a kneejerk reaction in the emergence of the crisis, and because the government asked us to be forbearing to customers in the hope it would all go away, we have been too lenient with some customers.

"It's a tough love approach," he said. "It's treating customers fairly, not nicely, because if you can't afford your mortgage you are only increasing your indebtedness. If we allow you to increase your indebtedness, that's not really fair to you."

This month the Council of Mortgage Lenders forecast a rise in repossessions from 40,000 this year to 45,000 next. This figure would still remain well below the 75,500 peak of 1991. The remarks by Banks follow a warning last week from the new regulator set up to spot financial risks in the system – the Financial Policy Committee (FPC) inside the Bank of England – that warned banks may be providing a "misleading picture of their financial health" if they were not making big enough provisions for borrowers in difficulty.

Forbearance has been brought into play in up to 12% of mortgages, the FPC said. It also noted that the most "vulnerable" households were concentrated in a few banks. It did not scrutinise UKAR but noted that the two other bailed-out banks, Lloyds Banking Group and Royal Bank of Scotland, had the largest exposure to customers whose mortgages were bigger than their value of their homes.

Last month, the Financial Services Authority issued a guide to handling forbearance in which it warned: "Arrears and forbearance support provided with due care by firms has a beneficial impact for both the firm and the customer … However, where such support is provided without due care or any knowledge or understanding of the impacts, it has potentially adverse implications for the customer, for the firm's understanding of the risks inherent within its lending book, and in turn for the regulators and the market."

---

Bank of America nears $8.5 billion deal over mortgage-backed securities
by E. Scott Reckard, Los Angeles Times

The proposed payment by Bank of America would settle claims by large investors including Pimco and BlackRock Inc.

In the latest blow from its takeover of Countrywide Financial Corp., Bank of America Corp. tentatively agreed to pay $8.5 billion to settle claims by large investors stung by losses on mortgage-related securities that Countrywide issued.

The final details of the agreement were still being worked out, according to a bank executive knowledgeable about the pending settlement but not authorized to discuss it publicly.

The 22 investors, including money-management giants Pacific Investment Management Co. of Newport Beach and BlackRock Inc. of New York, held $56 billion in bonds backed by loans from Countrywide, once the nation's largest home lender and an aggressive supplier of subprime and other high-risk mortgages.

"This transaction essentially takes all Countrywide's private-label mortgage-backed securities off the table," the executive said Tuesday. "It's considered to be a significant step forward in Bank of America putting the Countrywide issues behind us."

The pending settlement covers only mortgage-related securities issued by Countrywide and not those that BofA issued on its own.

BofA shares, which had lost 3 cents on the day, were up 12 cents at $10.94 in after-hours trading after word of the impending deal leaked. Some estimates of the bank's liability had been much higher than $8.5 billion.

"The Street will view this as a good number," said Paul Miller, an analyst with FBR Capital Markets.

Nearly all major mortgage issuers of that era bundled up most of their loans and sold them to private investors as well as to government-sponsored entities such as Fannie Mae and Freddie Mac.

Fannie, Freddie and a host of institutional investors have demanded that the banks buy back many of the mortgage bonds, contending that the lenders understated the riskiness of the loans and mishandled troubled borrowers after the industry's meltdown beginning in 2007.

Bank of America agreed in January to pay Fannie and Freddie $2.8 billion to settle demands for buybacks of flawed home loans, in addition to some $3.5 billion in such payments it had already made to them.

The pending settlement would be the first with private mortgage bond investors, but it's unlikely to be the last. Among other big lenders with major exposure are Wells Fargo & Co. and JPMorgan Chase & Co. Chase had bought the remains of one of the most aggressive lenders, Washington Mutual Bank, after the Seattle-based thrift became the largest bank failure in history.

BofA, based in Charlotte, N.C., has struggled to put Countrywide's woes behind it since 2008 when it paid $2.5 billion in stock for the Calabasas-based mortgage specialist.

The bank settled securities-fraud accusations by some major Countrywide shareholders in August, but before the deal was finalized 33 plaintiffs — including the California Public Employees' Retirement System — dropped out to seek more money on their own.

And in April, BofA agreed to pay $1.1 billion to mortgage insurer Assured Guaranty Ltd. Other mortgage insurers are pressing claims to try to recover losses they sustained on Countrywide loans.

BofA is also among five major loan servicers negotiating with a coalition of state attorneys general and federal officials seeking damages and reforms following revelations that the lenders shortcut procedures and failed to follow laws while foreclosing on borrowers.

