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Tuesday, September 6, 2011

US Postal Service Nearing Default as Losses Mount

The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.

“Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”

In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.

The post office’s problems stem from one hard reality: it is being squeezed on both revenue and costs.

As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.

At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent atUnited Parcel Service [UPS 64.42 -1.19 (-1.81%) ] and 32 percent at FedEx[FDX 73.08 -1.82 (-2.43%) ], its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.

The Senate Homeland Security and Governmental Affairs Committee will hold a hearing on the agency’s predicament on Tuesday. So far, feuding Democrats and Republicans in Congress, still smarting from the brawl over the federal debt ceiling, have failed to agree on any solutions. It doesn’t help that many of the options for saving the postal service are politically unpalatable.

“The situation is dire,” said Thomas R. Carper, the Delaware Democrat who is chairman of the Senate subcommittee that oversees the postal service. “If we do nothing, if we don’t react in a smart, appropriate way, the postal service could literally close later this year. That’s not the kind of development we need to inject into a weak, uneven economic recovery.”

Missing the $5.5 billion payment due on Sept. 30, intended to finance retirees’ future health care, won’t cause immediate disaster. But sometime early next year, the agency will run out of money to pay its employees and gas up its trucks, officials warn, forcing it to stop delivering the roughly three billion pieces of mail it handles weekly.

The causes of the crisis are well known and immensely difficult to overcome.

Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogs to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 percent from five years ago.

It’s difficult to imagine that trend reversing, and pessimistic projections suggest that volume could plunge to 118 billion pieces by 2020. The law also prevents the post office from raising postage fees faster than inflation.

Meanwhile, the agency has had a tough time cutting its costs to match the revenue drop, with a history of labor contracts offering good health and pension benefits, underused post offices, and laws that restrict its ability to make basic business decisions, like reducing the frequency of deliveries.

Congress is considering numerous emergency proposals — most notably, allowing the post office to recover billions of dollars that management says it overpaid to its employees’ pension funds. That fix would help the agency get through the short-term crisis, but would delay the day of reckoning on bigger issues.



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Bring Out Your Dead - UBS Quantifies Costs Of Euro Break Up, Warns Of Collapse Of Banking System And Civil War

Any time a major bank releases a report saying a given course of action is too costly, too prohibitive, too blonde, or simply too impossible, it is nearly guaranteed that that is precisely the course of action about to be undertaken. Which is why all non-euro skeptics are advised to shield their eyes and look away from the just released report by UBS (of surging 3 Month USD Libor rate fame) titled "Euro Break Up - The Consequences." UBS conveniently sets up the straw man as follows: "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change." So far so good. Yet where it gets scary is when UBS quantifies the actual opportunity cost to one or more countries leaving the Euro. Notably Germany. "Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. " It also would mean the end of UBS, but we digress. Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction trope made so popular by ole' Hank Paulson : "The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war." So you see: save the euro for the children, so we can avoid all out war (and UBS can continue to exist). The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro.

Executive summary:

Fiscal confederation, not break-up

Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break-up, is considerably more costly and close to zero probability. Countries can not be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move.

The economic cost (part 1)

The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.

The economic cost (part 2)
Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit.

The political cost
The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

A little more on that particularly troubling last point:

Do monetary unions break up without civil wars?

The break-up of a monetary union is a very rare event. Moreover the break-up of a monetary union with a fiat currency system (ie, paper currency) is extremely unusual. Fixed exchange rate schemes break up all the time. Monetary unions that relied on specie payments did fragment – the Latin Monetary Union of the 19th century fragmented several times – but should be thought of as more of a fixed exchange rate adjustment. Countries went on and off the gold or silver or bimetal standards, and in doing so made or broke ties with other countries’ currencies.

If we consider fiat currency monetary union fragmentation, it is fair to say that the economic circumstances that create a climate for a break-up and the economic consequences that follow from a break-up are very severe indeed. It takes enormous stress for a government to get to the point where it considers abandoning the lex monetae of a country. The disruption that would follow such a move is also going to be extreme. The costs are high – whether it is a strong or a weak country leaving – in purely monetary terms. When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences.

With this degree of social dislocation, the historical parallels are unappealing. Past instances of monetary union break-ups have tended to produce one of two results. Either there was a more authoritarian government response to contain or repress the social disorder (a scenario that tended to require a change from democratic to authoritarian or military government), or alternatively, the social disorder worked with existing fault lines in society to divide the country, spilling over into civil war. These are not inevitable conclusions, but indicate that monetary union break-up is not something that can be treated as a casual issue of exchange rate policy.

Even with a paucity of case studies, what evidence we have does lend credence to the political cost argument. Clearly, not all parts of a fracturing monetary union necessarily collapse into chaos. The point is not that everyone suffers, but that some part of the former monetary union is highly likely to suffer.

