Friday, September 16, 2011

Today's Headlines

  • Europe Rules Out Stimulus, Skips Bank Aid. European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders to go along with yesterday’s liquidity lifeline from the European Central Bank. Clashing with U.S. Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation. “We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing today’s trans-Atlantic finance meeting in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.” Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros ($353 billion) in aid for Greece, Ireland and Portugal has failed to extinguish.
  • Fix on Banks' Dollar Funding Costs Brings Next-Day Cost Rise. The cost for European banks to fund in dollars rose, signaling that investors view policy makers’ offer of unlimited loans in the currency as a short-term fix that doesn’t address the euro region’s underlying problems. “Major central banks have merely treated the symptom rather than the cause,” said Michael Derks, the chief strategist at foreign-exchange broker FxPro in London. The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 85.4 basis points below the euro interbank offered rate as of 3:20 p.m. in London, from 81.9 basis points yesterday, after the European Central Bank and peers around the world made it easier to fund in the greenback. “Policy makers are fighting the wrong disease,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “Liquidity is not an issue, but solvency still is.” The Euribor-OIS spread, the difference between three-month Euribor and overnight index swaps, fell to 75.6 basis points, from 76.9 yesterday, still within nine basis points of the highest level since March 2009, reached Sept. 12. Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.535 percent from 1.531 percent yesterday. One-week Euribor gained to 1.111 percent, from 1.089 percent. The three-month London interbank offered rate, or Libor, in dollars rose to 0.351 percent from 0.350 percent, according to the British Bankers’ Association. The European Central Bank said financial institutions increased overnight deposits. Banks parked 98 billion euros with the ECB yesterday, compared with 87 billion euros the day before and 197.8 billion euros on Sept. 12, the Frankfurt-based lender said in data released overnight.
  • Spanish Regional Debt Surges to Second-Quarter Record, Bank of Spain Says. Spanish regions’ debt burden surged to a record in the second quarter, adding to pressure on the central government to rein in spending or risk missing the nation’s deficit goal. The 17 semi-autonomous regions’ outstanding debt burden rose to 133.2 billion euros ($183.7 billion), or 12.4 percent of gross domestic product, from 11.6 percent in the first quarter, the Bank of Spain said on its website today. From a year earlier, the debt surged 24 percent and the outstanding amount has more than doubled since 2007. Spain’s regions are key to the nation’s efforts to cut the euro area’s third-largest budget deficit as they manage more than a third of public spending, including health and education. Fitch Ratings downgraded five regions including Andalusia and Catalonia this week, saying debt levels are climbing and the weak economic recovery will undermine revenue. Spain’s regional governments are behind schedule to meet deficit targets, according to data released last week that Moody’s Investors Service called “credit negative.” Slippage by the regions “adds to pressure on the central government to make the needed cuts to meet the general government deficit targets,” Fitch Director Douglas Renwick said on Sept. 13. Risks to Spain’s sovereign rating are “clearly on the downside,” he said.
  • Local Government Debt Is China's Subprime. Borrowing by thousands of companies set up by China’s local governments to fund construction is the nation’s equivalent of the U.S. subprime mortgage crisis, said Cheng Siwei, a former deputy head of the country’s top legislative body. “Our version of the U.S. subprime crisis is the lending to local governments, which is causing defaults,” Cheng said at the World Economic Forum in the Chinese city of Dalian today. He served as vice chairman of the standing committee of the National People’s Congress from 1998 to 2003. Local governments in China, barred from directly selling bonds or taking bank loans, set up more than 6,576 companies to raise money for roads, sewage plants and subways. A June report by the national auditor warned of repayment risks and said some authorities had offered illegal guarantees for these companies, known in China as local government financing vehicles.
  • Solyndra Collapse Foreseen by Some Workers, a 'Shock' to Others. Alex Brudny, a mechanical engineer at Solyndra LLC until two weeks ago, says he wondered why the Obama administration gave the California company $535 million in loan guarantees. “To a majority of us, it looked like a political stunt,” Brudny, 59, said in a telephone interview. “The product was not as good as we counted on, and things were not really going well, and it was just a matter of time to me.” The collapse of Solyndra, a solar-power manufacturer, has prompted inquiries by Congress, the FBI and watchdogs at the Energy and Treasury departments. For 1,100 workers such as Brudny, it also has meant the loss of a job when the company shut down on Aug. 31.
