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Adam Levin: The S&P and the EU: Timing Is Everything

by Adam Levin on January 15, 2012

Huffington Post…

In keeping with a tradition firmly established in the 20th century, Europe suffered a late-night bombing raid on Friday evening. This time the attacker was Standard & Poor’s , everybody’s favorite rating agency, which announced well after the markets closed in New York it was downgrading the debt of no fewer than nine European countries. France was dropped one notch and therefore lost its prized AAA rating, and Italy and Spain both dropped two notches. Portugal’s sovereign debt, like Greece’s , has now been relegated to “junk” status. This was not a sneak attack. In December, S&P had given broad warnings that steps such as these might be taken. Furthermore, late last week rumors were circulating in markets around the world that S&P was getting ready to lower the boom, so to speak. As you will no doubt recall, S&P downgraded United States debt late last summer, making the U.S. for the first time in history a less than AAA borrower. As a result of that step, S&P was the subject of heavy criticism, not to mention a federal investigation. On the other hand, the downgrading of U.S. credit had relatively little effect in the marketplace; after all, the United States is still the world’s largest economy (unless you amalgamate all the economies of the EU, which fewer and fewer people do these days,) and is still seen as a bedrock of cool in a world which is getting ever warmer, financially and politically as well as climatically. The always decorous French were particularly stung by so déclassé a thing as a credit downgrade. In France, a AAA rating was something of a matter of national pride; a financial Maginot line. Worse, always stylish French president Nicolas Sarkozy is facing a stiff electoral challenge early this spring from the Socialist party, which will certainly characterize the downgrade as a slip-and-fall on the Sarkozy runway prance. Despite the lateness of the hour, everyone in Paris was ready with predictable statements, downplaying the significance of the S&P assessment. They’re probably right. Many observers believe that the downgrade was already “baked into” market action on both sides of the Atlantic, and although there will certainly be a reaction when the markets reopen it may well be mild. The principal reason that I expect market reaction to be muted is because of the timing of several events, all of which occurred late last week. For example, S&P did not release its new report (which was blandly entitled ” Standard & Poor’s Takes Various Rating Actions on 16 Eurozone Sovereign Governments “) until after the markets closed New York. This is standard operating procedure in order to give traders time to think it over and therefore react more sensibly. From that standpoint, last Friday was a particularly propitious time, given the fact that it preceded a three-day weekend in the U.S. And since it was late-night in Europe, everyone there could sleep on it a couple of days before getting to their screens on Monday morning. There’s nothing unusual about all of that. However, on Thursday Spain conducted a debt auction, which was, in the view of many observers, a remarkable success. It sold about 10 billion euros’ worth of bonds, twice the expected amount, at prices yielding a full percentage point less than those of previous auctions. So, on Thursday morning Spain’s cost of borrowing was substantially reduced in the face of suddenly strong demand for its sovereign debt, but by Friday evening S&P saw fit to downgrade it a full two notches. The luck of the Spanish? I wonder what the result of that auction would have been had it been held on Saturday morning instead of Thursday morning… Even more curiously, Italy conducted an auction of its sovereign debt on Friday morning, within a few hours of the S&P announcement, which also went quite well — all things considered. It sold about 4.8 billion euros’ worth of bonds and found at least decent demand, with rates dropping about 15% as compared to the results of its last sale. All of this occurred at the tail end of a week that had seen the euro climbing in value against the dollar. Clearly, the EU had had a pretty good week until the S&P catcall. But most strangely, the announcement of the results of the Italian auction were delayed inexplicably, a fact that was generally overlooked in most of the reporting of the auction results. Perhaps the delay was merely the result of an overlong espresso and biscotti break, perhaps not — curiouser and curiouser. The European debt crisis is now two years old, and a double dip recession seems very likely since no real progress has been made in resolving that crisis, as S&P very correctly pointed out in the report that accompanied its new ratings. A default by one or more members of the EU, or even just another recession, could have a quite nasty ripple effect throughout the world — particularly in the U.S. which is a major trading partner of the EU countries, and whose banking system is intertwined with all of the central banks and financial institutions that would be severely damaged by such events. Many observers believe that the EU, at least in the form that in which it has existed for some time now, would not survive a real meltdown. Given the fact that pretty much all markets in all countries seem to be more and more vulnerable to psychological factors, I suppose it is in the best interests of all governments around the world to manage information so as to minimize mayhem and fear, irrespective of what actually happens in the coming months. After all, what really goes on in Area 51 makes no difference to our daily lives, unless and until there is an actual alien invasion, right? So the balanced seesaw of news that has characterized all of the financial events in Europe lately will probably continue until the crisis blows up or blows over. It really is all about timing; one does not need too much imagination to speculate that the Italian and Spanish debt auctions went well BECAUSE THEY HAD TO GO WELL, given the fact that everyone knew that S&P downgrade was likely imminent. If those auctions had produced a disastrous result, there would have been an awful lot of unsettling bad news in a very short time. Aside from the fact that I love espresso and biscotti, I really wish I could have been present at whatever conversation caused the delay in the announcement of the Italian auction results. Whatever else is true, right now, Europeans are trying to buy a stairway to heaven by buying time–and it makes me wonder… This story originally appeared on Credit.com .

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Nathalie Rothschild: On ‘Buy Nothing Day,’ It’s the Occupiers vs. the Masses

by on November 25, 2011

Huffington Post…

On Black Friday, the true colors of the Occupy Wall Street movement really shone through. Premised on the idea that it speaks on behalf of 99 percent of Americans, the Occupy movement is in fact deeply contemptuous of the masses. In no way was this made clearer than through the alignment of the Buy Nothing Day campaign and the Occupy movement. Part of the Occupy X-Mas initiative, which will last throughout the holiday season, Buy Nothing Day kicked off the day after Thanksgiving on so-called Black Friday. This is when vast numbers of Americans go on shopping sprees with hopes of laying their hands on cut-price flat-screen TVs, sneakers and other goods that are on their families’ Christmas wish lists. Many get in line hours before the shops open, some even set up tents and camp in front of stores to get in early. The Occupiers are apparently horrified at the prospect of seeing malls and high-street shops filled with the bargain-hunting masses, or ‘the 99%’ as the Occupiers call the American people, when they need to align great numbers to their cause in order to give it an air of legitimacy and popularity. But of course Occupy Wall Street never spoke for 99 percent of Americans. This was always a fantasy figure that lent itself well to sloganeering and to presenting a black-and-white view of the world, according to which the powerless masses struggling to get by are on one side, and the fat cat CEOs and reckless bankers are on the other. In this Star Wars -like narrative, the Occupiers serve as the heroes who will purportedly save the masses from their downfall by enlightening them and campaigning on their behalf. The message that the Occupiers want to send through their anti-consumption campaign is that Americans have been brainwashed by corporations, that they have been induced to blind over-consumption and unthinking acceptance of the messages put out by ‘the 1%’. As one Occupy sympathizer recently put it on the movement’s website: ‘The working class in this country has been brainwashed by MSM, Fox News, and the right-wing propaganda machine… We need to de-programme people against the brainwashing they’ve experienced.’ This is the Occupier’s Burden, a kind of re-vamped version of the civilising mission described by Rudyard Kipling: to ‘de-program’ Americans and, in the meantime, render them voiceless and clueless so that the apparently enlightened Occupiers can justify stepping in to define their interests for them and to speak on their behalf. The message of Buy Nothing Day follows in this vein. Initiated by Adbusters , every anti-consumption hipster’s must-have mag, the campaign is essentially promulgation for mass austerity — a point well-made on the American Situation blog — and it is an elaborate way of telling people they are stupid, irresponsible, greedy and shallow. For this year’s Black Friday, Adbusters promised ‘flash mobs, consumer fasts, mall sit-ins, community events, credit card-ups, whirly-marts and jams, jams, jams!’ It was Adbusters that originally called for the occupation of Wall Street back in September and designed the Occupy movement’s stylish posters and other propaganda. In a message posted on OWS’ website in the run-up to Black Friday, Adbusters says: You’ve been sleeping on the streets for two months pleading peacefully for a new spirit in economics. And just as your camps are raided, your eyes pepper sprayed and your head’s knocked in, another group of people are preparing to camp-out. Only these people aren’t here to support Occupy Wall Street, they’re here to secure their spot in line for a Black Friday bargain at Super Target and Macy’s. There you have it. On the one side are the Occupiers, ready to deploy every thinkable kind of shenanigan to bring the message home to those on the other side — i.e. vast numbers of ordinary Americans — that they are ‘rabid consumers’ hooked on ‘conspicuous consumption,’ that they are acting like zombies by pigging out and destroying the planet with their addiction to cheap electronics and videogames. A video ad for the 2007 Buy Nothing Day shows a globe in which a big, fat, lip-licking, burping pig sticks out of North America. A voice-over informs viewers that ‘we are the most voracious consumers in the world — a world that could die because of the way we North Americans live.’ In short, Adbusters and their fellow Occupiers see Americans — or, in their own lingo, ‘the 99%’ — as gluttonous, obese pigs. What a joyful holiday message.

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WATCH: Near Riot Ensue Over $2 Waffle Makers

November 25, 2011

Black Friday 2011 has seen its share of noteworthy, bargain-fueled madness. Shoppers lined up earlier than ever to take advantage of midnight openings and to get discounts at some stores that even opened on Thanksgiving Day. There have been reports of shoppers pepper spraying one another in the hunt for deals and even robbers shooting Black Friday customers to get their loot. And now, crazed shoppers reportedly got in a fight over $2 waffle makers at a Wal-Mart near Little Rock, Arkansas WBTV reports. After the video went viral, sites all across the web began to offer their commentary. Gawker wrote that the video embodies everything that’s “awesome” about America, including the “horrible economy, aggressive consumerism, mindless violence and a complete lack of concern for one’s fellow human beings.” Meanwhile, Reddit wonders if waffle makers could spawn a new slew of riots.

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Occupy Wall Street Takes On Black Friday Amid Skepticism

November 24, 2011

With Black Friday heralding the start of the shopping season, a bevy of groups identified with the Occupy Wall Street movement are asking consumers to reconsider their spending habits. But unlike other high-profile Occupy efforts of late — such as last week’s march across the Brooklyn Bridge , in which thousands of activists participated, it’s unclear whether the pushback against Black Friday shopping will serve as a show of strength for the movement. “I don’t think that they’re going to gain any traction out of this one,” said Stephen Hoch, a marketing professor at the Wharton School of Business at the University of Pennsylvania. “If I was them, I wouldn’t be investing a whole lot of energy in using this as a poster child for what’s wrong with our country.” Black Friday, otherwise known as the day after Thanksgiving, serves as the unofficial start of the November-December holiday shopping corridor, one of the busiest times of year for retailers. About 152 million people are expected to shop this Friday , in what has become an annual tradition of shoppers mobbing stores in the hopes of getting limited-time deals. This November, a number of Occupy Wall Street groups have publicized plans to oppose Black Friday in one form or another. These efforts are in line with Occupy Wall Street’s overall mission of reclaiming power from major corporations and financial institutions, and come a little more than a week after the cradle of the movement, Manhattan’s Zuccotti Park, was forcibly evacuated on the orders of Mayor Michael Bloomberg . One group, known as Occupy Black Friday , is urging shoppers to bypass chain stores in favor of small and local businesses, while another group, named Don’t Occupy Walmart , is organizing a boycott of Walmart stores in protest of what it calls unjust and anti-union practices on the part of the retail giant. Still other Occupy chapters around the country are planning flash mobs, singing protests and other public demonstrations with the aim of encouraging shoppers to support local merchants. Sean McKeown, a chemist and New York resident who has spearheaded the Don’t Occupy Walmart group, told The Huffington Post that his group’s actions are intended in part to make a statement about the Occupy movement’s enduring presence in New York, now that Zuccotti Park has been cleared. “We’re trying to show that even if we don’t have a park that we’re staying in, we certainly have the ability to do a lot of things,” said McKeown, 31. “This is a way to show the power of the movement.” Still, skeptics question whether the disparate Occupy efforts — which have been unevenly publicized, and do not appear to be centrally coordinated — stand much chance of interrupting the post-Thanksgiving crush at stores and shopping malls. “It will be very difficult for any kind of organization to thwart the efforts of both retailers and consumers as they quest for the perfect deal,” said Marshal Cohen, chief retail analyst at the NPD Group, a market research company. “No one is going to get in these people’s way.” Since the Internet has made it possible to shop from anywhere and at any time of day, Cohen noted — and since seasonal deals are often available not just on Black Friday, but for days and weeks afterward — Occupy protesters could have a hard time making their message as widely heard as they’d like. And since many small and local businesses get their goods from the same corporate suppliers that stock the shelves at Walmart and Target, it’s not clear whether encouraging people to shop locally will strike much of a blow to big business. “You’re basically taking from Peter to give to Paul in many cases,” Cohen said. “What’s the difference if I buy Tropicana orange juice from Walmart or if I buy it from the local grocery store?” Occupy Black Friday, which is among the groups calling for people to spend locally rather than at chain stores, could not be reached for comment. The anti-consumption spirit of the various scheduled Occupy events has a precedent in Buy Nothing Day , the yearly undertaking — always scheduled to fall on Black Friday — in which participants refrain from spending any money. Buy Nothing Day was created some 20 years ago by advocates associated with the Vancouver magazine Adbusters , which also issued the original call for the movement that would become Occupy Wall Street. While it remains a red-letter date on the calendars of many social activists, its effects on retail sales have traditionally been less than earthshattering. “They’re fragmentary, they’re ephemeral,” said Richard Hastings, a macro and consumer strategist at Global Hunter Securities, of Buy Nothing Day and similar campaigns that have attempted to build commercial headwinds on Black Friday. “To really be quite poetic about it, they’re evanescent.” Hastings said that “the Occupy movement in the U.S. can only have some impact if it starts to do boycotts” — but added that he does not expect the anti-Black Friday forces to change many minds this year. “This is not a society where sitting around and obsessing about ideology goes on and on forever,” Hastings said. “We’ve been a consumer society for an extremely long time.” What people bought during Black Friday last year:

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Thanksgiving Kicks Off Anxious Holiday Season For Retailers

November 24, 2011

(Phil Wahba) – The holiday shopping season starts in earnest on Thursday, with retailers anxious to see if U.S. consumers are willing to spend despite an endless stream of scary headlines about the fragile economy and their own precarious finances. However, in the eyes of retailers, the shopping period has been churning along for some time as retailers like Wal-Mart Stores Inc and Toys R Us started early by offering layaway programs, and others offering major deals to lure shoppers. These incentives have increased the stakes for retailers, and when Americans are done with their turkey dinners on Thursday, many will be getting a jump-start on ‘Black Friday’, the biggest shopping day of the year, and one that sets the tone for the entire season. “If Thursday and Friday are not very good, chances are it will not pick up going up to Christmas,” said Keith Jelinek, a director at consulting firm AlixPartners’s retail practice. WalMart, Gap Inc’s Old Navy and Sears Holdings’ K-Mart are again open on Thanksgiving Day to get a headstart, while Toys R Us opens Thursday evening. But to narrow the gap in store hours, discounter Target Corp, electronics chain Best Buy and department store chains Macy’s Inc and Kohl’s Corp will open doors at midnight on Thursday. Retailers themselves concede the pressure is on. “At the end of the day, we are trying to respond to what our customers want to do, and they are telling us that’s when they want to shop,” Mike Vitelli, president, Americas and enterprise executive vice president, Best Buy, told Reuters. Others, like J.C. Penney Co Inc are taking their chances and opting to open early Friday morning as they did last year. The National Retail Federation expects sales in November and December to be up 2.8 percent over last year. So retailers see little margin for error in their fight for sales. The battle will also be waged online, where comScore expects sales to be up 15 percent this year. Wal-Mart starts its Black Friday ‘doorbuster’ deals on Thursday at 10 p.m. at its stores. Amazon.com Inc, not to be outdone, will offer its deals online at 9 p.m. But Wal-Mart is also offering 30 percent more deals on Thanksgiving. The knock-down-drag-out fight comes as the rebound in sales cooled in October, when many top chains like Macy’s and Saks reported disappointing sales and shoppers were hit with a steady stream of bad news about the economy. It will be a tougher fight for chains that have struggled of late, like Gap, Penney and electronics giant Best Buy. PriceGrabber.com, a price comparison website, found that searches for electronics in recent days were flat with last year, helped only by a surge in interest in new tablets like Amazon’s Kindle Fire and Barnes & Noble Inc’sNook. The NRF expects 152 million people to hit stores this weekend, up 10.1 percent from last year. But that will be fueled by bargain hunting, with the real test coming after the weekend, as retailers see if shoppers are only willing to hit stores when there are juicer deals on the table. Last year, after a strong Black Friday weekend, shoppers sat on their hands until closer to Christmas – waiting for stores to hand out bigger bargains. “I think as time goes on, you’re going to see a leveling and a softness in the numbers,” said Al Ferrara, director of BDO USA’s national retail practice. (Reporting by Phil Wahba in New York, additional reporting by Dhanya Skariachan; Editing by Bernard Orr) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Country Want U.S. Help In Solving Europe’s ‘Systemic’ Crisis

October 29, 2011

ASUNCION | Sat Oct 29, 2011 10:31am EDT (Reuters) – Portugal asked Mexico on Saturday to tell fellow G20 members next week that the United States should offer “financial help” to resolve the euro zone sovereign debt crisis, describing it as a “systemic and global” problem, a Portuguese government source said. Portuguese Prime Minister Pedro Passos Coelho asked Mexican President Felipe Calderon to convey the message during the G20 meeting in Cannes next week, the source told reporters after the two leaders met at the Ibero-American summit in Paraguay. “The crisis isn’t in the euro zone. It is a systemic and global crisis and we hope that other big G20 countries intervene,” the source told reporters in the capital Asuncion, speaking on condition of anonymity. The source added that Washington should help resolve the crisis “by boosting trade and also with financial help.” No one from Calderon’s delegation in Asuncion could immediately be reached for comment. Financial markets rallied strongly this week after European leaders hammered out a deal to recapitalize their banks, boost the firepower of a euro zone rescue fund, and impose hefty losses on holders of Greek debt. However, economic analysts quickly warned that details of the rescue could still take weeks or even months to work out. Portugal is suffering a deepening recession as it implements painful austerity measures under a 78-billion-euro ($110.3-billion) EU/IMF bailout. (Reporting by Guido Nejamkis; Writing by Helen Popper; Editing by Paul Simao) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Georges Ugeux: How Did European Banks Trap Themselves in a Replay of the 2007 Crisis?

September 8, 2011

At a conference in New York at the end of 2008, Obama’s economic advisor, Larry Summers made a prophetic remark at an event organized by the Economist . He told an audience of Wall Street executives that we should never assume that bankers ever learn from their own mistakes. “We, as regulators, should never assume that the banks would amend themselves. Since 1960, banks have been in crisis every three years in one part of the world or another.” These words resonated as I watched the hopeless handling by the European banks and governments of what starts to look like the liquidity crisis of 2007 all over again. European banks are increasing the level of their excess liquidities with the European Central Bank rather than trusting each other. Furthermore, the increase of the yields and the risk premiums of their countries started penalizing the banks in those countries who pay more for their funding than their counterparts. A liquidity crisis is a credit crisis waiting to happen. It took a few weeks before the summer liquidity crisis of 2007 transformed itself into a credit crisis by the early fall. Seasons seem to matter in finance! While the strongest US banks saw their stock prices decrease by 20%, European banks saw decreases between 40 to 50% over the last three months. Investor confidence in the equity is already falling in a dramatic and substantial way. How could European Banks let this happen? Let’s examine the factors, many of which led to the crisis of 2007: • Lack of transparency. Europe was left in the dark to issues plaguing the banks of Greece, Portugal, and Ireland and soon thereafter, Spain and Italy. Further, European governments conducted a series of stress tests which failed to include any scenarios that would affect the value of the core banking relevant assets. • Political inaction. European leadership neglected to recognize the apparent systemic risks, much like those that were ignored prior to Lehman’s collapse in 2007. During that period, the yield on Greek bonds went from 6 to 50%. One-year bonds are now trading at an annual yield of 98%. While this does not represent a direct increase of the cost of financing Greece (which no longer has access to capital markets,) it is an indication of a bankrupt borrower. • Late action in restructuring the debt. Arguably, criminal, today, the level of sacrifice that the banks will have to bear is 21% of their sovereign exposure. It would have been 5% a year ago. This not only threatens Greece, but also the entire banking system. Joseph Ackermann, while apparently contradicting IMF Director General, Christine Lagarde on Monday, agrees on the fact that banks cannot afford to mark to market their exposure to Greece. • Ineffective resignation of the Board of Directors. Doing absolutely nothing to insist that bank managements create a livable restructuring solution, they watched silently, without consideration for their shareholders as half the market value of many banks was being lost. • Sloppy regulation allows proprietary trading. Clearly Europe has not drawn from the lessons of previous crises. And amazingly, banks have managed to convince governments that there was no need to limit proprietary trading to low-risk assets. The same applies to their exposure to hedge funds. • Basel III capital adequacy rules were watered down. Banks did everything to reduce their need for capital adequacy and moved its application to 2019. So here we are again, confronting yet another serious banking crisis. And although this time, the Europeans have created it themselves, in Europe, that will not stop them from blaming everybody else. Politics quickly took the place of financial discipline. The cost is in hundreds of billions of dollars. This time, however, governments will not be able to bail them out. They will have to rescue some of their sovereign assets. There is no alternative and Europe will have to pay the price of its own complacency.

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European Shares Recover As Investors Asses Short-Selling Ban

August 12, 2011

BRUSSELS — Bank stocks jumped after several eurozone countries banned short selling, helping European markets push higher Friday ahead of an expected further rise on Wall Street. The advance in Europe follows big gains in the United States on Thursday, which helped support most stocks in Asia. However, wild swings over recent days, with shares often changing direction every few hours, highlight how volatile trading is at the moment amid concerns over the global economy and the levels of debt in both the U.S. and Europe. In Europe, London’s FTSE 100 rose 1.4 percent to 5,234 points, while Germany’s DAX was 2.3 percent higher at 5,933. The CAC-40 in France gained 2.3 percent to 3,154, even after data showed the French economy did not grow in the second quarter. Wall Street also was poised for a higher open after Thursday’s big gains. Dow futures were up 0.6 percent at 11,147m while futures for the broader Standard & Poor’s 500 index rose 0.7 percent to 1,176. The gains in Europe came after regulators in France, Italy, Spain and Belgium imposed temporary bans on short-selling of financial shares late Thursday, following sharp selloffs and temporary gains in French bank shares in particular that were blamed on false rumors. The share prices of French banks, which fluctuated sharply in recent days, appeared to stabilize Friday, with Societe General up 3 percent and Credit Agricole up 1.3 percent. Belgium’s Dexia was doing particularly well, trading 14 percent higher. However, analysts question whether the short-selling ban would be successful in the long run, since many experts claim that a similar move in 2008 actually contributed to investor uncertainty. Short selling is a way for an investors to bet a stock will go down. It is done by selling borrowed shares in hopes of buying them back at a lower price and pocketing the difference. The practice has not been banned in Britain or Germany. “With deteriorating investor confidence in eurozone debt likely to continue driving reduced investor confidence in European banks’ ability to withstand the fallout from the euro-zone debt crisis, we doubt that downward pressure on European financials will now dissipate,” said Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ. The gains in Europe came despite figures showing France’s economy unexpectedly ground to a halt in the second quarter on the back of a sudden reversal in consumer spending and stagnation by the country’s exporters. The halt in the French economy is set to exacerbate concerns over the eurozone in general, where the three bailout countries of Greece, Ireland and Portugal are in recession and Italy and Spain are struggling with lackluster growth. Data also showed that Greece’s economy shrank 6.9 percent in the second quarter from the year before. France is already facing speculation that it may soon lose its AAA rating due to its high debt load. “With the economy stagnating and elections coming up next spring, it will be extremely difficult to implement the aggressive austerity measures that are needed to convince markets that the government finances are on a stable footing,” said Jennifer McKeown, senior European economist at Capital Economics. The euro also was seemingly unaffected by the French and Greek data, trading 0.3 percent higher at $1.425. Earlier in Asia, the session was far less volatile than of late. Hong Kong’s Hang Seng added 0.1 percent to 19,620.01. Australia’s S&P/ASX 200 gained 0.8 percent to 4,237.90, while benchmarks in New Zealand and Singapore also rose. But Japan’s Nikkei 225 stock average was lower – closing down 0.2 percent to 8,963.72 after spending the morning in positive territory. A stronger yen, which reduces the value of profits earned overseas, pummeled export shares. The dollar is trading around the 76.50 yen mark, which is not far off the levels that prompted the Bank of Japan to intervene directly in the markets to stem the export-sapping appreciation of the yen. Mainland Chinese shares, however, traded higher for a fourth day, with the absence of bad news helping boost sentiment, traders said. The Shanghai Composite Index gained 0.5 percent to 2,593.17 while the Shenzhen Composite Index gained 1 percent to 1,158.96. In the oil markets, prices fell as traders booked some profits garnered over the previous session, when crude rose 3.4 percent. Benchmark oil for September delivery was down 16 cents at $85.56 a barrel in electronic trading on the New York Mercantile Exchange. _____ Pamela Sampson in Bangkok contributed to this story.

