They all quickly go to junk if the US goes cold turkey to a balanced budget
> Spain Placed by Moody’s on Review for Possible Downgrade
> 2011-07-29 05:20:32.543 GMT
>
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> By Maria Ermakova
> July 29 (Bloomberg) — Spain’s Aa2 ratings were placed by
> Moody’s Investors Service on review for possible downgrade.
> The country’s Prime-1 short-term ratings are unaffected by
> today’s action, Moody’s said.
When Europe opens down big due to the US deficit issues, it will send a chill though the investment community and euro zone leaders.
This is the last thing they need while struggling with their domestic financial issues.
With export markets threatened, and impossible domestic debt loads given the current levels of growth,
markets could force (via deteriorating financial conditions) an ECB takeover of all national govt. funding.
Kind of like breaking your leg and getting hit by a car while trying to limp home.
And if the US debt ceiling is not extended the drop in aggregate demand (spending) will take down most of the world economy:
Headlines:
Swiss Investor Sentiment Falls to Lowest in More Than 2 Years
Euro-Area Services, Manufacturing Gauge at Lowest Since 2009
Juncker Says Selective Default for Greece Is a Possibility
German output growth slowed sharply to its weakest in two years
and this:
China’s Manufacturing May Contract for First Time in a Year
July 21 (Bloomberg) — China’s manufacturing may contract for the first time in a year as output and new orders drop, preliminary data for a purchasing managers’ index indicated.
The gauge fell to 48.9 for July from a final reading of 50.1 for June, HSBC Holdings Plc and Markit Economics said in a statement today. The final July reading is due Aug. 1.
Today’s data adds to evidence that growth in the world’s second-largest economy is slowing on Premier Wen Jiabao’s campaign to tame consumer and property prices. The International Monetary Fund said in a report released late yesterday in Washington that risks for the economy include the threat of faster-than-expected inflation, a real-estate bubble, and bad loans from stimulus spending.
“The data are another sign that the monetary tightening measures that commenced last October are biting,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV. “If there is a concern that growth is slowing too much, past practice is that there will be a pause in the tightening.”
Stocks in China fell for a fourth day. The benchmark Shanghai Composite Index closed 1 percent lower at 2,765.89, the biggest decline since July 12.
The yuan rose to a 17-year high after the central bank set the strongest reference rate since a dollar peg was scrapped exactly six years ago. It was 0.12 percent stronger at 6.4516 per dollar at 3:28 p.m. in Shanghai, the biggest advance in a week, according to the China Foreign Exchange Trade System.
Cost Pressure
Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch, said the HSBC survey may be “more downward- biased” than an official PMI because the average size of the businesses covered is smaller. Such companies “are under increasing pressure” from labor costs and to secure capital, Lu said. He advised investors to “not overly respond” to the data.
The government has raised interest rates five times since mid-October, boosted lenders’ reserve requirements to a record level and imposed curbs on property investment and home purchases.
Inflation, which has breached the government’s 2011 target of 4 percent every month this year, accelerated to 6.4 percent in June from a year earlier, the highest level in three years.
The IMF said in the report that China’s economy “remains on a solid footing, propelled by vigorous domestic and external demand.” The Washington-based lender’s 24 directors also “generally agreed” that a stronger yuan would help rebalance the China’s economy toward domestic demand.
Slowing Demand
HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. Output in July contracted at a faster rate, export orders shrank at a slower pace and the gauge of new orders dropped below 50, the dividing line between expansion and contraction, today’s data showed.
Manufacturing in some industries is being hit by slowing demand. Li Ning Co., China’s largest sportswear maker and retailer, said July 7 its first-half sales dropped by about 5 percent. The China Association of Automobile Manufacturers said July 8 that vehicle sales may increase about 5 percent this year, compared with an earlier estimate for 10 percent to 15 percent growth, due to lower demand for commercial autos.
The preliminary number has matched the final reading twice since HSBC began publishing the series in February. If it’s confirmed on Aug. 1, the index will have dropped to its lowest level since March 2009. It last fell below 50 in July 2010.
Gets stranger by the day as all sides seem to be struggling to merge the political with the pseudo economic.
A Greek bailout adds nothing to aggregate demand, as it doesn’t result in any increased spending from current budgeted levels.
However, and while not all that large, this bank tax both removes net euro financial assets from the private sector,which lowers aggregate demand, and raises the banking system’s overall cost of funds.
Bank tax proposed to help Greece bail-out
July 20 (FT) — A proposal to tax eurozone banks to help pay for a Greek rescue has emerged as the possible central pillar of a new bail-out programme. The plan, which advocates believe could raise €30bn over three years, could help satisfy German and Dutch demands that private holders of Greek bonds contribute to a new €115bn bail-out. It would also likely avoid a default on Greek debt. Both Berlin and The Hague are still insisting that other options for private bondholder participation be included. Officials said those proposals – which include a government-financed bond buy-back programme, a German-backed bond swap proposal, and a French plan for bond rollovers – could be included as a “menu” of options available to bondholders.
First, I’d guess the President will sign anything Congress passes, including short term measures.
But he might not.
And yes, there are options that allow the executive branch to continue to deficit spend if it wanted to, ranging from issuing a multi trillion dollar platinum coin to spending under cover of the 14th amendment.
However, there’s a real possibility Congress won’t pass anything for the President to sign, or that the President vetos what they do pass, and that the Treasury honora the current debt ceiling and limits spending to tax revenue.
Should that be the case, the US govt, as widely discussed, immediately goes to a ‘balanced budget’ mode, prioritizing interest payments, so there is no default by the US Treasury.
