Tuesday, August 2, 2011
Spain PM postpones holiday as debt fears hit record
Spain's Prime Minister Jose Luis Zapatero has been forced to postpone his holiday as investors continue to flee his country's debt.
Mr Zapatero had been due to leave for south-west Spain.
But on Tuesday, the yield on Spanish bonds reached 4.04 percentage points more than German debt - a record since the euro was introduced in 1999.
The so-called premium to hold Italy's debt also hit a record.
"The prime minister has postponed the start of his holidays," Mr Zapatero's spokesperson said. "He is keeping an eye on the international economic situation."
The latest spike in yields comes at a bad time for the Spanish government, which plans to raise as much as 3.5bn euros ($5bn, £3.1bn) in a bond auction on Thursday.
On Tuesday, the euro reached a record low against the Swiss franc. The currency is usually considered a so-called safe haven in times of turmoil.
Higher costs
Despite another bailout for Greece last month, the eurozone is struggling to contain fears that more countries will not be able to repay their enormous debts.
The Irish Republic and Portugal have both been bailed out, and Greece has been rescued twice.
And as the bond yields rise, Italy and Spain have seen their borrowing costs rise sharply in recent weeks.
Italy's 10-year bonds rose above 6% on Tuesday - a rate considered unsustainable.
The premium over the equivalent German debt also reached a record spread of 3.74 percentage points.
Italy has the largest sovereign debt of any European country.
As a percentage of output, Italy's debt is second only to Greece in the eurozone - whose huge debts have led to two bailouts.
Representatives from the Italian central bank and stock regulator Consob were set to hold discussions on "the sovereign debt market situation and implications for the banks and the economy".
As their countries' bond yields rise, it becomes more expensive for governments to sell more debt, which leads to a vicious circle as the old debt comes due for repayment.
On Tuesday, Germany - the biggest economy in Europe - saw its bond yield drop below the inflation rate for first time since reunification.
This suggests that investors are now so scared, they are willing to sacrifice a return on their investment to hold the least risky bonds in Europe.
BBC
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Chinese agency warns of U.S. debt downgrade
Beijing (CNN) -- As the deadline looms for the United States to raise its debt ceiling or risk default, China's leading credit rating agency on Tuesday told CNN it is prepared to downgrade U.S. sovereign debt after putting it on negative watch last month.
The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening it s monetary policy, said it plans a further downgrade to A, indicating heightened doubts over Washington's ability to repay its debts.
It said the gloomy assessment -- much lower than the AAA ratings given by the so-called "big three" Western agencies Moody's, Fitch, and Standard and Poor's -- was inevitable given the level of market concern generated by a long-running stalemate between Democrats and Republicans over the debt ceiling.
"The squabbling between the two political parties on raising the U.S. debt ceiling and the failure of Congress to pass a resolution so far reflect an irreversible trend on the United States' declining ability to repay its debt," said Dagong chairman Guan Jianzhong.
"The two parities acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals," he said.
Ironically, Dagong's expected move could hurt not just the United States but also China, the largest foreign owner of U.S. debt with holdings worth almost $1.2 trillion.
"Our downgrade would simply reflect reality," Guan said. "Our rating didn't cause China to lose any money --- it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt."
Observers say China, whose foreign exchange reserves now stand at $3.2 trillion, has had little choice but to purchase U.S. Treasury bonds.
"There aren't that many other markets that are as deep or as liquid as treasuries," said Patrick Chovanec, an economic analyst with Tsinghua University in Beijing. "When they accumulate reserves, this is the only place they can put them."
The privately-held Dagong, founded in 1994 to rate Chinese companies, attracted worldwide attention last July when it published its first sovereign credit ratings and, citing growing deficits in the developed world, ranked China higher than the United States and Japan.
Dagong now rates 67 countries and aims to double the number by the end of this year. Its ambition to become an alternative to the "big three" suffered a setback, however, when the U.S. Securities and Exchange Commission refused to recognize its rating because of the commission's inability to supervise the Beijing-based agency.
Guan, who worked as a civil servant and a Wall Street accountant before taking helm at Dagong, is quick to defend his firm's independence and objectivity. He points to what he calls Western agencies' "double standard" in rating the U.S. and European economies to underscore the global need for a newcomer like Dagong.