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GRAPHIC: How Often Are Heavily-Taxed Countries Considered Thriving?

August 5, 2011

With a marginal income tax rate of over forty percent, the U.S. comes in as the fifteenth most heavily-taxed nation in the world, according to an infographic by TurboTax . The actual percentage paid out by corporations appears to be substantially lower though, considering that even though the country’s listed federal corporate tax rate is 35 percent, it only takes in roughly 23 percent, as recently pointed out by former President Bill Clinton . One of the two countries where the gap between the rich and the poor widened most in the past decade, Sweden, is ranked as the most highly-taxed country, with a income tax rate of 56.5 percent. Of the 15 nations with the highest tax rates, 8 also are listed among the 15 most thriving countries, according to Galluup. Germany, Italy, France, Portugal, Japan and Austria all failed to make the cut, and it was only Austria that had a thriving majority. See the infographic here:

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Europe Acknowledges Greek Default May Be Necessary

July 12, 2011

BRUSSELS (Julien Toyer and Luke Baker) – European Union leaders are poised to hold an emergency summit after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens’ debts and stop contagion to Italy and Spain. “There will be an extra summit this Friday,” a senior euro zone diplomat told Reuters, suggesting policymakers have been seized with a new sense of urgency after markets started targeting Italian assets. A French government source said Paris was in favor, although the timing was not yet fixed, and in Spain, European Council President Herman Van Rompuy said he had not ruled out a meeting. Earlier, Germany’s finance minister had said a second Greek rescue package could wait until September after euro zone finance ministers effectively accepted that private creditor involvement meant a selective debt default was likely, despite the European Central Bank’s vehement opposition to such a move. “We have managed to break the knot, a very difficult knot,” Dutch Finance Minister Jan Kees de Jager told reporters. Asked about whether a selective default was now likely, he replied: “It is not excluded any more. Obviously the European Central Bank has stated in the statement that it did stick to its position, but the 17 (euro zone) ministers did not exclude it any more so we have more options, a broader scope.” Participants said a buy-back of Greek debt on the secondary market and a German proposal for a bond swap for longer maturities were under consideration after a complex French plan to roll over bonds made no headway. Both would likely be regarded by ratings agencies as a default, or at best a selective default, which although it would not necessarily cover all Greek debt and could be lifted quickly, would have major repercussions for financial markets. The Institute of International Finance, the lobby group representing private creditors, said the EU and IMF needed to deliver a plan for Greece, including a debt buyback, within days to avoid markets “spinning out of control. The increased likelihood of some form of default, and a lukewarm response from the IMF, hit European bank stocks and debt markets and propelled the euro sharply lower against the dollar although markets settled later. Ten-year bond yields in Italy, the euro zone’s third-largest economy, shot above six percent for the first time since 1997 but then subsided to around 5.7 percent, still at a level which bankers say will put heavy pressure on finances. Borrowing costs at an Italian 12-month bill sale surged to their highest since the 2008 financial crisis, putting a Thursday bond auction firmly in focus. There is now acute concern about contagion to Italy, where political tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti have exacerbated concerns, and to Spain, the euro zone’s fourth largest economy. In Rome, Berlusconi tried to calm fears Italy could be swept into full-scale crisis, pledging to accelerate debt-cutting measures and run a primary surplus this year. Willem Buiter, chief economist at Citi and a former UK central banker, said there was a clear spread beyond Greece, Ireland and Portugal, the three nations bailed out so far. “We’re talking a game changer here, a systemic crisis,” he said. “This is existential for the euro area and the EU.” The euro fell to a four-month low against the dollar before recovering, in part because IMF Managing Director Christine Lagarde said the lender and its EU partners were not yet ready to discuss terms for a second Greek bailout. “Nothing should be taken for granted,” she told reporters in Washington. FUNDAMENTAL SHIFT While the finance ministers were not explicit about how they planned to tackle Greece’s debt, saying only that proposals would be discussed “shortly,” they acknowledged that the debt pile — at around 160 percent of GDP — had to be reduced. “We stress the need to make Greek debt more sustainable,” Jean-Claude Junker, the chairman of the Eurogroup of finance ministers, said after more than eight hours of talks on Monday. Economists regarded Junker’s words and the comments from other finance ministers as a fundamental shift. “The euro area now seems to be moving more explicitly toward debt relief via EFSF-funded purchases of secondary market debt,” JPMorgan economist David Mackie wrote in a research note, referring to the euro zone’s 440 billion euro emergency loan fund, which as it stands would not have enough resources to bail out Italy. “Greece will need debt relief at some point, but it is not clear it is much of a help now. More likely the shift toward debt relief is intended as an attempt to limit contagion.” The decision to call an extra leaders’ summit helped counter negative market reaction to an apparent absence of hurry, after German Finance Minister Wolfgang Schaeuble said there was time to wait on Greece, with no new tranche due until September. That lack of urgency prompted stern criticism from Greece’s prime minister but the finance ministers did hint at the prospect of more fundamental steps to come. “Ministers stand ready to adopt further measures that will improve the euro area’s systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate,” they said in a statement. There was no indication, though, that they had broken a stalemate over how to make banks, insurers and other funds share the cost of additional funding for Athens. A senior member of Germany’s governing coalition acknowledged, however, that a debt restructuring was coming. “We just need to ensure that it’s as orderly a process as possible,” he said, adding that it could come in the autumn. Germany, the Netherlands, Finland and others want the private sector to provide at least 30 billion euros in a new package for Greece that could total 110 billion euros. (Additional reporting by John O’Donnell, Leigh Thomas, Dan Flynn in Brussels, Silvia Westall in Vienna, Huw Jones in London, Stephen Brown in Berlin, Lesley Wroughton in Washington and Milan/Rome bureaus, editing by Mike Peacock) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Robert Lenzner: The Contagion of Write-Offs in Europe

June 19, 2011

There must be a contagion of write-offs, sooner or later. Take Greece for example; its 2 year notes are yielding over 29%, but the institutions holding that debt are still valuing the paper at 100 cents on the dollar. And that’s just Greece, a small nation on the eastern border of Europe. What about the debt of Ireland, Portugal and Spain, not to mention Italy, whose impeccable AA credit rating was just lowered a notch? We are talking about a contagion that Tyler Durden of Zero Hedge suggests is part of narrative in the new financial crisis drama entitled ” The Countdown to Sovereign Debt Write-offs Has Started .” Who, pray tell, has the exposure to the debt issued by the most troubled European nations? On December 14, 2010, Streettalk (that’s me), using a Bank of International Settlements report, discovered the humungous $1.5 trillion Greece, Ireland, Portugal and Spain owed to all European banks. Those 4 nations also owed $353 billion to US banks. Total owed: $1.853 trillion. Of this $1.853 trillion, some $668 billion was somehow related to derivative exposures (exactly how was not made clear enough for me in the BIS report.) Luckily for me, a Columbia University economist, Charles Calomiris, got in touch with some incredibly worrisome breakdown of the relationship of these loans to the GDPs of the nations extending the credit. French banks had lent 9% of France’s GDP to Spain; Dutch banks fully 16.4% of Holland’s GDP to Spain; and Portugal’s banks: 13% of Portugal’s GDP to Spain. German banks had lent 12% of the German GDP to Ireland and Spain British banking giants Barclays and HSBC had lent 9.4% of the UK GDP to Ireland and another 5.7% to Spain. The Greek contagion has already made insolvent the Greek banks, while 3 French banks may have their credit ratings reduced. As the securities of Portugal and Ireland decline in price and rise in apparent yield, it raises significantly the issue of marking to market the holders of Portuguese and Irish loans, which are also being carried at par. Contage another step to the sovereign debt of Spain and Italy, where yields are rising, and the premium cost for insuring against default gets higher every day. What happens if there is further weakness in Spanish real estate or trouble at the Italian banks, suggests Edward Harrison of the Credit Writedowns blog. You can see how the chain could continue from nation to nation, from bank system to bank system, from central bank to central bank. It makes me think of the rolling financial crisis that began with the meltdown of subprime mortgage backed bonds, moved to Alternative A mortgages, then to prime, and onto LBO loans, and money market funds — culminating in the end of Bear Stearns, Lehman Brothers and causing shotgun marriages of Wachovia, Merrill Lynch and the massive bailout of AIG. What then happens to the fragile US banks that either own $350 billion European sovereign debt, or purchased credit default swaps to protect themselves. How will all this transatlantic web of relationships be resolved, unwound, stabilized? I’m exhausted just writing

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Raging Greeks Stage Biggest Anti-Austerity Protest

June 5, 2011

By George Georgiopoulos ATHENS, June 5 (Reuters) – Tens of thousands Greeks rallied in central Athens on Sunday to denounce politicians, bankers and tax dodgers, as the government prepared to inflict another bout of austerity demanded by its international lenders. “Thieves – hustlers – bankers,” read one banner as more than 50,000 people packed the main Syntagma square outside parliament to vent their frustration over rising joblessness as austerity bites, blaming the crisis on political corruption. Turnout was the biggest so far in a series of 12 nightly rallies on the square inspired by Spain’s protest movement. Amidst a sea of splayed hands waved at the parliament building — an offensive gesture for Greeks — one demonstrator raised a placard reading “Bravo Yemen”, whose president underwent surgery in Saudi Arabia for injuries suffered in a rocket attack on his palace. Police put the crowd at 50,000 by mid-evening, but numbers continued to grow as dusk fell over the Greek capital. Another banner drew comparisons with rallies early this year in central Cairo which ousted Egyptian President Hosni Mubarak. “From Tahrir Square to Syntagma Square, we support you!” it said. The cabinet of Prime Minister George Papandreou is due to discuss on Monday an economic plan, which a senior government official said would impose 6.4 billion euros of budget measures this year alone, on top of austerity already imposed under Greece’s original international bailout agreed last year. The medium-term plan includes tax increases while the international lenders are pushing for a crackdown on widespread tax evasion. The black economy is thought to be around 20-30 percent of gross domestic product. TAX CHEATS “Instead of going after tax cheats, they are raising taxes and cutting working people’s pay,” said Yannis Mylonakos, 34, who lost his job at an advertising agency. As Greece battles to avoid defaulting on its debt, which totals about 340 billion euros, unemployment has soared to almost 16 percent. The extra austerity is the price for a new bailout agreed with the European Union and International Monetary Fund to replace the old one, which has proved overoptimistic in assuming Greece could resume borrowing commercially early next year. The Syntagma Square rallies, organised through Facebook, so far have been peaceful, more festive and less politically motivated than traditional labour union protest rallies. Protesters from all over Greece on the square rejected the austerity policies to cut the budget deficit that lead to layoffs, wage and pension cuts and a heavier tax burden. “You got the disease, we got the solution — revolution,” read one banner. “We are not commodities in the hands of bankers and politicians.” Protesters also gathered in Greece’s second city of Thessaloniki. Organisers say they are determined to continue indefinitely as the number of people joining the Facebook group “angry at Syntagma” is growing. Some are camping on the spot, with about 30 tents on the square. “We don’t owe, we don’t sell, we don’t pay,” read a banner hung on the square’s lamp posts. Students, pensioners, young couples with their children and immigrants, were among those gathered on the square over the past week. Copyright 2011 Thomson Reuters. Click for Restrictions .

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Georges Ugeux: Is Madame Lagarde the Ideal IMF Leader?