The damages under discussion in that case range from a total of $5 billion to more than $20 billion, according to people close to the negotiations.

---

US downgrade worries hang over Treasuries
by Michael Mackenzie - Financial Times

A $100bn hit for investors. That is the price being put on the unthinkable: a downgrade of US debt should Republicans and Democrats fail to strike a deal on America’s debt ceiling. Judging by the very low levels of Treasury bond yields, which move inversely to bond price, investors for now appear sanguine about the risk that the US could lose its coveted triple A rating.

Indeed, the world’s biggest and most liquid government bond market, at $10,000bn and growing, has a number of built-in attractions, in particular its reserve currency status, that suggest it could shrug aside the loss of its top rating. With investors fretting over Greece and other debt-laden eurozone members, the US bond market is once more a haven in times of trouble. Signs of weakening global and US growth are also helping boost the appeal of owning Treasury debt.

But, given that the US Treasury market has more than doubled from $4,500bn since 2007, and faces a "daunting" budget outlook according to the Congressional Budget Office, there is growing concern that Treasury debt is on the path to losing its triple A rating. This year, the ratio of US debt to the size of the US economy will approach 100 per cent. And just last week the CBO projected that, without significant policy changes that address an aging population and rising per capita healthcare costs, federal debt will reach nearly 200 per cent of gross domestic product by 2035.



Projections of large long term deficits moved rating agency Standard & Poor’s in April to revise its outlook on the US credit rating from ‘stable’ to ‘negative’. Now research from Standard & Poor’s Valuation and Risk Strategies, a research arm of S&P’s parent McGraw Hill, estimates that should US debt be downgraded, losses for investors owning Treasury paper could total $100bn.

Michael Thompson, managing director at S&P Valuation and Risk Strategies, says his team arrived at these findings by tracking average credit default swap rates for sovereign credits around the world to determine a range of interest rate fluctuations that could be expected if the US triple A rating was lowered. They then combined this rate movement data with bond duration data and total debt outstanding to determine the potential price drop.

Mr Thompson says if the US were downgraded to double A, CDS rates would increase 23.2 basis points and if it were downgraded to single A, CDS rates would increase 37.5 basis points. In turn, given that the 10-year note has a modified duration of approximately 8.5 years, its price would drop by 2 per cent and 3.2 per cent for ratings reductions to ‘AA’ and ‘A’, respectively.

Such calculations may be little more than an academic exercise, given the reserve currency status enjoyed by the US. Richard Gilhooly, strategist at TD Securities, says: "Regardless of what Moody’s and S&P say, the market still needs a benchmark and that’s the US. If the US becomes double A plus, that's the new triple A."

Japan is a case in point where ratings downgrades of government debt, for example, have not prevented yields staying very low, even if, unlike the US, most of that country’s outstanding debt is held domestically. By contrast, nearly half of US Treasuries is held by foreign investors as the US market sits at the centre of the global financial system and is viewed as a safe haven and extensively used as collateral by investors across markets.

Fidelio Tata, head of US interest rate strategy at Société Générale says: "Treasuries are so big and liquid as a market and investors have no other choice for a benchmark." He adds: "It’s more of an academic argument as to how a downgrade would affect the market."

A sovereign risk index developed by BlackRock ranks sovereign debt issuers according to the relative likelihood of default, devaluation or above-trend inflation. Based on their metrics, the US is currently ranked in the lower half of countries perceived as being stronger, behind China and Germany, but ahead of the UK, France and Japan.

While this suggests the odds of a downgrade are low, not all bond investors are so sanguine. Bill Gross, founder and co-chief investment officer of Pimco, has been very vocal about the long term US fiscal position and has turned negative on US government debt.

The spectre of a downgrade could come a lot sooner than some think as Washington continues to wrangle over increasing the $14,300bn Federal debt ceiling ahead of an early August deadline.

Given that some $4,000bn of Treasury debt is used as collateral across the financial system, any delay in raising the debt ceiling could upset the vital infrastructure that supports daily trading across bonds. "Even a short suspension of payments on principal or interest on the Treasury’s debt obligations could cause severe disruptions in financial markets and the payments system," Ben Bernanke, Federal Reserve chairman, said earlier this month.

There could be a significant impact on bond prices. JPMorgan polled 45 large clients recently for their views of how much the yield on 10-year notes would rise in the event of a missed coupon payment by the Treasury. The mean response was 37 basis points, but foreign investors expected a significantly larger initial increase than domestic investors at 55bp.