That means a lot of other bills won’t get paid.
Chairman Bernanke said that this could cut 6% off of GDP and send the US into a recession with GDP going from positive to negative.
However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.
It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.
In other words, for the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.
And as difficult as it might be for the US, the euro member nations may be looking at something even more catastrophic.
The drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.
This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.
While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.
Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.
So far when push comes to shove, the ECB has ultimately written the check.
As long as they keep doing that it can all muddle through.
Executive Summary: Markets seemed to turn around this morning on reports that the ECB will (or has already begun to) buy Spanish and Italian debt in order to calm markets.
Please check out the website and offer a comment, thanks!
Mosler bonds issued to both address current funding requirements and buy back discounted Greek govt debt would further enhance the credit worthiness of those bonds by further and substantially reducing Greek govt interest expense.
Interesting how the word now coming out on the French plan, which initially was greeted with a near celebration, is now entirely negative to the point where it’s being dismissed.
And default discussions now moving to the front burner is telling, as just last week that was proclaimed ‘out of the question’
EU stance shifts on Greece default
By Peter Spiegel and Patrick Jenkins
July 10 (FT) — European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.
The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt.
“The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations.
Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer. But if the strategy were agreed, it would mark a significant shift in the 18-month struggle to contain the eurozone debt crisis.
Until now, European leaders have been reluctant to back any plan categorised as a default for fear it could lead to a flight by investors from all bonds issued by peripheral eurozone countries – including Italy and Spain, the eurozone’s third and fourth largest economies.
Yields on Italian bonds, which move inversely to prices, rose sharply last week due to the Greek uncertainty. Senior European leaders – including Jean-Claude Trichet, European Central Bank chief, and Jean-Claude Junker, head of the euro group – are to meet top European Union officials ahead of Monday’s finance ministers’ gathering amidst growing fears of contagion.
A German-led group of creditor countries has for weeks been attempting to get “voluntary” help from private bondholders to delay repayment of Greek bonds, a move they hoped would lower Greece’s overall debt while avoiding a default.
But in recent days, debt rating agencies warned any attempt to get bondholders to participate would represent a selective default. Rather than abandon bondholder buy-ins, however, several European leaders have decided to return to a German-backed plan to push current Greek debt holders to swap their holdings for new, longer-maturing bonds.
The move essentially scraps a French proposal unveiled last month, which many analysts believed would only add to Greek debt levels by offering expensive incentives for banks that hold Greek debt to roll over their maturing bonds.
Officials said the Institute of International Finance, the group representing large banks holding Greek debt, has gradually moved away from the French plan and begun to embrace elements of the German plan.
“There’s some convergence in the banking community towards a more realistic plan than the French plan, which was out of this world,” said the senior European official. The plan criticised as being self-serving for the banks.
According to executives involved in the IIF talks, banks have pushed for a Greek bond buyback plan in return for agreeing to a restructuring programme, arguing that only if Greece’s overall debt were reduced could a sustainable recovery occur.
European officials said there was support for the proposal in government circles. The plan, originally pushed by German investors, including Deutsche Bank, could see as much as 10 per cent of outstanding Greek debt repurchased on the open market.
Since Greek bonds are currently trading below face value, such purchases would essentially be a voluntary “haircut”, since bondholders would accept payment for far less than the bonds are worth.
It remains unclear how a buyback would be financed, however. The European Commission has long pushed for the eurozone’s €440bn bail-out fund to be used for buybacks, but Berlin blocked the proposal.
Wonder what that does to the remaining contributing nations balance sheets?
Not good, and increases the likelihood of Italy getting seriously tested.
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ECB Seeks Expansion of Euro-Rescue Fund to Help Italy, Welt Says
By Karin Matussek
July 10 (Bloomberg) — The European Central Bank is seeking to have the euro-rescue fund expanded to include help for Italy, Die Welt reported, citing unidentified “high ranking” people at central banks.
The fund may have to be doubled to 1.5 trillion euros($2.14 trillion) to cover a crisis in Italy, the ECB said according to the German newspaper.
Central banks are no longer ready to buy government debt, so the rescue fund should take on that task instead, according to the bankers, Die Welt said preview of an article for tomorrow’s edition.
The overall trade picture continues to appear to be ‘deteriorating’ and could be removing fundamental support for the euro.
Yes, German net exports remain firm, but it’s the euro zone as a whole that drives the value of the euro.
And higher prices for imported energy could be hurting the euro zone more than the US, as they import their natural gas as well and pay more for it.
France reports record trade gap in May
July 7 (Xinhua via COMTEX) — Sluggish exports and soaring costs of imported petroleum products drove higher France’s trade deficit to a record of 7.42 billion euros (10.61 billion U.S. dollars) in May, customs figures showed on Thursday.
For the past 12 months, the cumulated trade deficit widened to 63.41 billion euros in total compared to 51.55 billion euros in 2010.
“As in April, the trade deficit exceeded seven billion euros. It worsened due to double effects of surging imports, notably energy, and of sluggish exports …” French customs said in a statement.
The country’s total imports stood at 41.6 billion, up from 41.47 billion euros reported in April as purchases of refined products remained high and imports of natural hydrocarbons grew.
At the end of May, France reported a slight drop in its sales abroad to 34.17 billion euros on the back of lower sales of Airbus.
The giant aero group garnered 1.33 billion euros after selling 21 aircrafts versus 26 worth 1.7 billion euros in April, but during the week-long Paris Airshow in June, Airbus reported record orders for a total of 730 aircraft worth 72.2 billion U.S. dollars.