June 2, 2011

The extraordinary push and unusual consensus of the European Union on the candidacy of Madame Lagarde deserves some attention and maybe scrutiny. Being a lawyer and politician who ran a U.S. law firm in Chicago, Madame Lagarde is undoubtedly a very serious candidate. France considers the IMF top job as “theirs,” and has provided a succession of quite remarkable leaders of the IMF. Whether that means the next one should be French was “beyond reasonable doubt” for the Elysée Palace where Président Sarkozy rules. The fact that he or she should be European is part of a “deal” between the United States and Europe, whereby, at Bretton Woods in 1944, the World Bank goes to an American and the IMF to a European. That deal reflects the fact that, at Bretton Woods, the U.S. and Europe were alone to split the jobs. More than ever, this position is no longer defendable. The IMF, under the leadership of Dominique Strauss-Kahn, embarked in a co-financing process, together with the Eurozone, of the bail-out of Greece ($150 billion), Ireland ($130 billion) and Portugal ($120 billion). The Eurozone was indeed unable or unwilling to put on the table the full amount and is now in the unenviable position to have to call on the International Monetary Fund. The new Director General will have to represent the interests of all the members of the Fund in these negotiations. Is a European the best candidate to have the necessary objectivity and dispassionate view of the situation? One could also argue that Madame Lagarde is a crucial part of the negotiations that are taking place which could lead to a further $60 billion loan to Greece, which has not fulfilled its commitments. She supported the European Central Bank view that the Greek debt should be restructured, thereby protecting the ECB’s substantial portfolio of Greek bonds, as well as the European bank’s exposure to Greece. The IMF has always insisted on loans associated with strict application of its conditionality to pay the additional tranches. In this case, it departed from its sound and historical practice. Last but not least, with 43% of the capital of the IMF, the emerging countries are asking for more say and would be perfectly legitimate in requesting that seat for one of them. Agustin Carstens, the Mexican Finance Minister, is campaigning in their name. It seems that the United States, which stayed silent on the matter, will not support Madame Lagarde unless she gets some support from the key emerging countries. They are right. She was in Brazil starting a campaign. The G8 talked about it but, as he often does, Président Sarkozy pretended that it was not the place for such discussions. His Minister of Foreign Affairs, Alain Juppé, pretended that the candidacy of Madame Lagarde was agreed upon, contradicting the statement by Russian President Medvedev that there was a “near-accord” on the fact that an emerging market candidate would be considered. Prime Minister Manmohan Singh of India indicated to German Chancellor Merkel in Delhi that it was not the nationality that should define the right candidate. The reality is that the European attitude has literally infuriated the other countries who saw in it a sign of colonialism and arrogance. In France, Madame Lagarde is under investigation by the Court Supérieure de Justice for allegedly abusing her power in bypassing the procedure to grant $300 million for a former French Minister and businessman Bernard Tapie. The Court was established by President Mitterrand to investigate irregularities committed by Cabinet Members, in the exercise of their function. Those elements should at least require a serious look, for a candidacy that cannot be treated as ideal, without further consideration. This being said, as Patrick Stewart of the Council on Foreign Relations wrote today: “The apparent lesson of this episode is that while emerging powers are quite content to criticize existing global institutional arrangements, they do not yet constitute an effective bloc that can unite behind an agreed program of action.”

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The Euro appreciates with expectations that China is looking to buy Portugal bailout bonds

May 26, 2011

The Euro appreciates with expectations that China is looking to buy Portugal bailout bonds

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Italy’s Ratings Outlook Lowered To Negative On Debt Fears

May 22, 2011

ROME — Standard & Poors cut its ratings outlook for Italy’s debt from stable to negative Saturday, citing the country’s poor growth prospects and concerns about the government’s ability to reduce public borrowing. The revision means there’s a one-in-three chance that Italy’s debt ratings could be downgraded in the next two years, raising fears that the debt crises that have struck Greece, Portugal and Ireland could be threatening Italy. But with a ratings outlook still at A+/negative, Italy remains in far better shape than Greece, which had its debt grade ratings dowgraded to junk status Friday by the Fitch agency. In a statement, S&P said Italy’s current growth prospects were “weak” and that there was a faltering commitment on the part of the government to undertake necessary reforms to revive the econoomy. It cited “potential political gridlock” as a concern for Italy’s finances and predicted weaker growth than the current estimated GDP of 1.3 percent over the 2011-2014 period. Premier Silvio Berlusconi’s forces suffered a setback in local elections this week, failing to win an outright victory for the mayor of the financial capital of Milan. The premier is also squabbling with his main coalition partner the Northern League, which is opposed to Italy’s involvement in the NATO campaign in Libya. Finally, the premier is on trial on corruption and prostitution charges, which he denies. In response, the Italian Treasury dismissed the notion that political gridlock would get in the way of reforms, saying it would “intensify” its efforts to implement its debt reduction plan and would maintain all its financial commitments. It noted that recent evaluations by the International Monetary Fund, and other bodies were “very different” from that of S&P.

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IMF approves USD36.8b loan to Portugal

May 22, 2011

IMF approves USD36.8b loan to Portugal

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IMF Approves $36.8 Billion Loan For Portugal

May 21, 2011

(Reuters) – The International Monetary Fund on Friday approved a 26 billion euro ($36.8 billion) loan for Portugal to help the country recover from a debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns over the euro zone member’s debts. The IMF said in a statement that total financing to Portugal in 2011 will include about 12.6 billion euros from the IMF and another 25.2 billion euros from the European Union. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout package. “The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track,” the IMF said in a statement. The financial package was calibrated to allow Portugal to stay out of the market for medium- to long-term bonds for slightly more than two years, IMF Mission Chief Poul Thomsen said. Under the agreement, Lisbon will have to carry out steep spending cuts, raise taxes, reform its labor and justice systems, and embark on an ambitious privatization scheme. “The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its center,” said IMF Acting Managing Director John Lipsky. “It addresses the fundamental problem in Portugal — low growth — with a policy mix based on restoring competitiveness through structural reforms, ensuring a balanced fiscal consolidation path, and stabilizing the financial sector,” he added. The deal follows a 110-billion-euro package for Greece last May and an 85-billion-euro program for Ireland in November. Portugal’s arrangement is the first time a country has asked private investors not to sell down their holdings of bonds on a voluntary basis. The leader of Portugal’s opposition Social Democrats, Pedro Passos Coelho, warned on Thursday the country has no room for failure in meeting the austerity measures of the program. The conditions included in the bailout are expected to contribute to a contraction in the Portuguese economy of 2 percent both this year and next. “This is not going to be an easy program. There is going to be a difficult period of adjustment,” Thomsen said. The program addresses a lack of competitiveness among businesses in Portugal, he said. It sets a goal of achieving a deficit that is 3 percent of GDP by 2013. “Even during the good years, before the crisis, Portugal was hardly growing,” Thomsen noted. Portugal’s economy is expected to begin expanding again in two years, he said, adding that many of the initiatives are weighted heavily to the early phases of the reforms. Poulsen said he believes political consensus behind reforms bodes well for the success of measures to reshape the Portuguese economy. “It’s quite striking how most of the key issues, not least on the structural reform side, have broad political support, which to me is one of the encouraging things,” he said. (Additional reporting by Lesley Wroughton; Editing by Diane Craft, Gary Crosse) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Video: Merk Expects Greece to Delay Default, Sees Euro Strength: Video

May 20, 2011

May 20 (Bloomberg) — Axel Merk, president and chief investment officer at Merk Investments LLC, discusses the Greek fiscal crisis, the outlook for the euro and Portugal’s bailout from the International Monetary fund. He speaks with Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Video: Merk Says IMF Loan Is `Step Along the Way’ for Portugal

May 20, 2011

May 20 (Bloomberg) — Axel Merk, president and chief investment officer at Merk Investments LLC, talks about the International Monetary Fund’s approval of a 26 billion-euro ($36.8 billion) loan to Portugal, the potential for default by Greece on its sovereign debt and the outlook for the euro. He speaks with Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Antonio Borges: The Emerging Bright Spot in Europe

May 18, 2011

With all the anxiety generated by the troubles of Portugal, Greece and Ireland, it is easy to forget that a different part of Europe was in the spotlight two years ago, facing equally dire predictions of bank runs, fiscal ruin and devaluation. Today, many economies in emerging Europe are quietly staging a strong comeback. Most impressive is the turnaround in the three Baltic countries, which suffered record deep recessions in the wake of the 2008/09 financial crisis. Take Lithuania, which grew an eye-catching 14.7 percent in the first quarter of 2011. But many other countries in the region are seeing strong growth as well. True, it will take a while before most crisis-hit countries will be able to reclaim the economic output that was lost as a result of the crisis. But things are definitely going in the right direction. Most encouragingly, the growth pattern is very different from that in the years leading up to the crisis. During the boom years, emerging Europe grew rapidly, but growth in many countries was unbalanced — real estate, construction and banking boomed while manufacturing languished. Capital inflows were large, but they boosted demand rather than supply, and led to a surge in imports, extremely high current account deficits — 25 percent of GDP in Latvia and almost 30 percent of GDP in Bulgaria — and overheating. Today, growth is driven by exports and manufacturing. Take Estonia, where exports of goods in the fourth quarter of 2010 were 52 percent higher than a year earlier. The old growth engines are spluttering, but others have kicked into gear. And it is not just exports anymore — the recovery is broadening to include investment and even consumption. In 2011, domestic demand is set to become the main growth engine in emerging Europe. What has caused the shift? The answer is both markets and policies. Markets at work. During the boom years, real estate, construction and finance were very profitable — much more so than manufacturing. But profits were artificially inflated by asset price bubbles and the under-pricing of risk. Now that profits have evaporated, investors are moving into other sectors. The adjustment is underpinned by improving competitiveness — the wage explosion of 2007-08 has given way to a decline in labor costs across the region. Policies have delivered. Painful but determined fiscal adjustment put public finances back on track, which has led to a sharp reduction in risk. For instance, Latvia’s credit default swap spread (which measures the cost of insuring debt against default) is 200 basis points today — down from 1100 basis points in 2009. Given this good news, what more can policymakers do to sustain the recovery — and prevent a new boom-bust cycle? Raising the long-term growth trend is key. Good structural policies can raise growth potential. A big push to remove bottlenecks in energy, transportation and communication would boost productivity. Here, funding from the European Union could be used to overcome the current lack of domestic resources. Efforts to upgrade the skills of the labor force would enable industry to climb the quality ladder. Good macroeconomic policies can prevent boom-bust cycles. When the next boom takes off, policies should be much tighter. This will reduce the risk of overheating that pulls resources away from manufacturing and other traded goods into sectors where there is little competition, such as real estate and banking. When revenues are growing strongly, they should not be used to increase spending and public wages, as was done during the boom years. Instead, savings that can stimulate the economy during a downturn should be built up. This means that large, even very large, surpluses may be needed during boom years. Emerging Europe still has a lot of scope for catching up with advanced Europe. But catching-up is not a law of nature — without the right policies, countries can get stuck, as we have seen all too clearly with Greece, Ireland and Portugal. From iMFdirect blog

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Financial Services Technology Summit Europe 2011 To Open On 4-6 October In Portugal

May 18, 2011

Financial Services Technology Summit Europe 2011 To Open On 4-6 October In Portugal

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Officials Agree On Huge Portugal Bailout Package

May 16, 2011

BRUSSELS (AP, By Gabriele Steinhauser) — European finance ministers on Monday signed off on euro 78 billion ($110 billion) in rescue loans to Portugal to give the debt-ridden country time to overhaul its economy. One-third of the package will be financed by other eurozone states, another third will come from a fund backed by the EU budget, and the International Monetary Fund will contribute the final euro26 billion, the ministers said in a statement from Brussels, where they were meeting. The statement also said that the Portuguese authorities agreed to “encourage” private investors to maintain their exposure to the country “on a voluntary basis” and not pull out funds. That was a key demand from Finland, which had a hard time getting approval for the rescue package from its parliament. European officials could not immediately explain how private investors could maintain their exposure in practice, since the bailout program was supposed to keep Portugal out of international debt markets for about two years. It could mean that investors make a commitment to continue buying short-term treasury bills during the bailout period. Greece, for instance, has continued to issue short-term debt over the past year, after being granted euro110 billion in rescue loans. For the Greek bailout, large multinational banks were also asked to support their Greek subsidiaries. Approval from finance ministers was expected, after the Finnish parliament dropped its resistance, and many of the broad details of the program had already been revealed over the past weeks. A European official previously said the average maturity of the rescue loans will be 7 1/2 years — like the bailouts for Ireland and Greece — and come at an interest rate of around 5.7 percent. That’s lower than the rate Ireland has to pay for its bailout.

