Financial Market report for September 28, 2011
1) .. Charles Stockdale in 24/7 Wall Street article 9 cities going broke relates tales of municipal debt travail.
Municipal Debt was a leading factor in the Depression; the securitization of municipal bonds has soared since then.
Harrison, NJ which has a credit rating of Ba3; 2009 revenues: $32,763,000; 2009 debt ($000s): $92,613,000; Median household income: $49,596; Harrison “issued a significant amount of debt to foster redevelopment, and continues to collect substantially less revenue from those developments than projected,” Moody’s explains. One of the largest projects is the $200 million Red Bull Arena, which was opened in March 2010 and cost the city $39 million in debt but has yet failed to have the expected returns. To help solve its debt problem, the city, which has a population of 13,620, plans to fire some police officers and firefighters
Strafford County, NH has a credit rating of Ba2; 2009 revenues: $36,204,000; 2009 debt ($000s): $23,866,000; Median household income: $58,363; Strafford County’s low rating is largely due to a money-losing nursing home, on which the county spends two-fifths of its budget. Just under 85% of the patients at the Riverside Rest Home are eligible for Medicaid, yet state reimbursements to the county continue to decrease, according to Moody’s. Between 2004 and 2009, the nursing home lost $36 million. The county does not expect to recover much of the money it used to cover these deficits.
Camden, NJ has a credit rating of Ba2; 2009 revenues: $181,257,000; 2009 debt ($000s): $103,284,000; Median household income: $25,418; Camden suffers from high unemployment, high poverty, and a weak tax base. The city’s median household income is less than half that of the national median income and is the lowest of all the municipalities on this list. Moody’s notes that “more than half of Camden’s real estate is tax-exempt, hampering already weak tax collections.” The city has had a speculative grade credit rating since 1998.
2) … As US Federal Reserve quantitative easing exhausts, credit is evaporating; lending is drying up.
Bloomberg reports that the risk trade that came with the US Federal Reserve’s Quantitative Easing is off causing the evaporation of credit globally. Emerging-Nation Bond Rout Reduces Sales by 72%: Credit Markets. Emerging-market companies are selling the fewest bonds in 2 1/2 years as investors drive borrowing costs higher amid a global economic slowdown. Borrowers in developing nations issued $16 billion of fixed-income securities since the end of June, a 72 percent decrease from $58 billion in the previous quarter and the least since the first three months of 2009, according to data compiled by Bloomberg. Prices of emerging-market corporate notes are down 4.7 percent, the biggest drop since the 20 percent rout after Lehman Brothers Holdings Inc. collapsed in September 2008, JPMorgan Chase & Co.’s Composite Corporate EMBI Index shows. “For emerging-market borrowers, access to international markets is hugely important because they aren’t able to fund on domestic markets in the scale they want,” said Stuart Culverhouse, the chief economist of broker Exotix Ltd. in London. “There’s been a massive retreat from risk.”
LBO-Burdened European Firms Face $272 Billion of Refinancings, Fitch Says. European companies acquired by private-equity firms will struggle to refinance more than 200 billion euros ($272 billion) of leveraged buyout debt as investors eschew risky securities, Fitch Ratings said. “A raft of lower-rated issuers still must find ways to address looming refinancings in 2013 and 2014,” according to the report by Edward Eyerman, the London-based head of European leveraged finance at Fitch Ratings. The deepening sovereign crisis in Europe is closing avenues for the most vulnerable borrowers to replace maturing debt after a record 36.8 billion euros of sales in the first half, Fitch said. Sales of high-yield bonds have dried up as concern that Greece will default prompts investors to favor larger, less- indebted companies that can withstand a slowing economy. “Prolonged uncertainty over refinancing and the macroeconomic outlook will keep many of these companies in operational limbo, potentially threatening their competitiveness,” according to Eyerman. LBOs are traded by the ETF PSP.
3) …Stocks fell in advance of German vote on EFSF Monetary Authority.
4) … Mainline Economists and Austrian Economists argue for default and the rise of sovereign nations; but European leaders are calling for a collective future.
Martin Feldstein, proposes a default, devalue, leave and borrow anew strategy in Europe’s High Risk Gamble. The Greek government needs to escape from an otherwise impossible situation. It has an unmanageable level of government debt (150% of GDP, rising this year by ten percentage points), a collapsing economy (with GDP down by more than 7% this year, pushing the unemployment rate up to 16%), a chronic balance-of-payments deficit (now at 8% of GDP), and insolvent banks that are rapidly losing deposits.
The only way out is for Greece to default on its sovereign debt. When it does, it must write down the principal value of that debt by at least 50%. The current plan to reduce the present value of privately held bonds by 20% is just a first small step toward this outcome.