The fracturing of the Czech and Slovak monetary union in 1993 led to an immediate sealing of the border, capital controls and limits on bank withdrawals. This was not so much secession as destruction and substitution (the Czechoslovak currency ceased to exist entirely). Although the Czech Republic that emerged from the crisis was considered to be a free country (using the Freedom House definition), with political rights improving relative to Czechoslovakia (also considered to be a free country), Slovakia saw a deterioration in the assessment of its political rights and civil liberties, and was designated “partially free” (again, using Freedom House criteria).

Similarly the break-up of the Soviet Union saw authoritarian regimes in the resulting states. Of course, this was not a change from the previous status quo, but that is not the point. The question is not how a liberal democracy develops, but whether a liberal democracy could withstand the social turmoil that surrounds a monetary union fracturing. We lack evidence to support the idea that it could.

Even the US monetary union break-up in 1932-33 was accompanied by something close to authoritarianism. Roosevelt’s inauguration was described by a contemporary journalist as being conducted in “a beleaguered capital in wartime”, with machine guns covering the Mall. State militia were called out to deal with the reactions of local populations, unhappy at what had happened to the monetary union (and specifically their access to their banks).

Older examples are less helpful, as they tend to be more akin to fixed exchange rate regimes under a gold standard or some other international monetary arrangement. Nevertheless, the Irish separation from the UK, or the convulsions of the Latin Monetary Union in Europe (particularly around the Franco-Prussian war in 1870 and its aftermath) saw monetary unions fragment with varying degrees of violence in some parts of the union.

Writing in 1997, the Harvard economist Martin Feldstein offered a view that seems to be somewhat chillingly precognitive. He said “Uniform monetary policy and inflexible exchange rates will create conflicts whenever cyclical conditions differ among the member countries... Although a sovereign country... could in principle withdraw from the EMU, the potential trade sanctions and other pressures on such a country are likely to make membership in the EMU irreversible unless there is widespread economic dislocation in Europe or, more generally, a collapse of the peaceful coexistence within Europe.” (emphasis added).

As for what happens if UBS, and the Euro Unionists lose the fight for the euro:

Our base case for the Euro is that the monetary union will hold together, with some kind of fiscal confederation (providing automatic stabilisers to economies, not transfers to governments). This is how the US monetary union was resurrected in the 1930s. It is how the UK monetary union, and indeed the German monetary union, have held together.

But what if the disaster scenario happens? How can investors invest if they believe in a break-up, however low the probability? The simple answer is that they cannot. Investing for a break-up scenario has not guaranteed winners within the Euro area. The growth consequences are awful in any break-up scenario. The risk of civil disorder questions the rule of law, and as such basic issues such as property rights. Even those countries that avoid internal strife and divisions will likely have to use administrative controls to avoid extreme positions in their markets.

The only way to hedge against a Euro break-up scenario is to own no Euro assets at all.

Zero Hedge

European banks face collapse under debts, warns Deutsche Bank chief Josef Ackermann

bundle of euro bank notes leaning against a savings box infront of the twin towers of the Deutsche Bank in Frankfurt, Germany

Mr Ackermann said that the value of billions of euros of loans has plunged to a level that could overwhelm smaller banks.

He told a conference in Frankfurt: "Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."

Mr Ackermann said market conditions were as febrile as the height of the banking crisis. "We should resign ourselves to the fact that the 'new normality' is characterised by volatility and uncertainty," he said. "All this reminds one of the autumn of 2008."

The volatility was demonstrated as Deutsche Bank shares tumbled 8.9pc as banks led a stock markets lower across Europe.

Deutsche Bank's shares closed at €23.79, valuing the company at €21.6bn (£18.9bn) - its lowest level since it completed a €10.2bn rights issue last October. The Stoxx Europe 600 banking index fell to its lowest level for 29 months. The DAX fell to its lowest level in two years.

Traders said fears over the banks' exposure to European debt were exacerbated by the uncertainty of the US legal cases and regulatory reform.

The debt crisis has also squeezed bank revenues as mergers and acquisitions – as well as stock market listings – have been shelved. Trading figures have also fallen. Mr Ackermann said that bank profits will take a long time to recover.

"Prospects for the financial sector overall... are rather limited," he said. "The outlook for the future growth of revenues is limited by both the current situation and structurally."

Deutsche Bank has already warned that it could miss its target of €6.4bn pre-tax profits this year without a quick and sustainable resolution of the European debt crisis.

Even so, Mr Ackermann firmly rejected the proposal by Christine Lagarde, the new head of the International Monetary Fund, for another round of recapitalising European banks.

Mr Ackermann claims that the move would be "counterproductive" and argued that "a forced recapitalisation would give the signal that politicians do not themselves believe in the measures" they have implemented to bolster fragile eurozone countries.

