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Wednesday, July 27, 2011

Libya and Russia Progress?

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Downgrade may now be unavoidable

Jim Watson/AFP/Getty Images

The principal risk emerging from the U.S. debt quagmire is not a cataclysmic default that many economists maintain is highly unlikely.

Much more realistic is a downgrade to the country’s creditworthiness, which markets are beginning to register as distinctly possible, even if the debt ceiling is raised.

“Focusing on default ignores the true issue,” said Michael Gregory, senior economist at BMO Capital Markets. “A lot of people are thinking that there’s no way they can come up with an agreement to avoid a downgrade by at least one of the agencies.”

So far, markets have largely assumed the U.S. Congress will break the impasse and legislate an increase to the US$14.3-trillion borrowing limit, thereby averting a crisis.

But ratings agencies have since interjected, expressing concern for the country’s fiscal imbalances and calling for immediate steps to reduce the deficit as part of the debt ceiling negotiations.

Otherwise, Standard & Poor’s Inc. could strip the United States of its AAA rating, the agency warned.

Neither will the compromise taking shape in Washington, D.C., satisfy S&P, which indicated it requires US$4-trillion in savings over the next 10 years.

Both Republican House speaker John Boehner’s two-stage plan for US$2.6-trillion in spending cuts and Democratic Senate majority leader Harry Reid’s US$2.7-trillion proposal appear to fall well short of that mark.

While not as ominous a prospect as outright default, a downgrade could nonetheless profoundly reverberate through the global economy.

A threat to the “riskless” status of Treasury securities would have implications for anyone using U.S. debt as collateral in transactions.

And money market funds and insurance companies are required to hold high-quality securities, said Nariman Behravesh, chief economist with IHS Global Insight.

“It’s unclear what the effect would be,” said Mr. Behravesh, saying U.S. sovereign debt would likely retain its status as a premiere safe haven. “There are not a lot of alternatives in terms of safe assets to U.S. Treasuries right now.”

Investors would certainly demand a risk premium on Treasuries, which would in turn push up borrowing costs for consumers, businesses and governments.

Exactly what the U.S. economy, which is showing glimmers of hope, doesn’t need, Mr. Gregory said.

“There are reasons to believe that things are going to get better, but you start raising interest rates, it does change the cost-benefit analysis of investments,” he said.

Despite ongoing distress in the U.S. housing and labour markets, not to mention the country’s fiscal challenges, consumer confidence inched upwards in July, according to the Conference Board.

Additionally, gas prices have backed off of late, inflation concerns have eased, home prices showed signs of rebounding in June, and a record weak greenback continues to bode well for an export-led recovery.

The effects of a downgrade, however, “could be what causes this soft patch to persist,” Mr. Gregory said.

In fact, the debt ceiling showdown itself may be partly to blame for stalled U.S. growth, Mr. Behravesh said.

“Uncertainty around not only the debt ceiling, but what it means in terms of spending cuts and tax increases, is giving pause to consumers, businesses, state and local governments,” he said. “The uncertainty, more than anything else, is getting in the way of the recovery.”
Financial Post

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Gold strikes new record high on US default fears

Gold forged a record high above $1,625 per ounce here on Wednesday, as investors parked their cash in the precious metal in the face of heightened concerns over a potential US default.

The price of gold struck $1,625.70 an ounce at about 0600 GMT on the London Bullion Market, beating the previous record of $1,624.07 that was hit on Monday.

"The threat of default by the world largest economy has led gold to a fresh peak above $1,625 this morning," said FastMarkets analyst James Moore.

"The metal looks set to extend towards $1,650 in the coming sessions as investors seek to diversify into more tangible assets as confidence in paper assets, even government-backed, dwindles."

The United States remained on course on Wednesday for a potential debt default with grave consequences, with common ground still elusive on a deal that would let Washington borrow the cash it needs to pay its bills.

The White House and its divided Republican foes clashed on Tuesday but failed to break an impasse that could see the world's richest nation default on its debt, with potentially ruinous global results.

Investors are extremely worried about the risk of an August 2 deadline passing without a breakthrough.

"Should a default occur, gold will be vulnerable to a sharp correction as investors cut their risk exposure and use gold to generate cash, but ... once the initial sell-off is complete there are likely to be further upside gains," added Moore.