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Video: Ghemawat Says Spain Should Focus on Small Companies

May 16, 2011

May 16 (Bloomberg) — Pankaj Ghemawat, a professor at the IESE Business School, talks about the prospects for Spain and Portugal stimulating economic growth amid the European debt crisis. He speaks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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What Arrest Of IMF’s Head Means For Greece’s Bailout

May 15, 2011

BERLIN — The arrest of IMF chief Dominique Strauss-Kahn complicates a key European meeting on whether to give Greece billions more in aid – but experts insisted one man’s troubles won’t keep the 17 eurozone nations from trying to contain a debt crisis that threatens them all. Eurozone financial leaders are to discuss Greece’s deteriorating economy Monday at a Brussels meeting where experts will brief them on the situation in Athens. Key questions include what conditions to put on more help to the debt-strapped nation, with European leaders unhappy at what they see as limited Greek efforts to raise money by selling government property. Strauss-Kahn was arrested Sunday in New York on suspicion of sexual assault on a hotel maid. Despite the arrest, the International Monetary Fund said in a statement it remains “fully functioning and operational.” The IMF Executive Board convened an informal session Sunday and made Strauss-Kahn’s deputy, John Lipsky, acting managing director while its chief was unavailable. The Washington, D.C.-based lending body also sent Nemat Shafik, a deputy managing director who oversees IMF work in several EU countries, to Monday’s eurozone meeting to replace Strauss-Kahn. Strauss-Kahn had to cancel his Sunday meeting with Chancellor Angela Merkel in Berlin, where the German public is deeply skeptical about putting up any more money for Greece. Germany, as Europe’s largest economy, provided a large chunk of the euro110 billion ($157 billion) bailout for Greece from the European Union and the IMF last year. Greek government spokesman Giorgos Petalotis insisted the arrest would not affect his nation’s efforts to resolve its financial woes. “The Greek government deals with institutions, not individuals, and continues unimpeded to implement the program that will get it out of the crisis,” Petalotis said. German Finance Minister Wolfgang Schaeuble struck a similar tone, saying the eurozone meeting would go ahead as planned. And European politicians had already gotten used to the idea that Strauss-Kahn may leave his post soon to run for president of France next year. Yet others said Strauss-Kahn’s immediate departure from the financial stage adds additional uncertainty to the already difficult situation in Europe. “The leadership vacuum at the IMF comes at a highly inopportune time for Europe, which is teetering on the brink of a full-blown debt crisis,” said Eswar Prasad, a professor of international economics at Cornell University and a former IMF official. Many investors believe that Greece’s financial troubles are so overwhelming that a Greek default or a restructuring that would give creditors less than the full value of their bonds is inevitable. But that would be a serious blow to the euro, and eurozone governments and the European Central Bank appear determined to prevent it. Merkel has stressed that her government will need clear conditions for any new Greek loans before it will back more help. But Schaeuble has conceded that if the experts’ full report in June shows that Greece can’t pay its debts, something more will have to be done. The IMF put up euro30 billion ($43 billion) of that Greek loan and also supplies expertise in assessing whether Greece and other countries that get emergency loans are living up to the conditions attached to them. A euro78 billion ($111 billion) bailout for Portugal was also on the agenda for Monday’s meeting in Brussels, as is Ireland’s progress in dealing with the financial morass that led to its own EU-IMF bailout. With the terms of the Portuguese bailout largely decided, EU finance ministers are expected to signal approval of that deal. Although eurozone ministers were talking about Greece, a new bailout announcement was not planned for Monday. Instead, investors expected a general statement of support, followed by days or weeks of more haggling. Marco Valli, chief eurozone economist at UniCredit, said Greece’s troubles were separate from those of Strauss-Kahn, and he expected a decision on more help for Greece in the near future. “There is no way that just because the IMF’s chief gets into personal trouble that Greece would be left alone,” Valli said. “Maybe it can have some impact on timing, but our view is that this is not going to have a meaningful impact on the bottom line, which is that Greece would get a second bailout package.” Other analysts agreed that the IMF will simply navigate through the upcoming difficulties. “The IMF is not a one-trick pony,” David Buik at BGC Partners in London. “European markets may be damaged by this news for a few hours but there is plenty of depth to the IMF.” ___ AP Business Writer Gabriele Steinhauser contributed from Brussels and Demetris Nellas from Athens, Chris Rugaber in Washington D.C.

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Video: Lagarde Says She Would Like to See a Strong U.S. Dollar

May 4, 2011

May 4 (Bloomberg) — French Finance Minister Christine Lagarde talks about the euro and U.S. dollar. She also discusses Portugal’s bailout package and the outlook for European economies. Lagarde speaks with Bloomberg’s Phillip Yin in Hanoi. (Source: Bloomberg)

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EU And IMF Near Agreement On Portugal Bailout

May 3, 2011

LISBON – Portugal is close to reaching an agreement with the European Union and IMF on a bailout for the debt-laden country and there are no disagreements between the donors, the European Commission and the IMF said on Tuesday. Portugal’s caretaker Prime Minister Jose Socrates was set to make a statement at 1930 GMT, his office said. Officials from the European Commission, the International Monetary Fund and European Central Bank have been in Lisbon for almost a month to hammer out an agreement with Portugal on a bailout expected to reach about 80 billion euros ($120 billion). An agreement could come any day, officials have said, but local media have reported that it could be delayed because of disagreements between the European Commission and IMF on the terms of the loan. EC spokesman Amadeu Altafaj, who is in Lisbon, denied any rifts. “There has been progress in talks, and we can expect a deal soon. My feeling is that we are getting close to a deal … There are no divergences among members of the troika,” he said. “Discussions are currently going on and there is good progress, we are getting closer to a staff agreement and we keep a constructive dialogue with the political parties too,” he added. An IMF spokesperson also said there were no divergences between the EC, ECB and the IMF and a deal was close. Portugal became the third country in the euro zone, after Greece and Ireland, to seek a bailout after its government collapsed in late March and borrowing costs soared. Officials said the agreement would be presented to Portugal’s opposition Social Democrats and the caretaker government soon so that they can commit to the terms of the deal ahead of a snap June 5 general election. Social Democrat leader Pedro Passos Coelho said he stood ready to meet with the lenders. The deal is expected to be approved at a meeting of eurozone finance ministers in mid-May, in time for the EU rescue fund to raise money for Portugal by June 15, when the country needs to meet a bond redemption of 4.9 billion euros. Portuguese media have said the European Commission and the International Monetary Fund diverged over whether Portugal should be given more time to meet its budget deficit targets, as well as on the size of the aid package, which Brussels initially put at around 80 billion euros. Diario Economico newspaper said earlier Portugal may need over 100 billion euros in EU/IMF loans, including up to 10 billion euros for its banks, but there were doubts whether Brussels will allow the bailout to exceed its initial target. SIC television said, without citing its sources, the bailout could reach 105 billion euros. (Reporting by Andrei Khalip; Writing by Axel Bugge; Editing by Louise Ireland) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Scott Bittle: Fiscal Follies: S&P, Groucho Marx, and the Bond Vigilantes

April 21, 2011

Admittedly, we may have an odd sense of humor when it comes to the federal budget. But after an initial shiver of fear, our first reaction to the news that Standard & Poor’s had issued a “negative outlook” for the U.S. national debt was: “Oh, no. Mrs. Teasdale has finally made her move.” You may not know who Mrs. Teasdale is, but she’s the oblivious dowager played by Margaret Dumont who starts the action rolling in the classic Marx Brothers political satire, Duck Soup . That movie starts with a government financial crisis, and Mrs. Teasdale may be the world’s first “bond vigilante.” Some say the term “bond vigilante” dates from the 1980s, while others say it was coined during the Clinton administration. Either way, it describes what happens when the traders who deal in government securities start to get nervous about a nation’s deficits and debt load, and threaten to dump their bonds unless a government changes its policies. That’s what S&P is starting to do with its “negative outlook,” and that’s what Mrs. Teasdale does in Duck Soup . Duck Soup takes place in the fictional nation of Freedonia, which is broke. Mrs. Teasdale, who has more money than sense, agrees to lend $20 million to Freedonia’s government, but only if it will appoint Rufus T. Firefly (Groucho) as prime minister. Things only get worse, and more ridiculous, from there. But while it’s an absurd situation, it’s also an indispensible lesson: when you’re in debt and need to borrow, the people with the cash on hand hold the cards. You might not think the United States and Freedonia have much in common. Now that we know we can’t fix this thing by axing agricultural subsidies and National Public Radio, we face some truly unpleasant choices — cutting spending on things that matter to people and hiking taxes in an economy that’s still sputtering. Right now we’re borrowing to get by, and we can only continue to do that as long as the world’s investors continue to loan us money. Right now, the United States relies on borrowed money that we get by issuing Treasury bonds. We have about $9.66 trillion in Treasury bonds outstanding, and we’ve got another $4.6 trillion in intergovernmental debt (mostly borrowed from the Social Security Trust Fund), which also has to be repaid. U.S, Treasuries are owned by investors around the world ranging from the People’s Bank of China and the “Caribbean Banking Centers” (The Bahamas, Cayman Islands, and the like) to state and local governments to individual bond holders like Mrs. Teasdale. For years, the United States has been in the catbird seat in the world bond market. Both here and abroad, investors have always seen U.S. Treasuries as a prudent, trustworthy investment in a dangerous, changeable world. Government bonds in general are considered one of the safest investments out there, no matter which government you’re talking about, because governments (a) can always raise taxes to pay their bills and (b) rarely go out of business. But sometimes governments get in too deep and then drag their feet on getting their fiscal houses in order. Then bondholders start wondering whether the government is actually good for the money. That’s what has happened to Greece, Ireland, Portugal, and Spain over this past year. The world’s bond markets had their Mrs. Teasdale moment when they started to see these countries as risky financial bets. That’s the reason behind the wave of budget-cutting sweeping over Western Europe right now, as Britain and France try to head off trouble. It’s important to remember: the United States is a wealthy, powerful country, the biggest economy in the world. We’re also the sole superpower, so it’s unlikely any of our creditors would impose a leader like Rufus T. Firefly on us. (We’re not saying he might not get elected on his own.) But it’s risky to think that we’re invulnerable to the power of the bond markets. They know we’re good for the money, if we tax ourselves more and/or spend less. But what S&P and others are really saying is that they don’t think we’ve got the political will to do either one. S&P said there was “significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and presidential elections,” and S&P said there’s a one-in-three chance it would actually lower our bond rating in the next two years. Is it fair that the bond market has this much power? Not really. Did the bond ratings agencies behave as dimwittedly as Mrs. Teasdale when they missed the looming financial crisis in 2008? Sure. Does that change anything? Not at all. We’ve been safe from the Mrs. Teasdales of the world so far, but with new red flags appearing every day, how long can that last? The cold fact is that the federal budget is on an unsustainable path , because as the population ages and our health care costs continue to go up, the costs for Medicare and Social Security are going to skyrocket. In a little more than a decade, our national debt could be as big as our entire economy, and nearly the entire federal budget could be taken up by Medicare, Medicaid, Social Security and interest on the money we’ve already borrowed. If we don’t start getting our deficits down and reining in our long-term spending, someday Mrs. Teasdale will come to call, and she’ll be able to make demands, and we’ll have to listen, and it won’t be funny. At that point, every single one of us could be in duck soup.

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USD116b bailout for Portugal: EU, IMF

April 12, 2011

USD116b bailout for Portugal: EU, IMF

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EU Finance Ministers Urge Austerity Reforms As European Unions Protest

April 9, 2011

GODOLLO, Hungary (Marton Dunai) – EU finance ministers on Saturday urged Portugal to commit to reforms and defended the region’s austerity steps as tens of thousands of European workers protested in Budapest against spending cuts. Finance ministers and central bankers from the 27-nation bloc held a second day of informal talks outside the Hungarian capital on their response to the euro zone debt crisis after Portugal on Wednesday became the third euro zone country to ask for EU and IMF financial aid. EU ministers said that in return for an estimated 80 billion euros in emergency loans over three years, Lisbon would have to commit to further structural reforms to bring down its budget deficit and debt in a sustainable way. “The rules are very clear. Whoever needs assistance by other European member states and member states of the euro zone, he has to deliver sustainable measures for reducing the deficits because the deficits are the reason why they need help,” German Finance Minister Wolfgang Schaeuble told reporters. Some 30,000 people from all over Europe marched in central Budapest in protest against austerity measures at a rally organized by the European Trade Union Confederation (ETUC). Demonstrators blew horns and chanted slogans, one of which read: “We want jobs! Create, do not abolish (jobs)!” One of the demonstrators, Christian Guldentops from CNE, the Christian Belgian trade union, told Reuters: “We are coming here to say no to the plan of Angela Merkel, Nicolas Sarkozy, and to the EU ‘s austerity plan.” John Monks, General Secretary of ETUC, said Europe should not “panic” over high debts and said the cost of paying back the debt for countries like Greece and Ireland was too high. “If we’re all in it together, then what are the banks, what are the financial markets, what are the rich and comfortable doing? We want the broadest shoulders to bear the heaviest burden, not for the whole weight of the adjustment to fall on the poor, the low paid, the unemployed …” FUTURE GROWTH IN FOCUS European Union leaders agreed last month that all EU countries would start consolidating budgets this year as Europe seeks to reassure financial markets that its fiscal policies are sustainable and draw a line under the year-long debt crisis. Olli Rehn, the EU’s Economic and Monetary Affairs Commissioner told a news conference on Saturday that reducing the debt burden was essential for future economic growth. “In many countries we have unsustainable debt burdens and therefore it is important also for the sake of economic growth and economic dynamism to ensure that this consolidation can be achieved with full determination and concrete results,” he said. Spanish Economy Minister Elena Salgado said growth and deficit reduction were essential to ensure governments could keep funding the welfare state. “We know that the decisions that are being taken assume efforts and are difficult. But (these decisions) are necessary because we need to grow and we need to reduce our deficit to keep funding the welfare state,” Salgado told reporters. “So, we understand their position (of trade unions) but we would also like that they understand ours,” she said. But in the streets of Budapest protesters said the measures devised by EU leaders would make workers in Europe poorer instead of leading economies out of the crisis. “These measures will take us back to the 1930s. They will cut masses of people out of work — the rich will become richer, the poor will become poorer,” said Fritz Keller from the Austrian trade unions. (Reporting by Ecofin team, writing by Jan Strupczewski, editing by Susan Fenton) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Euro Rally Looks to Portugal Bailout Talks for Added Fuel