The bank estimates a 20 per cent reduction in Treasury holdings by foreign investors over a one year period would result in Treasury yields rising by 50bp to 60bp. These higher interest costs would increase annual deficits by $10bn in the short run, and by $75bn per year over time, only serving to make the US’s task of cutting its budget deficit even tougher.

---

U.S. Consumer Confidence Falls to Seven-Month Low
by Alex Kowalski and Jillian Berman - Bloomberg

Consumer confidence dropped to a seven-month low in June as Americans grew concerned about the outlook for jobs and wages. The Conference Board’s sentiment index decreased to 58.5 from a revised 61.7 in May that was higher than previously estimated, figures from the New York-based private research group showed today. Home prices fell in the year ended in April by the most in 17 months, another report showed.

Unemployment hovering around 9 percent, deterioration in the housing market and a drop in share prices may restrain Americans’ sentiment, raising the risk that the biggest part of the economy will stagnate. The Federal Reserve last week kept in place record monetary stimulus to help nurture the expansion through what it views is a "temporary" slowdown.

"We have a fairly weak economy with little to no job growth," said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "With consumers so worried about their job prospects, I’m not so sure that we can count on demand picking up. The housing market is dead in the water."

Home values in 20 cities declined 4 percent in the 12 months to April, according to the S&P/Case-Shiller index. From March to April, values fell 0.1 percent on a seasonally adjusted basis, the smallest decline since July 2010. "Home prices are still easing, but the declines are not dramatic anymore," said Harm Bandholz, chief U.S. economist at Unicredit Group in New York, who correctly predicted the year- over-year drop. While month-to-month changes show "prices have basically bottomed and are moving sideways," he said "we’re a long way away from significant increases in house prices."

Stocks Rise
Stocks climbed on optimism that a deal can be reached to help Greece avoid defaulting on its debt. The Standard & Poor’s 500 Index gained 1.3 percent to 1,296.67 at the 4 p.m. close in New York. Treasuries slumped, pushing up the yield on the benchmark 10-year note to 3.03 percent from 2.93 percent late yesterday.

Economists predicted a June reading of 61, according to the median estimate in a Bloomberg News survey. Projections ranged from 55 to 66.7 in the survey of 69 economists. The index averaged 98 during the last economic expansion that ended in December 2007. The group’s measure of present conditions deceased to 37.6 from 39.3 in May. The measure of expectations for the next six months dropped to 72.4, the lowest since October, from 76.7.

Sentiment Figures
Today’s report parallels other data on consumer sentiment. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 71.8 in June from 74.3 in May. The Bloomberg Consumer Comfort Index declined to minus 44.9 for the week ended June 19 from minus 44.0 the prior week. The percent of respondents in the Conference Board survey expecting more jobs to become available in the next six months slumped to 14.2 from 16.7 the previous month. The proportion expecting their incomes to decline rose to the highest since August.

Confidence declined in eight of nine U.S. regions, today’s report showed. Consumer spending, which accounts for about 70 percent of the economy, fell 0.1 percent in April and May after adjusting for changes in prices, a report yesterday from the Commerce Department showed. It was the first back-to-back decline since March and April 2009, when the economy was still in a recession.

Buying Plans
Fewer respondents in the Conference Board’s survey indicated they were planning to buy cars, homes or major appliances in the next six months. Weak employment gains may be keeping consumers out of stores. Employers added 54,000 jobs in May, the slowest pace in eight months, according to June 3 Labor Department figures.

Fed officials cut their projections for economic growth this year and raised their estimates for the jobless rate after their June 21-22 meeting, noting that "the damping effect of higher food and energy prices on consumer purchasing power and spending" contributed to the slowdown. Gasoline prices retreated to $3.55 on June 27 from an almost three-year high of $3.99 high on May 4, according to figures from AAA, the largest auto club. The decline may free up some income for consumers to spend on other goods and services.

The Conference Board’s report showed 38 percent of respondents, the most March 2009, expected stocks to decline in the next year. Rick Dreiling, chairman and chief executive officer of Goodlettsville, Tennessee-based Dollar General Corp., said he expects continued unemployment to weigh on consumer confidence. The largest U.S. dollar-store chain posted a first-quarter profit on June 1 that fell short of analysts’ estimates.

"We are remaining cautious as unemployment, and just as importantly, underemployment, gas prices, food inflation and the general uncertainties of the economic outlook continue to challenge customers," Dreiling said on a June 1 call with analysts.

---