In recent weeks, gold has blazed a record-breaking trail as investors have also sought shelter from the intensifying eurozone debt crisis.

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Postal Service names 3,700 post offices that could be closed

The U.S. Postal Service is targeting 3,700 post offices (can get the list here) across the country that could be closed, the largest downsizing in the history of the money-losing agency.

The unprofitable stations, branches and main offices that could be shuttered starting in January account for about 11 percent of the Postal Service’s retail operations. In the Washington area, 32 post offices could be jettisoned, from those servicing Congress in the U.S. Capitol to ones in Silver Spring and downtown Leesburg.

Another 124 elsewhere in Maryland and Virginia are on the list, with the rest are scattered across 47 other states. The local post office with an American flag flying overhead has helped define communities — rural, suburban and urban — in many of these areas for more than two centuries.

The Postal Service hopes the contraction will save $200 million a year. That does not come close to recouping the $8 billion the agency is expected to lose for the second year running as it fights plummeting mail volume. But postal officials said they intend to review half of their network of 32,000 post offices for closure in the next decade as they try to slash labor costs.

“We’ve made heroic efforts to take costs out of the organization while continuing to provide services,” Postmaster General Patrick R. Donahoe said at a news conference, comparing his agency’s financial struggles to the federal government’s effort to stay within its cap on borrowing.

“We have employees waiting for customers to come into their lobbies, and they have less than two hours they’re working,” he said.

Post Politics

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Betting $4.8 billion on a U.S. default


NEW YORK (CNNMoney) -- With its winners and losers, Wall Street is often likened to a big casino for obvious reasons. And even when it comes to a possible U.S. default next week, at least a few financial players are looking to cash in on such a bleak turn of events.

A small camp of investors are betting that the U.S. government will default on its debt, and they're putting $4.8 billion of their chips on the table.

In the event of a default, that's how much financial firms will have to pay out to investors who bought credit default swaps against the U.S. government, according to figures from the Depository Trust and Clearing Corp.

With only a week to go until the government breaches its debt ceiling, are these few investors likely to come away with the winnings of a lifetime?

Probably not, experts say.

"I think we're a long way away from considering this hypothetical [case]," said Otis Casey, director of credit research at Markit.
Debt ceiling: What happens if Congress doesn't raise it?

A credit default swap, or CDS, is basically an insurance contract against a default, and in this case, $4.8 billion is quite meager in comparison to what those on the other side of the bet are putting down.

Private investors -- including everyone from individual consumers to hedge funds to the Chinese government -- currently hold $9.3 trillion (with a T!) in Treasury bonds, and they're counting on Uncle Sam paying up when those contracts mature.

But if they're wrong to count on the "full faith and credit of the U.S. government" and the U.S. stops paying bondholders principal and interest, Treasury investors could lose some of those funds.

In contrast, the small group of CDS investors could demand payment from the investment banks that sold them their "insurance" contracts.

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Head of U.S. cyber agency resigns suddenly

Head of U.S. cyber agency resigns suddenly

WASHINGTON (Reuters) - The head of a U.S. agency that helps respond to cyber attacks resigned suddenly after several high-profile attacks on government computer systems but the Department of Homeland Security declined Monday to comment on the reason.

Randy Vickers resigned as director of the U.S. Computer Emergency Readiness Team Friday, according to an email from Roberta Stempfley, acting assistant secretary for cyber security and communications at Homeland Security, which was sent to some employees.

The email, obtained by Reuters, did not disclose any reason for the resignation, and a Homeland Security official would only say: "we aren't commenting on personnel matters."

Vickers' resignation follows several high-profile hacker attacks against the Pentagon and public websites of the Central Intelligence Agency and U.S. Senate.

Lee Rock, who was deputy director, will serve as acting director until a new head of the agency is named.
The email from Stempfley said, "we are confident that our organization will continue its strong performance under his leadership."

Chicago Tribune

No monuments for compromise

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Calif. borrows $5.4 billion amid U.S. debt drama

NEW YORK (CNNMoney) -- California secured a $5.4 billion loan to see it through the financial market turbulence that could hit if federal policymakers don't solve the debt ceiling impasse by Aug. 2.