Ms Lagarde has said banks need another capital injection to "avert contagion". She told reporters she believed it is "necessary to recapitalise European banks so that they are strong enough to withstand the risks linked to the debt crisis and weak growth".

The Telegraph

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Soaring prices mean new goldrush is on

Gold prospector

Gold prices have risen more than 25 per cent since the beginning of the year as concern over global growth has turned investors to the safe haven of the metal, which they believe will hold its value amid market volatility.

Adelaide's Dennis Cooper has been a gold prospector for 25 years and has just returned from an 8000km round-trip to Western Australia's Port Hedland, where he found three troy ounces of gold worth $5373.

"I go to the original 1870s goldfields and I go bush on tracks where people don't usually go," Mr Cooper said.

"The goldfields were packed when I went last time and there's been a definite increase in the number of people looking for gold."

While Australia's first prospectors panned streams for gold, the tool of choice for the new breed of prospectors like Mr Cooper is a hand-held metal detector.

Metal detector company Minelab's general manager Peter Charlesworth said there had been a rise in sales of detectors since 2009 that corresponded with a rise in the price of gold.

"Across the world we've had a record sales year and it's been driven largely by a significant rise in the gold price," Mr Charlesworth said. "Sales have been especially strong in Africa, but we are also seeing solid growth across all continents."

Minelab's ASX-listed parent company Codan has reported a significant increase in the number of detectors sold over the past two years, with revenue gained from metal detectors more than doubling since 2009 to about $92 million.

Mr Cooper warned that detecting was hard work and owning a gold detector did not guarantee success.

"You can be lucky and find a patch of gold, but sometimes you do go with high expectations and come back with nothing for the day," he said.

"You can't just go out there with a machine; it takes years to learn how to use them properly."

While gold prices are still high and fetching $1791 an ounce last night, they are likely to remain volatile in the near term as investors look towards US economic data due later this week.

The Australian

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Germany's Schäuble calls for new EU treaty

According to Bild, Schäuble spelled out his plan at a behind-closed-doors meeting of leaders of his conservative Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU) yesterday (1 September).

Shifting greater powers over economic and financial policy to Brussels is necessary, he reportedly said, "even though we know how difficult a treaty change will be".

Some EU leaders, including Chancellor Angela Merkel, have argued that a treaty change could help enforce fiscal rules to avoid repeats of the debt crises plaguing members of the euro zone, including Greece, Ireland and Portugal, which have required costly bailouts.

"I will push for necessary treaty changes so that we can act sooner and more effectively when things go wrong, including with targeted sanctions," Merkel said at the time.

"Europe must learn the right lessons for the future [...] We have seen that the instruments of the euro zone as they currently stand are insufficient," Merkel said.

Schäuble, however, insisted that such reforms were needed even if they threatened to further divide the 17 EU member states that used the euro and the remaining 10 that did not.

The Treaty on European Union, signed in Maastricht in 1992, came into force in 1993, and making changes in the years since then has proven cumbersome and complicated.

The most recent example was the signing of the Lisbon Treaty, which was eventually ratified by all 27 member states after heated debate in some countries, especially those which were required to hold a referendum. One major stumbling block was the rejection of the treaty in a 2008 Irish referendum, which was reversed the following year in a second vote.

Schäuble's proposal may also face opposition in the Budestag, Germany's federal parliament, where some MPs have criticised the government's decisions over the eurozone bailouts.

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Italian President warns on ‘alarming’ debt signals


ROME — Italian President Giorgio Napolitano urged swift action to strengthen planned austerity measures on Monday, saying a severe market selloff was a clear warning that markets had lost confidence in Italy.
“No one can underestimate the alarming signal from today’s surge in the differential between the prices of Italian public debt instruments and those of Germany,” Napolitano said in a statement.
“It is a sign of the persistent difficulty in regaining trust as is urgently and indispensably required,” he said, adding that he urged all parties not to block measures needed to restore credibility.
He said there was still time to insert measures “capable of reinforcing the efficiency and credibility” of the austerity package passed in parliament last month which is currently undergoing revision in the Senate.
The call to action from Italy’s head of state came after a day of rising pressure on the euro zone’s third largest economy as financial markets have lost faith in government pledges to bring its finances under control.
Yields on Italian 10 year bonds climbed to nearly 5.6 percent on Monday, approaching the levels of more than 6 percent seen before the European Central Bank began buying Italian bonds last month in a bid to hold down its borrowing costs.
The premium investors demand to buy Italian bonds rather than benchmark German debt widened to 369 basis points, more than 30 points higher than the equivalent Spanish spread as Italy has moved firmly to the centre of the euro zone crisis.
Debate on the austerity package is due to begin on the floor of the Senate on Tuesday afternoon with approval expected before the end of the week when the package moves to the lower house. Final approval is expected by Sept. 20.
As head of state, Napolitano wields little direct power but his office carries great symbolic weight and he has played an unusually direct role in the current crisis.
His statement follows widespread criticism of Prime Minister Silvio Berlusconi’s centre right government over its handling of the austerity measures, which have been changed repeatedly over recent days.
The ECB has also stepped up its warnings, with Mario Draghi, who takes over as head of the central bank in November, delivering a pointed warning on Monday that its willingness to continue buying bonds “should not be taken for granted”.
The CGIL, Italy’s largest union, has called a general strike on Tuesday to protest the austerity measures, which have also been condemned as “weak and ineffective” by the country’s main employers federation, Confindustria.
A poll published by the left-leaning daily La Repubblica on Monday showed support for Berlusconi’s government has crumbled, falling to 22 percent in September, from 27 percent in June and 29 percent in February this year.
Italy has found itself at the centre of the euro zone debt crisis since early in July as markets have woken up to its combination of a public debt running at 120 percent of gross domestic product and one of the world’s most sluggish economies.
Berlusconi holds a clear parliamentary majority but his coalition is riven with internal divisions and bitter personal rivalries and there has been persistent speculation it may fall apart before the end of its five year term in 2013.
Financial Post