If Greece leaves the euro after it defaults, it can devalue its new currency, thereby stimulating demand and shifting eventually to a trade surplus. Such a strategy of “default and devalue” has been standard fare for countries in other parts of the world when they were faced with unmanageably large government debt and a chronic current-account deficit. It hasn’t happened in Greece only because Greece is trapped in the single currency.
The markets are fully aware that Greece, being insolvent, will eventually default. That’s why the interest rate on Greek three-year government debt recently soared past 100% and the yield on ten-year bonds is 22%, implying that a €100 principal payable in ten years is worth less than €14 today.
Why, then, are political leaders in France and Germany trying so hard to prevent – or, more accurately, to postpone – the inevitable? There are two reasons.
First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank.
The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s.
A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks.
If Greece is allowed to default in the coming weeks, financial markets will indeed regard defaults by Spain and Italy as much more likely. That could cause their interest rates to spike upward and their national debts to rise rapidly, thus making them effectively insolvent. By postponing a Greek default for two years, Europe’s politicians hope to give Spain and Italy time to prove that they are financially viable.
Two years could allow markets to see whether Spain’s banks can handle the decline of local real-estate prices, or whether mortgage defaults will lead to widespread bank failures, requiring the Spanish government to finance large deposit guarantees. The next two years would also disclose the financial conditions of Spain’s regional governments, which have incurred debts that are ultimately guaranteed by the central government.
Likewise, two years could provide time for Italy to demonstrate whether it can achieve a balanced budget. The Berlusconi government recently passed a budget bill designed to raise tax revenue and to bring the economy to a balanced budget by 2013. That will be hard to achieve, because fiscal tightening will reduce Italian GDP, which is now barely growing, in turn shrinking tax revenue. So, in two years, we can expect a debate about whether budget balance has then been achieved on a cyclically adjusted basis. Those two years would also indicate whether Italian banks are in better shape than many now fear.
If Spain and Italy do look sound enough at the end of two years, European political leaders can allow Greece to default without fear of dangerous contagion. Portugal might follow Greece in a sovereign default and in leaving the eurozone. But the larger countries would be able to fund themselves at reasonable interest rates, and the current eurozone system could continue.
If, however, Spain or Italy does not persuade markets over the next two years that they are financially sound, interest rates for their governments and banks will rise sharply, and it will be clear that they are insolvent. At that point, they will default. They would also be at least temporarily unable to borrow and would be strongly tempted to leave the single currency.
But there is a greater and more immediate danger: Even if Spain and Italy are fundamentally sound, there may not be two years to find out. The level of Greek interest rates shows that markets believe that Greece will default very soon. And even before that default occurs, interest rates on Spanish or Italian debt could rise sharply, putting these countries on a financially impossible path. The eurozone’s politicians may learn the hard way that trying to fool markets is a dangerous strategy.
No one knows if Greece will leave or be forced out of the EU. But I question, would anyone lend to them? One thing is for sure, history repeats itself, Greece is going to default, and out of the chaos will come a new order, that being authoritarian rule through regional economic government, as leaders are calling for a collective future.
Open Europe reports Barroso calls for pooling of debt at the eurozone level. The President of the European Commission, José Manuel Barroso, delivered his annual ‘State of the Union’ address to the European Parliament this morning in which he said the EU faced the biggest challenges in its history. He insisted that: “Greece is, and will remain, a member of the euro area”, argued that monetary union needed to be completed with an economic union, and announced that the Commission will present proposals for a “single, coherent framework to deepen economic co-ordination and integration, in particular in the euro area” in the coming weeks. And he called for more integration between EU member states, including greater political union and more pooling of efforts in the defence sector, and urged national governments across the EU “to show a bit more pride in Europe. I want to see and hear that pride in being European”.
Open Europe reports On the WSJ’s Real Time Brussels blog, Stephen Fidler in article EFSF Leverage: A Rundown notes, “It appears that the only way to bulk up the EFSF convincingly through leverage is for it to gain access to ECB funding, directly or indirectly. That leads to the question now being asked by some analysts in Brussels: Why, if the expansion of the EFSF depends entirely on the ECB’s balance sheet, wouldn’t it make more sense for that balance sheet be used to buy government bonds directly, cutting out the middle man?” … And Open Europe reports In the Irish Independent, David McWilliams argues, “Expect the Greeks to be allowed to default in some form in the next few days. if Greece can default on its debts, why not the Irish banks on their bondholders? This would save us tens of billions of euro. After all, the ECB is on the hook in Greece, and it is also on the hook here. What is good for the Grecian goose must also be good for the Celtic gander.”