Eight major financial institutions, including Goldman Sachs (GS,Fortune 500) and Wells Fargo (WFC, Fortune 500), put up the funds, which will help the state with its daily cash flow needs. Also, the money will cover California in case the federal government delays payments for services such as health care and transportation. (States brace for U.S. default)

"California had to obtain this interim financing to protect the state from the immediate, drastic consequences of a failure by Washington to resolve the debt ceiling impasse by the Aug. 2 deadline," said Treasurer Bill Lockyer.

The state had planned to issue $5.4 billion in short-term debt in late August, but opted instead for a bridge loan in case there is a federal default. Lockyer plans to issue the debt eventually and use the proceeds to pay off the bridge loan.

States around the nation are drawing up contingency plans in the event that federal policymakers don't resolve the debt ceiling impasse by Aug. 2.

They are preparing for chaos in the municipal debt markets and delays in federal payments for Medicaid, education and other services, which could happen if the federal government defaults on its obligations.


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Loonie storms to strongest since 2007

Mark Blinch/REUTERS

TORONTO — The Canadian dollar rose to its best level in more than three and a half years against the U.S. dollar on Tuesday, as debt fears in the United States continued to slam the greenback.

The currency climbed as high as US$1.0625, its strongest level since November 2007, when it hit a modern-day high.

The U.S. dollar fell across the board, plunging to a record low against the Swiss franc, as a speech by U.S. President Barack Obama gave no sign of a swift breakthrough in deadlocked talks to raise the U.S. debt ceiling.

Commodity prices such as oil also rallied on a weaker U.S. dollar, though investors shrugged off fears that a U.S. default would undermine the appetite for riskier assets, while a run of strong earning reports further boosted market sentiment.

“The political brinksmanship that’s being played out south of the border is clearly having an impact on the U.S. dollar,” said Jack Spitz, managing director of foreign exchange at National Bank Financial, noting talk of central banks’ reserves diversifying out of the U.S. dollar and into other currencies, such as Canada’s.

“Pretty well every currency is trading as a safe-haven currency when compared with the U.S. in terms of its current environment but that could change on a dime.”

The United States edged closer on Tuesday to a devastating default as Republicans and Democrats were deadlocked over competing plans to raise the debt ceiling, one week before a deadline to act.

At 8:09 a.m., the currency stood at US$1.0620, up from Monday’s North American session close at $1.0573.

Spitz said there was no major technical resistance for the Canadian dollar on its way to the November 2007 high, when the currency hit $1.10.

“From a technical perspective, it’s air below the calendar low in dollar/Canada until we get to the modern day low,” he said.

Psychologically, he noted investors will look at international money market levels, with C$0.9345 versus the U.S. dollar, or $1.07 as the next major mark insight.

Canadian government bond prices were little changed across the curve, outperforming U.S. Treasuries as the deadlock in Washington showed no sign of easing.

The two-year bond was off 1 cent to yield 1.511%, while the 10-year bond was down 2 cents to yield 2.934%.

Thomson Reuters

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India raises interest rates in a bid to slow inflation

A vendor selling vegetables in India

India's central bank has raised interest rates by more-than-expected as it continues to fight rising prices.

The Reserve Bank of India raised its main rate to 8% from 7.5%, the eleventh increase since March 2010.

Inflation has been accelerating and a key measure of price growth hit 9.44% in June, pushed up by higher food and fuel costs.

The central bank has said that slowing prices gain is a top priority.

"Actual inflation so far has been even higher than expected," the Reserve Bank of India said in the statement announcing its latest interest rate move.

"The recent increase in domestic administered fuel prices and the minimum support price for certain food items will also keep inflation under pressure," the bank added.Growth vs inflation

The central bank's decision comes at a time when concerns are being raised about the sustainability of the global economic recovery.

A slowdown in developed economies, coupled with the debt crisis in various nations, has seen a decrease in demand from these economies.

Data released earlier this month showed that India's factory output grew by a weaker-than-expected 5.6% in May, as manufacturing activity slowed.

Analysts said given the current economic situation, the central bank's decision to raise interest rates by more than been expected has taken them by surprise.

"A surprisingly hawkish move, considering the external risks and slowing growth," said Vishnu Varathan of Capital Economics.

While the central bank acknowledged that "there are signs that growth is beginning to moderate, particularly in respect of some interest rate sensitive sectors", it said there was no evidence of a broad-based slowdown in the economy.

"Considering the overall growth-inflation scenario, we determined that it is necessary to persevere with the anti-inflationary stance," the bank said.

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