April 9, 2011

Euro Rally Looks to Portugal Bailout Talks for Added Fuel

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Gold Prices Hit Record High On U.S. Dollar’s Decline

April 8, 2011

NEW YORK (Frank Tang) – Gold rose to a record high for a fourth straight day and silver surged on Friday, as a weaker dollar, the prospect of a U.S. government shutdown and inflation worries lifted precious metals in a broad commodities rally. Gold was set for its biggest weekly gain in four months, drawing support from renewed euro zone sovereign debt fears amid Portugal’s financial crisis and inflation jitters as crude oil and corn hit new highs this week. Bullion broke above key resistance on technical charts and could target above $1,500 an ounce. The metal has risen more than 10 percent since late January when political unrest began to flare in the Middle East and North Africa. “With the expected future inflation being higher in this low interest rate environment, investors are more inclined to have some contributions to commodities as an inflation hedge,” said Hakan Kaya, commodities portfolio manager at Neuberger Berman, which manages about $190 billion client assets. Spot gold rose as high as $1,474.19 an ounce and was later up 1 percent at $1,472.20 an ounce by 12:36 a.m. EDT. Bullion was on track to rise 2.5 percent this week for a fourth straight weekly gain. U.S. gold futures for June delivery gained 1 percent to $1,473.60. Gold remained far below its all-time inflation-adjusted high, estimated at almost $2,500 an ounce set in 1980 as a result of heightened geopolitical pressure and hyperinflation. (Graphic: r.reuters.com/ren88r ) U.S. futures activity was sharply below average for a second consecutive day, but analysts said low volume is not detrimental to the bull run after a strong price rally. Silver rose 2.3 percent to $40.42 an ounce, just off the session high of $40.49. The gold-to-silver ratio — the number of silver ounces needed to buy an ounce of gold — fell to a 28-year low near 36 on Friday. “One would expect silver to outperform in this environment because it bears a higher risk than gold on a volatility basis,” Kaya said. DOLLAR WEAKNESS UNDERPINS The dollar slide against the euro, supported by widening interest rate differentials after ECB’s rate hike, and crude oil’s surge to 2-1/2 year high added fuel to a rally that has already taken gold to a series of record highs this year. Gold also benefits from dollar weakness as Democratic and Republican congressional leaders said on Friday there was no overall deal on government funding for the rest of the fiscal year that ends September 30, and could not even agree on what disagreements remain ahead of the midnight Friday deadline. The looming U.S. government shutdown was “simply a minor problem of far greater problems,” said Camilla Sutton, chief currency strategist at Scotia Capital. The issues with the U.S. dollar are not temporary and the dollar is expected to remain weak this year, she added. On charts, gold breached important technical resistance at $1,466 an ounce near Thursday’s high, said Rick Bensignor, chief market analyst at Dahlman Rose. If bullion could hold above $1,466 early next week, it should next target an area between $1,500 and $1,510 an ounce, Bensignor said. Among other precious metals, platinum gained 1.3 percent to $1,803.74 an ounce, while palladium jumped 2.2 percent to $791.97. Prices at 12:36 p.m. EDT (1636 GMT) (Additional reporting by Julie Haviv in New York, Jan Harvey in London; Editing by David Gregorio) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Attacks On Libyan Oil Fields Cause Global Price Hike

April 8, 2011

Oil hit a 32-month high near $125 on Friday after attacks on Libyan oil fields raised the prospect of long-term supply cuts, with commodities in general rising on optimism global economic recovery will fuel demand. Ongoing unrest in the Middle East and concerns postponed elections in Nigeria could spark a new wave of militant violence and disrupt supply also contributed to the bullish mood in the market. By 1216 GMT Brent was up $1.82 to $124.49, after earlier climbing more than $2 to just below $125. U.S. crude climbed $1.29 to $111.59, down from slightly an intra-day peak of $111.90 last reached in September 2008. “Troubles in Libya mean Gaddafi has caused damage to the Sirte basin which has about two thirds of their oil, there’s dollar weakness and some very large fund action piling into the market in oil and base metals,” said Rob Montefusco, an oil trader at Sucden Financial. “People are saying the target is $150 but if we get up there it will come off pretty quickly. I don’t think this is a sustainable rally because we’re not seeing real demand pick up.” Rebels and forces loyal to embattled leader Muammar Gaddafi exchanged bitter accusations over who had attacked oilfields and infrastructure vital to both sides. The seven-week old civil war has cut Libya’s 1.6 million barrels per day output by 80 percent to between 250,000 and 300,000, a senior government official said. It took Kuwait two years to restore oil production to pre-war levels of about 1.6 million bpd, similar to Libya’s pre-conflict production, after the 1991 Gulf War, according to International Energy Agency data. Fellow OPEC member and 1.9 million bpd producer Nigeria postponed parliamentary elections again in some areas although polls will go ahead in most of the country on Saturday as planned. “Upcoming elections in Nigeria has already seen an uptick in violence in oil rich states of Akwa Ibom and Balyesa, with any loss in Nigerian crude (similar in quality to Libya) likely to put further pressure on light-heavy differentials,” said Barclays Capital analyst Amrita Sen. Further supply worries came from Norway where a trade source said the North Sea Oseberg crude oil stream will load 118,000 barrels per day in May, significantly down from the provisional program of 160,000 bpd in April. COMMODITIES BOOMING Crude prices rallied in step with gains across the commodities market where gold hit a record high, driven by a weaker dollar and positive global outlook despite Portugal’s request for a bailout earlier this week. But surging oil prices have stoked inflationary concerns for governments worldwide due to the potential adverse impact on economic growth of the rising cost of foodstuffs and raw materials, and the risk of demand destruction. “Awash with still extremely cheap money – the leading policy approach to cope with the passed recession – the investment community is pouring record volumes into long commodity positions,” said analysts at JBC Energy in a note. “This drives not only fuel and food prices to record highs, but also raises the costs for other raw materials massively, clearly putting the economic outlook under threat.” (Additional reporting by Randy Fabi and Alejandro Barbajosa; editing by Keiron Henderson) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Video: Portugal Seeks European Union Bailout Ahead of Elections

April 7, 2011

April 7 (Bloomberg) — Bloomberg’s David Tweed reports on Portugal’s request for a bailout from the European Union. Linzie Janis also speaks on Bloomberg Television’s “Global Connection.”

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Video: Kotecha Says Spain Not Bailout Contender `Anytime Soon’

April 7, 2011

April 7 (Bloomberg) — Mitul Kotecha, global head of foreign-exchange strategy at Credit Agricole CIB, talks about the outlook for the European sovereign debt crisis after Portugal said it is seeking a bailout from the European Union. He speaks from Hong Kong with Linzie Janis on Bloomberg Television’s “Global Connection.”

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Obama Rejects Tax Increase On Big Business

April 6, 2011

WASHINGTON — As Congress grinds closer to shutting down the federal government and the White House floats proposals to cut social services for working families, big business is gearing up to try to win yet another budget battle: overhauling the corporate tax code. However the current budget tussling between President Obama and congressional Republicans ends, corporate titans and their lobbyists appear poised for a big victory at the expense of the American middle class. President Obama said he hopes to eliminate many corporate tax loopholes during his State of the Union address, but he also pledged to cut the overall corporate tax rate — a joint policy the White House has billed as “revenue neutral,” meaning it will neither increase or decrease overall corporate tax receipts. The administration has not yet outlined which loopholes it wants to close or how far it wants to push down the tax rate. Buoyed by the prospect of a business-friendly tax overhaul, however, the Business Roundtable and other high-powered corporate lobbyists are using tax reform negotiations to push for more offshore tax breaks and official federal forgiveness for tax avoidance schemes. They got a big boost on Tuesday when House Budget Committee Chairman Paul Ryan (R-Wis.) pledged to actively reduce corporate taxes in his fiscal 2012 budget proposal, which would also do away with or fundamentally change key social services, including Medicare. Ryan’s sweeping budget plan generated fierce opposition from congressional Democrats. But it may spark renewed enthusiasm for using the December released bipartisan deficit commission report as a starting point for long-term budget negotiations. The corporate tax reform proposed by the commission would permanently push popular offshore tax shelters beyond the reach of Uncle Sam — very bad news for legislators, economists and average citizens hoping to see big companies play a bigger role in helping to narrow the budget gap. A bipartisan group of senators is already engaged in talks based off the report, and, in the wake of Ryan’s budget proposal, Third Way , a centrist Democratic think tank with close ties to Wall Street, is pressing lawmakers to hammer out a compromise largely based on the commission’s recommendations. The push for lower corporate tax rates comes during a flush time for corporate America. Overall corporate taxes as a share of GDP are hovering around one percent, the lowest share of GDP since World War II. “At a time when cuts to access to college, cuts to scientific research are on the table, it makes no sense to take corporate taxes off the table,” said Chuck Marr, Director of Federal Tax Policy for the Center on Budget and Policy Priorities, a left-leaning think tank focused on economic issues. “The country is just starting this process of deficit reduction, and there are going to be some wrenching choices.” A senior Treasury official defended Obama’s push for a revenue-neutral corporate tax overhaul in a recent meeting with reporters, contending that the main threat to today’s economy isn’t low corporate tax rates, but the possibility that higher tax rates will force companies to decamp abroad. The Treasury official requested anonymity in order to speak candidly about rationales for the department’s economic policy proposals. Both Obama and congressional Republicans have repeatedly emphasized that the official tax rate for big corporations of 35 percent is high relative to other nations, but the actual tax bills companies pay are much lower, thanks to the use of special exemptions, tax havens and other sweeteners sprinkled throughout the tax code. According to a 2007 study by George W. Bush’s Treasury Department, the average American company actually pays a tax rate of just 13.4 percent — lower, for example, than France, Portugal, Spain, Japan, Canada, and Switzerland, and less than half the average rate paid in the United Kingdom and Australia. This, despite the fact that, according to the study, the U.S. had one of the highest official rates in the industrialized world. Tax experts say that no meaningful corporate tax overhaul, revenue neutral or otherwise, can allow companies to continue stashing money in offshore tax havens– a creative accounting tactic that allows big firms to avoid paying $50 billion in taxes every year, according to the U.S. Treasury. Gauging the specific amount of taxes lost to offshore accounts is difficult, however, and reform advocates say the number could be even bigger. “Anybody who tells you that they do know is probably full of it,” said Jack Blum, a Washington attorney who chairs Tax Justice USA, a tax code reform group. “The problem is that people don’t report what they don’t pay in tax, so it’s very, very hard to tell how much money we’re losing. For a long time administrations went out of their way to make certain that no data was collected.” For years, progressive lawmakers and tax policy advocates have targeted tax havens as hotbeds of federal budget abuse. Companies can register profitable enterprises at an address in the Cayman Islands– even if it actually does business on Wall Street — and voila: so long as companies leave their profits in the Caribbean, their taxes can be “deferred” indefinitely. “It’s the number one issue, more important than anything I can think of,” said Bob McIntyre, a long-time tax reform advocate who works as Director of Citizens for Tax Justice, a non-partisan research organization dedicated to progressive taxation. According to a 2008 report by the Government Accountability Office, 83 of the 100 largest U.S. companies operate subsidiaries in nations that the government watchdog considers tax havens. All types of firms indulge, from telecommunications giants to retailers to banks. Wall Street is particularly aggressive; at the time the GAO report was issued, just six American banks were operating more than 900 such sub-companies. The few lawmakers with the audacity to propose a crackdown on offshore havens say that it would be politically impossible to secure without bestowing other tax benefits on companies. Last year, Sen. Ron Wyden (D-Ore.) and then-Sen. Judd Gregg (R-N.H.) pushed legislation to overhaul the entire tax code for both individuals and corporations. The effort would have ended deferred tax shenanigans, but in order to bring any Republicans on board, the bill had to be revenue neutral, according to Jennifer Hoelzer, a Wyden aide closely involved with the talks. “When you start talking about raising revenue, that just enters in more controversy than you need at the moment,” she said. Although the Wyden-Gregg legislation went nowhere last year, it included some provisions that could be used to build political support for another tax reform push. Under that plan, average voters would get a tax break, giving them a stake in a debate that is otherwise simply a battle between muscular corporations and other firms unable to more fully exploit tax perks. “When we do something big like tax reform . . . people need something to show for it at the end of the debate,” Hoelzer said. “For us, when we did both corporate and individual reform at the same time, the average tax filer gets a tax break at the end of it. You want to give people a reason to root for something.” A major concern for those hoping to require corporations to help narrow the deficit is a plan being floated by the Business Roundtable, a lobbying group representing CEOs of the largest American companies. The Business Roundtable plan would make all international revenue from U.S. firms, including money stashed in Caribbean tax shelters, becomes permanently nontaxable. The Business Roundtable declined to comment for this story, but its website claims that moving to a permanently untaxed foreign income system– known as a “territorial” plan among tax experts — is vital to making American business competitive with firms in other countries. Many economists beg to differ. “Those offshore affiliated corporations have no economic reality,” said University of Texas Economist Calvin Johnson. “Cayman Islands is a suburb of Greenwich, Connecticut and ought to be treated that way. It has no independent life or meaning.” The Obama administration is already backpedaling in the face of this lobbying push. In a Tuesday hearing before a Senate subcommittee, Treasury Secretary Timothy Geithner said that the administration would consider granting a one-time tax holiday for corporations who stash money in tax havens, if it were part of a “comprehensive” tax reform project. Geithner did not specify what else should be included in such a comprehensive overhaul, but reiterated that the administration is committed to a “revenue-neutral” plan. A bipartisan group of six senators is currently attempting to cut a deal on narrowing the deficit. The group includes Sens. Richard Durbin (D-Ill.), Kent Conrad (D-N.D.), Mark Warner (D-Va.), Tom Coburn (R-Okla.), Saxby Chambliss (R-Ga.) and Mike Crapo (R-Id.). A spokesperson for Chambliss said the group has no proposal yet and is still working out legislative language. None of the other senators would comment. But a source close to the talks, who requested anonymity because negotiations are ongoing, said that corporate tax reforms would be based on recommendations from Obama’s Fiscal Responsibility Commission . The Commission called for eliminating four categories of corporate tax breaks, while exempting offshore tax havens by adopting the “territorial” tax policy now being pushed by the Business Roundtable.