Steven Erlanger of the NYT writes on the engine of depression: Everyone agrees that countries like Greece need to cut their deficits. But if everyone is cutting at the same time, and in an uncoordinated way, the result may be a fierce economic contraction for Europe as a whole. And without growth, there is very little hope of getting out of the “debt trap,” whereby more cuts in government spending result in recession, lower tax receipts and larger deficits. “If there is austerity everywhere, where is the engine for growth?” said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. “If there is no consumption, no reason to invest, difficulty in accessing the credit market, where is the growth? The only engine that is functioning in this view is the engine of depression, and this will worsen the sovereign debt and deficit problem.” The Germans and northerners, Mr. Fitoussi said, still believe that austerity and recession eventually will lead to stability, confidence and growth. “But there is no way what the Germans are saying can be true without divine intervention or a belief in miracles,” he said. “No austerity program can lead to growth in a period of discontinuity in the global economy and slowing economic activity everywhere.” Mr. Fitoussi has just done a study of economic growth in France, which is currently nearly flat, and which will have a growth rate of about 0.8 percent in 2012 if little changes, he said. “But if all the countries in Europe follow this austerity program,” Mr. Fitoussi said, France also will fall into recession, and its economy will shrink by 1 percent.
Authoritarian rule has been the way through out history. Authoritarian rule in a collective is the future.
Authoritarians have ruled throughout history. These have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, and George Bush, The Decider, ruling America with Unilateral Authority.
Authoritarian rule in a collective, is the future. A Tsunami of collectivism is coming. The Clarion Call of the 300 elite of Club of Rome is compelling for regional economic government. The visionaries foresaw that the engine of growth that came from Milton Friedman’s Free To Choose Floating Currency Regime, would sputter as currencies sink, as sovereign debt fails, and as credit evaporates, and that a new regime of state corporatism should rule in all of the world’s ten regions.
Obviously the writings of Austrian Economists and mainline economists, like Mr. Feldstein, reveal they are in denial or blind, to the fact that Neoliberalism died and Neoauthoritarianism is rising.
Rebeca Wilder in EconoMonitor relates It’s a sovereign coordination crisis. Eroding implicit government guarantees on the liabilities side of bank balance sheets and ability to recapitalize writedowns on the asset side of bank balance sheets. This is big; and in my view, the driving force of bank risk at this time. As policy makers debate about what cannot be done, they’re missing a glowing opportunity to prevent a banking crisis (see Munchau’s article in the FT). Essentially, bond investors do not ‘believe’ that policy makers can individually address their own banks’ capital needs and imminent deleveraging (see my previous post on bank leverage) a joint euro-wide effort is needed. Lack of credible coordination among the sovereigns has left banks wide open to speculative attack.The pressure’s on. We’ll see if policy makers can understand what I see: this is not a liquidity crisis, this is a sovereign coordination crisis.
Under Neoauthoritarianism, there are no sovereign individuals, as there are only sovereign leaders, who will put an end to any free enterprise, as economic life will exist for the security and prosperity of the regional government. Choice is the epitaph on the tombstone on the former regime of Neoliberalism. And Freedom is a simply a mirage on the Neoauthoritarian Desert of the Real.
As The Oracle said, Were all here to do what we are her to do. Milton Friedman was a libertarian, he came to set investors and bankers free. He was just one many libertarians; those given to the belief that they are sovereign individuals; this group of individuals includes: individualist anarchists, (Lysander Spooner), anarcho-capitalists (Murray Rothbard, John Locke), constitutionalists (Chuck Baldwin), fiscal libertarians (Kristin Davis), objectivists (Ayn Rand), libertarian economists (Milton Friedman), left-libertarians (Noam Chomsky), and anarcho surrealists (Andre Breton). In contrast, The Call of The Club Of Rome, is a terminator; it can’t be argued with, it can bargained with; it can’t be reasoned with; it is coming to terminate liberty. Collectivism is abhorrent to Austrian Economists just as sin is to Christians. Collectivism is viewed by Ludwig von MIses, and Murray Rothbard, as tantamount to death.
Neoliberalism was fathered by Milton Friedman, as he suggested floating currencies, and featured wildcat governance, a Doug Noland term. Neoauthoritarianism was fathered by the August 2011 Angela Merkel and Nicolas Sarkozy Joint Communique for a true European Economic Government, and features wildcat governance, where leaders bite, rip, and tear one another.
Out of the EU sovereign debt and banking crisis, European leaders will waive national sovereignty, announce regional framework agreements, which supplant and transcend state Constitutional law and Euro Treaty Law, as well as call for the appointment of a President of the EU. He must have the quality of fierceness, as he will have a whole spectrum of angry to deal with. A leading individual for this position is Herman Van Rompuy, as he orchestrated the original Greek bailout, and as who the Daily Mail reports as saying, the age of the nation state is over and the idea that countries can stand alone is an ‘illusion’ and a ‘lie’.