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We Need Fiscal Union': EU Commissioner Almunia

Greater fiscal and political union is needed in Europe, and will be discussed by euro zone leaders within months, Joaquin Almunia, EU Competition Commissioner, told CNBC Saturday.

"This is one moment where we need greater integration. We need to learn from history to look forward with ambition," said Almunia, speaking on the fringes of the Ambrosetti Forum, at the Villa d'Este on the shores of Lake Como.

"We need fiscal union," he added. He said that European people "would understand" that greater union was needed, but that their political leaders needed to explain the situation to them.

"What we learned during 10 years of the Lisbon Treaty is that we need clear strategies and objectives," Almunia added.

As the debt crisis in the euro [EUR=X 1.398 -0.0112 (-0.79%) ] region has escalated, the pressure on its leaders to ensure the future of the single currency has increased.

A common theme of the gathering of political and business leaders was frustration at the lack of leadership from individual European countries.

"There is a lack of strong political leadership in Europe," Mario Monti, former European Commissioner, told CNBC. "We need the sort of strong leadership which helped bring in the euro."


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World stocks slide on economy and debt fears

REUTERS/Susana Vera

LONDON — Stocks fell on Monday and the euro hit a three-week low versus the dollar as worries about Greek and Italian fiscal deficits and a regional election rout for Germany’s ruling party cast more doubt on the euro zone’s ability to solve its debt crisis.
Data on Friday showing U.S. employment growth halted in August fueled concerns that the world’s biggest economy is slipping back into a recession, sending Wall Street sharply lower on Friday before a long weekend.
The euro zone faces a week packed with political and legal risks, beginning with the German Federal Constitutional court ruling on Wednesday on claims that Berlin is breaking German law and European treaties by contributing to bailouts of Greece, Ireland and Portugal.
The yield premiums investors demand to hold Italian and Spanish 10-year government bonds rather than benchmark German Bunds hit their highest in a month.
“Not a great start to the week. There is a lot going on for banks, especially in the light of a low-growth environment and the backdrop in the euro zone not improving,” said Mike Lenhoff, chief strategist at Brewin Dolphin.
The MSCI world equity index fell 1.5 percent on the day. It is just over 4 percent above an 11-month low hit during market turmoil in early August and has lost nearly 10 percent since January.
European stocks fell 2 percent while emerging stocks lost 2.2 percent.
U.S. crude oil fell 1.6 percent to US$85.07 a barrel.
The dollar rose 0.4 percent to set a one-month high against a basket of major currencies.
The euro had fallen to a three-week low of US$1.4111 before trimming losses.
As many European financial institutions are saddled with losses on bond holdings, traders are also worried that their funding could face more strains, putting pressure on the euro.
Bund futures rose 100 ticks to a record high. Italian 10-year yields rose to their highest since August 9 at 5.467 percent, dragged away from the 5 percent level to which European Central Bank buying had eased them.
Besides the German court ruling, a meeting of finance ministers of Germany, the Netherlands and Finland will also be closely eyed as they discuss the nagging issue of collateral for loans to Greece.
Debate over the effectiveness of ECB bond-buying is likely intensify at the bank’s monthly policy meeting on Thursday.
“We will probably get the … assertion that ‘all euro zone countries must stick to their fiscal plans as agreed with the euro zone authorities’,” Richard McGuire, rate strategist at Rabobank, said.
“Singling out Italy — there is a risk that that would be counterproductive because it would put Italian yields under significant pressure and therefore undo much of the work that the ECB has done.”

Financial Post

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Gerald Celente on RT....CERO JOBS

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