  • U.S. Household Worth Declines by $149B. Household wealth in the U.S. dropped in the second quarter for the first time in a year, hurt by falling share prices and declining home values. Net worth for households and non-profit groups decreased by $149 billion, a 1 percent drop at an annual pace, to $58.5 trillion, the Federal Reserve said today in its flow of funds report from Washington. It rose at a 7.4 percent rate in the previous three months. Housing wealth decreased for a fourth consecutive quarter from April to June. A loss of $947 billion in real estate assets over the past year was compounded by a drop in the Standard & Poor’s 500 Index last quarter, the first decline in a year.
  • Payrolls Decreased in 30 U.S. States in August. Payrolls fell in 30 U.S. states in August, led by New York and Georgia, while the jobless rate increased in 26, showing the slump in hiring is broad-based. Employers cut staff by 22,700 workers in New York last month, and by 18,200 in Georgia, figures from the Labor Department showed today in Washington. Nevada continued to lead the nation in unemployment with a rate of 13.4, up from 12.9 percent in July.
  • Consumer Confidence in U.S. Rises More Than Estimated on Economic Outlook. Confidence among U.S. consumers rose in September from the lowest level since November 2008 as Americans’ views of current economic conditions improved. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 57.8 this month from 55.7 in August. The median estimate of economists surveyed by Bloomberg News called for a reading of 57. The group’s measure of consumer expectations six months from now dropped to the lowest level since May 1980.
  • Crude Oil Futures Decline Most in a Week in New York on European Concern. Crude oil tumbled the most in a week in New York on concern that European leaders meeting today haven’t taken sufficient steps to contain the region’s debt crisis. Futures fell as much as 2.7 percent as the euro halted a two-day advance against the dollar on signs that an agreement to bail out Greece may be hindered by demand from Finland for collateral. Technical resistance at about $90 a barrel also caused prices to retreat after yesterday’s rally. Crude for October delivery fell $1.54, or 1.7 percent, to $87.86 a barrel at 12:28 p.m. on the New York Mercantile Exchange. Futures have fallen 3.9 percent this year and gained 0.7 percent this week.
  • Gold Jumps Most in a Week as European Debt Concerns Boost Demand for Haven. Gold rose the most the in a week on renewed concern that Europe’s debt crisis will threaten economies, boosting demand for a haven. European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders at a meeting today. Before today, gold jumped 25 percent this year, reaching a record $1,923.70 an ounce on Sept. 6, on mounting signs the global economy will slow. Gold futures for December delivery rose $35.20, or 2 percent, to $1,816.60 on the Comex at 12:18 p.m. in New York. A close at that price would be the biggest gain since Sept. 8. Prices are still heading for a weekly drop of 2.3 percent.
  • BRIC Outlier India May Raise Rates Further as Prices Trump Europe Threat. India’s central bank may extend its record interest-rate increases, economists predicted after Governor Duvvuri Subbarao said a “premature” change in the monetary policy stance may fan inflationary expectations.
  • Leon Black: Europe Banks to Shrink Dramatically. European banks need to sell 1.5 trillion euros ($2.1 trillion) in assets because of the region’s sovereign-debt crisis, said Leon Black, head of private-equity firm Apollo Global Management LLC. “Banks need to sell a trillion and a half euros of assets off their balance sheets in the next few years,” he said today at an investment forum in Sochi, a resort town in southern Russia. “There are going to be great sales and they have already started.”
Wall Street Journal:
  • Bank Group Courts IMF, BRICs on EUR20B Greek Debt Proposal. The bank industry group negotiating Greece's debt refinancing is asking the International Monetary Fund and major emerging markets to back a private-sector led plan for Athens to buy back EUR20 billion ($27.6 billion) of its debt.
  • Greece May Tap Bank Fund For Cash As EU-IMF Loan Delayed - Source. Greece may tap an emergency fund for banks to keep it going as its creditors pushed back the decision on whether to continue its financing to October, a senior government official said Thursday.
  • Hong Kong Dollar Doubters Rush In. Hedge fund manager Bill Ackman created a stir this week with a call to go long on the Hong Kong dollar, a currency that has been linked in a in a very tight range near 7.8 to the U.S. dollar since 1983.
  • ECRI Leading Index Still Falling, Now With More Falling-Ness. (graph) The Economic Cycle Research Institute’s weekly index of leading economic indicators continues to trot in the wrong direction, down. The ECRI’s index ticked lower last week, the institute said today, and the four-week rolling average fell to -7.1%, the worst rate of decline in nearly a year.