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FOREX: Yen Hits 5-Month Low on Fed Outlook, Euro Eyes Portugal Bond Sale

April 6, 2011

FOREX: Yen Hits 5-Month Low on Fed Outlook, Euro Eyes Portugal Bond Sale

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Video: Wyplosz Says Portugal May Need $20-$30 Billion Bailout

March 30, 2011

March 30 (Bloomberg) — Charles Wyplosz, director of the International Centre for Monetary and Banking Studies, discusses the outlook for Portugal’s financial crisis. Wyplosz speaks with Deirdre Bolton on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

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Michael Pento: The Inflation Knuckle Ball

March 29, 2011

Inflation has now manifested itself in nearly every asset class and price level in our economy. Fed Chairman Ben Bernanke’s plan from the start has been to lower the dollar’s value and cause asset prices to rise–especially in real estate. But that goal was full of hubris from the start because the Fed can’t control the exact rate of inflation nor can it direct where inflation will be distributed across the economy. In other words, inflation is like a knuckle ball: once you let it loose, you’re never really sure where it will end up. And Bernanke’s pitches are so wild they would make Tim Wakefield jealous. But the Fed’s printing spree is so far off the mark that Bernanke now has a difficult choice. He can either do nothing and allow most price levels in the economy to become intractable or to raise interest rates significantly and crush the housing market. Data released last week shows that the median home price of existing homes declined 5.2% in February compared to the previous year, to $156,100. New home prices fared even worse; the median sales price dropped to $202,100 in February, from $221,900 a year earlier, a tumble of some 9%! And data released today from the S&P/Case-Shiller 20 city home price index showed that prices have now dropped 6 months in a row and were down 3.1% from last year. Yet, perhaps nowhere is the Fed’s inflation madness so apparent as in commodity prices. Gold is up over 4% in the last three months, as M2 is rising at a 6% annualized rate. The CRB Index is up 8% so far this year and the Dollar Index has lost 4% of its value over the same period. The dollar is down against other fiat currencies in the last three months despite the following: the world’s third largest economy has most likely been taken off-line due to a catastrophic earthquake; the EU was placed further in turmoil when the Prime Minister of Portugal failed to pass his austerity measures and was forced to resign; and, a plethora of Middle Eastern countries have erupted in violence, leading the U.S. to enter into a war with Libya. Yes, in the face of a world of turmoil, still the dollar fell. This is clear evidence that Bernanke’s policies are causing investors to second-guess the dollar’s historic ‘safe haven’ status. It’s really no wonder that faith is waning. The effects of inflation are being felt right now and there is no prospect for a change in policy any time soon. By all reasonable accounts, commodity prices will continue to surge as real interest rates continue to fall. Right now, the yield on the one year T-bill is .23%, while the YOY increase in inflation is 2.1%. And this is using the government’s twisted figures! I estimate real interest rates are somewhere close to -8.75% if using a more realistic inflation rate of 9%. Therefore, investors are being thrust into the arms of precious metals and away from dollar-based assets. There really isn’t much choice. However, since the real estate market was in a prolonged and lofty bubble, it will be the last asset class to respond to the Fed’s dollar debasement strategy. Bernanke should have studied more about asset bubbles than the Great Depression. If he did, he would have learned that gold took decades to recover to its nominal high in 1981 and the NASDAQ is still 45% below its all-time nominal high set over a decade ago. And those markets were allowed to clear, unlike housing prices, which are being levitated by the government. But amazingly, since 40% of the core CPI is owner’s equivalent rent, Bernanke will continue to miss the mark about the true level of the inflation he has created. The aftershock of the real estate bubble has sent millions of homes into foreclosure, left 11% of homes vacant, and caused 23% of mortgage holders to be without any equity in the home. And since home prices are still falling the number of individuals with negative equity continues to increase. The housing market is still very anemic despite the fact that the government is providing 95% of new mortgage financing. But unless the Fed starts to create credit to buy houses directly off the market, it will be very difficult to get real estate values to move higher. If Bernanke does chose to go that route, I’d recommend taking the money you got from selling your house to the Fed and find a property in a country that actual cares about its currency. It is clear that by trying to target his inflation into just one asset class, Bernanke has placed the entire US economy in severe danger. And he is now facing a serious conundrum. Does he raise interest rates significantly to fight inflation and thus pour a concrete containment structure over the housing market, or does he sit idly by and watch the broader economy suffer an inflationary meltdown? The fallout from either choice isn’t pleasant. But we can be assured of this: if he waits for the bond vigilantes to raise interest rates for him, the situation will quickly spiral out of control. Michael Pento is the Senior Economist for Euro Pacific Capital

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Video: Portugal Seeks to Expand Brazil Ties to Boost Economy

March 29, 2011

March 29 (Bloomberg) — Bloomberg’s Nicole Itano reports from Lisbon on economic ties between Portugal and Brazil.

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Sheldon Filger: Portugal Faces Severe Fiscal and Economic Crisis As Eurozone Sovereign Debt Fears Grow

March 28, 2011

The weakest links in the Eurozone chain are known as the PIIGS. This acronym represents five fiscally vulnerable members of the European monetary union: Portugal, Ireland, Italy, Greece and Spain. Already, two of the five members of this august club have capitulated to the dismal reality of their public finances and are receiving a Eurozone bailout, which comes from a fund consisting of borrowed money, borrowed that is by slightly less indebted Eurozone partners. Now, it would appear, Portugal is likely to be the third affiliate of the PIIGS to get a bailout. Portugal’s Prime Minister Jose Socrates has resigned after Lisbon’s parliament rejected his proposed austerity package. Socrates claimed that Portugal did not need financial aid , and could resolve its fiscal problems through its own austerity measures. That hope appears now to have been abandoned, and the expectation is that Lisbon will soon come crawling for a bailout, as the spread on its bonds gets ever wider. Standard & Poor’s, S&P and Fitch have all severely downgraded their ratings on Portuguese government debt. In the meantime, a new government in Ireland is stating that it wants to negotiate a less severe austerity package than the one accepted by the previous Dublin government in exchange for a Eurozone and IMF bailout. As Portugal wobbles, Ireland confounds while continuing to bankrupt its citizens as the price for bailing out its reckless banks. In the meantime, the Greek economy is deflating, making it ever more likely that Athens will eventually default on its public debt. That still leaves the two biggest PIIGS without a bailout. After Portugal, Spain is the next likely candidate for the bond vigilantes. The most significant problem with Spain is that it is so much larger an economy than the previous candidates for a bailout, it is unlikely that the Eurozone and its already indebted taxpayers could sustain the massive public borrowing required to rescue Madrid from its own fiscal follies. The sovereign debt crisis in the Eurozone is spinning out of control. And not far behind in entering this vortex of doom is the United Kingdom, which despite massive public spending cuts retains an unsustainable deficit as its economy contracts. And then there is the United States, with a national debt now virtually at parity with its annual GDP, and projected to have a record deficit in the current fiscal year, exceeding ten percent of its annual GDP. In my book, Global Economic Forecast 2010-2015: Recession Into Depression , I predict that by 2012 a massive sovereign debt crisis in the major advanced economies will plunge the world into a global economic depression. All the recent developments regarding fiscal issues in the Eurozone, UK and U.S. do not give me any reason to alter my forecast.

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Marshall Auerback: We Aren’t Greece — But We Could Be Japan if Flawed Logic Persists

March 28, 2011

Influential journalists are making persuasive cases that austerity is the wrong approach in fragile economies. That’s good news. But discussions still get muddled in ways that can have perverse effects. Take the case of Japan. Last week Bill Mitchell wrote an excellent blog post discussing Martin Wolf’s article on Japan’s fiscal position following the earthquake. Wolf suggested that the “national insolvency” threat allegedly posed by the earthquake was vastly overstated. He argued that the sums involved were too small to matter. Mitchell agreed, but went further, challenging Wolf’s implicit suggestion that the Japanese government faced a solvency risk of any kind : The reality is that the Japanese government has no solvency risk at all in relation to its net spending position and the debt issuance that matches it (nearly). It is grossly misleading to leave the impression that it is just because the reconstruction sums are small that there is no insolvency risk. As Mitchell put it, Wolf’s assessment was so close to comprehension, and yet so far. I had a similar sensation reading Paul Krugman’s latest challenge to the prevailing fiscal austerity mania now gripping most of today’s leading policy makers in the global economy. Krugman rightly exposes the central flaw inherent in the deficit reduction hysteria: Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks. The article moves along swimmingly until Professor Krugman invokes the dreaded example of Greece: But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt. But that’s not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts. No, no, no! There is no debt crisis in sovereign nations such as the U.S., Japan, the U.K., or Canada. Barring a decision by Congress to give up the dollar and adopt, say, the Mexican peso, we can never end up like Greece. Nor will Japan, which does not need to “dip into its rainy day fund,” as Carmen and Vince Reinhart wrongly suggested last week. To clarify, the nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies and adopting a supranational one, the euro. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues, and this applies perfectly well to Greece, Portugal, and even countries like Germany, which continues to champion the cause of fiscal austerity under the respectable sounding guise of “sound finances.” This distinction is key, but it gets lost in our economic debates. Happily, Dean Baker gets it , but for the most part our inability (whether through misunderstanding or ideology) to distinguish between issuers and users of currency continues to provoke perverse policy responses, notably in the countries that remain sovereign in regard to their monetary/fiscal operations, such as the U.S. As my friend Warren Mosler always likes to say, “Because we believe we can be the next Greece, we continue to work to turn ourselves into the next Japan.” The only public debt problems that have emerged in the current crisis have been in non-sovereign countries. Even then, with appropriate “fiscal support,” those crises were managed largely through the expedient of the ECB’s ongoing purchases of PIIGS’ debt in the secondary bond markets — which amounts to a fiscal act within a flawed monetary system. But blurring the distinction between sovereign and non-sovereign nations is the starting gate for this muddled discussion that persists when we invoke Greece as an example of what we could become. Those of us who make the key distinction between a non-sovereign country like Greece and a sovereign one like the U.S. accept that the prevailing concern about Portugal, Ireland, Italy, Greece and Spain (PIIGS) and even other Euro nations is justified. But using PIIGS countries as analogues to the U.S. is a result of the failure of deficit critics to understand the differences between the monetary arrangements of sovereign and non-sovereign nations. Greece is a user of the euro. It is not an issuer. In that respect, it is more like California or even New York City, which are users of the U.S. federal government’s dollar. The hysteria, which Paul Krugman rightly decries, comes from a flawed understanding of how the monetary system works. It also partly explains why even in sovereign monetary/fiscal systems, conservatives continue to impose arbitrary constraints on our government’s ability to provide policies that generate full employment. Which is precisely what we need right now. Sovereign governments have been led to believe that they need to issue bonds and collect taxes to finance government spending and that good policies should be judged by their ability to enforce fiscal austerity. The guardians of the status quo know that the fear of rising public debt can be politically manipulated and demonized, and they do this to put a brake on government spending. But there is no operational necessity to issue debt in a fiat monetary system. In fact, in the case of sovereign nations, it is a logical impossibility for households and nonbank firms to finance the budget deficit by paying taxes and buying government bonds. The private sector cannot create money (and bank-created money is not a net financial asset for the private sector, as the private deposit holders cancel out the private borrowers). The domestic private sector has to first earn the money by net selling goods and services (to the federal government) and net selling assets (to the central bank) before it is in a position to pay taxes or buy government bonds. Mainstream economics has guided policymakers into imposing artificial constraints on fiscal policy and government finances, such as issuing bonds when running deficits, debt ceilings, forbidding the central bank from directly buying treasury debt, allowing the markets to set interest rates on government bonds, etc. This is a huge conceptual flaw that is currently paralyzing the Governor of the Bank of Japan, even as his country reels from its greatest disaster since World War II. It is also destroying the U.K. economy, as both Krugman and John Cassidy have recently highlighted. All these constraints, sadly, are self-imposed and voluntary. As my colleague Randy Wray has put it , it is as if someone would tie his/her feet together and then complain about the inability to walk. It may seem petty to criticize otherwise strong critiques of the current thrust of self-styled deficit hawks. But we have to be on guard against conceptual confusion that can hamper our ability to act decisively to do what it is certainly in our power to do: namely to stop choking our economy and put Americans back to work. Cross-posted from New Deal 2.0 .