Business Insider:
Zero Hedge:
NY Post:
  • Dems' 'Primary' Message to Obama. Two days after his party’s humiliating loss in the special election to fill disgraced ex-Rep. Anthony Weiner’s House seat, President Obama faced angry complaints from some in his own party that a primary challenge might be the best way to catch his attention in case he missed the political warning signs that seem to be flashing red. “It’s a common refrain, and it’s certainly common in my district among Democrats [because] they want the guy back that they voted for,” liberal Rep. Peter DeFazio of Oregon said, referring to the perceived political shift by the president.
Dow Jones:
  • German Cabinet Delays Discussing Stability Mechanism. Eurozone fund now unlikely to be in place by end of year.
Washington Times:
  • Obama Agrees to Sell Arms to Taiwan. President Obama has decided to sell a new arms package to Taiwan that will likely include weapons and equipment to upgrade the island’s F-16 jets, according to administration and congressional officials. Congress will be briefed Friday on the arms package, worth an estimated $4.2 billion, said officials who spoke on the condition of anonymity. A formal announcement is expected soon. China, which opposes U.S. arms sales, is expected to react harshly to the upgrade package. China's military cut off exchanges with the Pentagon in 2008 and last year after two arms packages were announced.
  • Gauging the Gloom. (graph) An uptick in press mentions of recession bodes ill for the world economy.
Chicago Tribune:
  • Germany's Weber Says Eurozone's Debt Issues to Worsen and Need Crisis Management. As the Eurozone debt crisis threatens banks and potentially the global economy, former German central banker Axel Weber said he “fears” financial conditions will have to deteriorate more in Europe before leaders take “drastic action.” Meanwhile, he said, “Europe needs to improve the probability of successful crisis management.” Speaking at the Chicago Council of Global Affairs, Weber said policy makers need the political cover of an emergency to take action. “Things have to get worse before they get better,” he said. “If you act swiftly in the middle of a crisis people” appreciate the need for urgent action. He described recent Greece bailout measures as “an attempt to kick the can down the road,” but added “If Europeans don’t react the markets will get worse. Pressure from the bond market is already there. Investors want to hear a convincing story why they should buy new bonds.” “The debt problems of countries like Greece have become a problem for all the other countries” in the Eurozone, he said. Even France has been impacted, and along with Germany it is critical to the core of the union. Weber said resolution of the financial crisis is complicated because in the Eurozone there is “no common view of the origins of the crisis or solution.” Ultimately, Weber thinks there must be shared fiscal practices so that some countries don’t spend excessively and rely on more frugal companies to provide aid later. He envisions a two tiered system with the current Eurozone “a training ground” for countries that wish to get into a fiscal union with standards for stability. But, he said, that “is not around the corner” and will take years to get there. Meanwhile, the bailout has had a sharp impact on Germany, already. Weber said a couple of years ago Germany’s debt to GDP was a sound 64 percent. But two years into the bailouts of countries on the periphery of Europe, debt has jumped to 84 percent of GDP. Weber said in the past it would have taken 1.5 years for debt to mount so dramatically. “The numbers are moving up fast,” he said. If Germany were to guarantee the debt for the European Union, Germany’s debt would be 320 percent of GDP. “Germany would no longer be a triple A country,” said Weber. While hedge fund manager George Soros and others have suggested that issuing Eurobonds would be a solution, Weber said that “would do more harm than good.”
  • Exclusive: United Tech(UTX) Seeks Financing for Deal: Sources. United Technologies Corp is lining up financing in the double-digit billions of dollars to support a major acquisition in the United States, according to people with direct knowledge of the matter. The U.S. industrial conglomerate is tapping the credit market for funds that could top $20 billion, said one of the sources.
Frankfurter Allgemeine Zeitung:
  • Germany's credit risk on its contribution to the expanded European Financial Stability Facility could swell to as much as 400 billion euros if interest obligations are considered in extreme cases. That figure is about twice as much as German officials have indicated, citing calculations from Deutsche Bank AG.
  • International Monetary Fund Managing Director Christine Lagarde called for concerted action by policy makers to cut debt and keep the global economy on track, she said. Dithering by politicians in dealing with debt in developed countries has contributed to a vicious circle that is holding back consumer demand, investment and job creation, Lagarde wrote.
Beijing Business Today:
  • Beijing new home prices fell 6.6% in the first eight months from a year earlier, citing the city's housing association. Transaction volume dropped 17.2% y/y to 32,000 units.

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