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Video: Teixeira Says Portugal May Get Bailout Before Elections

March 25, 2011

March 25 (Bloomberg) — Pedro Braz Teixeira, an economist and adviser to former Finance Minister Manuela Ferreira Leite, talks about the prospects for Portugal getting an international bailout. He speaks with Andrea Catherwood on Bloomberg Television’s “Last Word.”

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Video: Lemco Says `Inevitable’ Portugal Has to Take EU Bailout

March 25, 2011

March 25 (Bloomberg) — Jonathan Lemco, a sovereign credit analyst at Vanguard Group Inc., talks about the likelihood Portugal will accept a bailout from the European Union. Lemco speaks with Betty Liu on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

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Video: Kraemer Says S&P to Reassess Greece, Portugal Amid ESM

March 25, 2011

March 25 (Bloomberg) — Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s, discusses the outlook for the sovereign debt ratings of Greece and Portugal once full details of the European Stability Mechanism, the euro area’s permanent rescue fund, are disclosed. Kraemer speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

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Video: Portugal’s Passos Says New Government Can Restore Trust

March 25, 2011

March 25 (Bloomberg) — Pedro Passos Coelho, the leader of Portugal’s opposition Social Democrats party, talks about the country’s austerity plan and negotiations with the European Union. He spoke with Bloomberg’s David Tweed in Brussels yesterday.

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Video: Schmieding Says Portugal Will Need to Negotiate Bailout

March 24, 2011

March 24 (Bloomberg) — Holger Schmieding, chief economist at Joh Berenberg Gossler & Co., talks about the outlook for an international bailout for Portugal and the capital levels of Spanish banks. He speaks with Francine Lacqua on Bloomberg Television’s “On The Move.”

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Video: Stocks Advance as Metal Prices Rise; Portugal Bonds Drop

March 23, 2011

March 23 (Bloomberg) — Bloomberg’s Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks rose, erasing yesterday’s drop, as higher metal prices lifted commodity shares, while oil gained as allied forces struck Libyan leader Muammar Qaddafi’s troops. Bonds of Europe’s most-indebted nations sank amid concern Portugal will need a bailout. Bloomberg’s Pimm Fox also speaks. (Source: Bloomberg)

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Gemma Godfrey: EU Bonds: Portugal Proving the Point & How You Can Profit

March 23, 2011

First the bank bail-outs, then countries joined the queue. Talks of Greece defaulting, Irish riots and Spanish air-staff simultaneously taking a ‘sick-day’. Just what is at the root of the EU’s troubles? And how do last week’s events with Portugal exemplify the problem? A Flawed Strategy Einstein summed up the challenge being faced within the EU succinctly when he proclaimed “you can’t solve a problem with the same kind of thinking that created it.” In Europe today, many countries are struggling under the burden of too much debt and the problem is being tackled with the issuance of yet more debt. Crucially, without growth, debt as a percentage of GDP will continue to worsen even before new debt is added to the equation. Investors are losing patience. Portugal Proves the Point… According to central bank forecasts, Portugal’s economy will contract by 1.3% this year, pushing the country into its second recession in three years. In reaction to this poor growth outlook, Moody’s downgraded its bond rating not one but two notches on Tuesday night. The very next day it sold €1bn in short-term government debt. Unsurprisingly, investors asked for a higher interest rate on their loan — exacerbating Portugal’s problem. As the finance minister conceded , servicing debt at current yields is “unsustainable over the long term”. …but Presents Opportunities A downgrade in a country’s government debt may trigger a wave of forced sellers. Pension funds, insurance companies and ETFs are focused on matching their liabilities to their assets. Therefore, they may be restricted in holding debt rated below a certain level. With Portugal’s government debt downgrade (again let me emphasize by not just one but by two notches), these investors may have to sell certain Portuguese debt holdings. Any forced selling may be exploited with the purchasing power in your hands. Misunderstood Markets In addition, as Christine Lagarde, the French economy minister, admitted “Europe is difficult to understand for markets. They work in an irrational way sometimes,” and it is possible to profit from this ‘irrationality’. Companies located in an EU periphery country, with strong balance sheets and demand insulated from worries about their homeland (i.e. international exposure etc), may suffer from illogical moves in the markets that punish anything connected to the country regardless. This debt can be picked up ‘cheaply’. United They Stand; Divided They Fall The problem with the “EU” banner is that it links together economies that are quite different from each other. Much press has been dedicated to the fate of the ‘PIIGS’ — Portugal, Italy, Ireland, Greece and Spain but it is interesting to compare journalistic exposure with economic impact. Greece Ireland and Portugal account for less than 5% of EU GDP. It is wise to remember that often overreaction offers the most profitable investment opportunities.

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Portugal Government May Collapse Ahead Of Austerity Vote

March 23, 2011

LISBON, Portugal — Portugal’s government could collapse Wednesday after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout. The expected defeat of the minority government’s latest spending plans in a parliamentary vote will likely force its resignation and could stall national and European efforts to deal with the continent’s protracted debt crisis. The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal. Last year, both Greece and Ireland had to accept massive rescue packages after markets lost faith in their governments’ efforts to deal with their debt burdens. The political tension fueled a rise in Portugal’s borrowing rates, just as it is trying to cut spending. The yield on the country’s 10-year bond, for example, was up to 7.57 percent Tuesday – just shy of its euro-era record level. The interest rate has been above 7 percent for several weeks despite the government’s earlier austerity measures which, its political rivals say, failed to quell investor fears. As in Greece, the austerity policies – including tax hikes and pay cuts – have prompted an outcry from trade unions and numerous demonstrations and strikes. Train engineers walked off the job during the morning commute Wednesday, causing widespread travel disruption. By most measures, Portugal is one of the eurozone’s smallest and feeblest economies but its financial collapse would likely trigger a fresh bout of nerves over other debt-heavy – and bigger – euro countries such as Spain, Belgium and Italy. “Portugal seems very likely to become the third … eurozone country to need a bailout,” Emilie Gay, European economist at Capital Economics said. The governing Socialist Party’s parliamentary leader Francisco Assis made an 11th-hour appeal for opposition rivals to negotiate changes to the latest austerity package and ensure the government’s survival. Prime Minister Jose Socrates, who heads the government, has said he will no longer be able to run the country if the package is rejected. “This is a decisive moment,” Assis said Tuesday. Finance Minister Fernando Teixeira dos Santos has said failure to enact the package – the fourth set of measures in 11 months – would push Portugal closer to needing financial assistance. But opposition parties say the center-left government’s latest austerity plan goes too far because it hurts the weaker sections of society, especially pensioners who will pay more tax. The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares. The leader of the main opposition center-right Social Democratic Party, Pedro Passos Coelho, said the political deadlock made an early election “inevitable.” Markets have heaped pressure on Portugal over the past year as investors demanded ever higher returns for lending it money, driving the country’s borrowing costs to intolerable levels. Even so, the government has insisted it can weather the current difficulties and doesn’t need a bailout. The government’s austerity measures have won praise from other European countries, but they are only half the story: Portugal urgently needs to generate fresh growth. The economy is in deep trouble, with a double-dip recession expected this year and unemployment standing at a record 11.2 percent. Moody’s recently downgraded the country’s credit rating, and Standard & Poor’s has warned it may follow suit. Portugal’s plight stems from a decade of miserly growth. While growing at the tepid rate of 1 percent a year, it ran up debt to finance its western European lifestyle. Its economy is hobbled by old-fashioned practices, especially outdated labor laws which protect jobs, and has failed to keep pace with more flexible competitors. Tullia Bucco, an analyst at Unicredit in Milan, says investors who have risked their money on Portugal can take some heart from the fact that the Social Democratic Party also espouses debt reduction and increased economic competitiveness. The Social Democrats have been ahead in recent opinion polls. Even so, the winner of any election is unlikely to get an extended honeymoon period. “They could be very tough times ahead,” Bucco said.

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Dan Solin: The Only Question That Matters for Investors

March 16, 2011

The financial media is whipped into a frenzy. There is so much uncertainty. Here’s a summary of recent developments: Bill Gross eliminated U.S. government debt from the Pimco’s Total Return Fund. Nouriel Roubini (“Dr. Doom”) predicts $100 billion in municipal bond defaults over five years. Ireland, Greece, Portugal and Spain remain in tenuous financial condition. The devastating earthquake in Japan has broad economic ramifications. Unrest in Libya and in the rest of the Middle East threatens oil prices. What does it all mean for investors? How fortunate we are to have so many “experts” who can make sense of these disturbing developments. Money manager Laszlo Birinyi advises “[]These kinds of strong beginnings lead to long and durable bull markets. Hedge fund manager Barton Biggs agrees. Over at The Wall Street Journal , they’re not so sure. Brett Arends listed ten reasons why investors should be worried. His sources are interesting. He relies on an unnamed “European hedge fund manager” who is “worried about China.” The source is not buying aggressively, and Arends find that significant. It’s quite remarkable what passes for responsible financial journalism at The Wall Street Journal these days. I get asked for my opinion on many of these issues by readers of my books and blogs, advisory clients and prospective clients. Many can’t hide their disappointment when I tell them I have no clue how these events will affect the markets. What’s more, neither does anyone else, including those who are so confident of their predictions and who dispense their advice so freely. What’s more, I don’t care and I don’t believe intelligent investors should either. Here’s why. Many studies confirm the relationship between loss of money and suicide. Ask most men what they fear most and they will tell you it is the loss of their money and homelessness. You would think their investing decisions would seek to minimize this possibility. Instead, they are more often focused on the short term consequences of current events. This makes no sense. The average sixty-year-old will live another twenty years or so. Here’s the only question she (and all other investors) should be asking her financial advisor: Can you financially engineer a portfolio for me, using long term (at least 50 years) data, that will maximize my returns for the amount of risk I will be taking, for the rest of my life, and will minimize the possibility that I will be destitute in my old age? The good news is that it is very easy to accomplish this goal. We have all the tools and data necessary to do so. The analysis can be based on sound academic, peer-reviewed research, used by savvy pension and trust fund administrators and high net worth individuals. Of course, it’s not predictive, but it’s far more reliable than relying on financial astrologers. I have rarely met an investor who had such a plan, or who understood that he could get one. You have a choice. You can listen to the musings of people who believe they can predict the future, or you can plan intelligently for your own future. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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