"People are used to credit ratings issued by the 'big three,' but the financial crisis has clearly proved them wrong," Guan said. "They can no longer shoulder the responsibility of rating the world."
"That's the role we are striving to play," he added.
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US Dollars Without "In God We Trust"
US mint officials acknowledge that probably one batch (or part of a batch) of presidential coins missed the edge lettering machine process resulting in “God-less” dollars, no edge lettering on that batch of dollars.
Some collectors have reported discovering “God-less” dollars in rolls found at their bank or in circulation. Independent coin grading services PCGS and NGC have certified as authentic some of these coins without the “In God We Trust” inscription or the edge lettering. Now the US mint has acknowledged that some “Plain Edge” presidential dollars do exist and they are unintentional errors.
Godless Dollars - a Rarity?
The exact number of plain edge dollars minted is unknown. They seem to be hard to find. At the time of this writing God-less, plain edge dollars are selling from about $100 for very low grade plain edge errors to $300 or $400 for higher grade certified dollar coins.
The US mint has declared that they are improving the mintage process so that such God-less dollar errors do not happen in the future.
Facts about the United States Presidential Coins:
Presidential coins are golden colored but not really made of the metal gold. The P and D mint mark dollars are minted for general public release into the banking system and will be available at local banks (if your bank will order them).
S mint dollar coins are only available in special proof sets sold by the US mint and some coin dealers. These proof presidential dollar coin sets are housed in special hard plastic cases where the edge lettering of the presidential coins are also visible.
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U.S. debt not only crisis on horizon
The United States looks set to escape a crushing debt default, but it has yet to find a way to escape the economic quicksand.
A half-hour into a relief rally on the bi-partisan deal to raise the United States’ borrowing ceiling and cut the deficit by US$2.4-billion, markets were undercut by figures showing manufacturing activity plunged to its slowest pace in two years.
The figures were much worse than forecast and add to a string of data showing the world’s biggest economy virtually grinding to a halt this summer.
Add in the fiscal drag from the debt deal — an initial US$917-billion in cuts across the board covering everything from the military to food inspection, followed by US$1.5-trillion still to be thrashed out — and some economists say the risk of a new recession looms large.
“So we are starting the second half of the year with the so-called economic ‘soft spot’ looking more like a gulley,” Sherry Cooper, chief economist at BMO Capital Markets said. “Additional fiscal tightening in this environment runs the risk of tipping the U.S. economy into another recession.”
The Institute for Supply Management (ISM) said its index of national factory activity fell to 50.9 in July from 55.3 in June. That was the lowest reading for the index, which surveys U.S. purchasing managers, since July 2009, when it registered 49.
A reading of less than 50 indicates contraction in the manufacturing sector, while more than 50 suggests expansion. Economists surveyed by Bloomberg News had been expecting 54.5.
“I think it’s quite worrying really and suggests that the sharp slowdown in economic activity we saw in the first half of the year appears set to continue into the second half, which is generally against what everyone thought,” said Paul Dales, senior U.S. economist with Capital Economics.
Most observers felt the sluggish first half of the year was just a soft patch or temporary slowdown that would soon be reversed, he said. “The more data we get, the more it looks like that’s not necessarily the case and it’s more of a sustained slowdown.”
Although the U.S. economy is still growing — GDP numbers out last Friday showed the economy expanding at a rate of just 1.3% in the second quarter of the year after revisions took a big bite out of previous quarters — growth is much too slow to start generating jobs and become self-sustaining.
As the country looks to rein in its debt, it is likely to move into a period of sustained fiscal austerity that could further hamper growth.
“In an environment where the United States is trying to sort out its fiscal situation, the consequence of that will be a number of years of really weak economic growth,” Mr. Dales said.
Jennifer Lee, senior economist at BMO Capital Markets, said that uncertainty generated by the brinkmanship of U.S. lawmakers likely affected the ISM manufacturing numbers.
“Nobody can make decisions on investment plans or hiring plans if they don’t know how the economy’s going to be faring in the next three to six months,” she said. “Everyone was holding back on what they were planning to do and you’re seeing that show up in the numbers now.”
Tom Porcelli, chief U.S. economist for RBC Capital Markets in New York City, agreed that the uncertainty around the debt ceiling likely influenced the ISM measure to some degree. But he cautioned against attributing the slump entirely to the drama in Washington.
“I don’t think anyone can deny that the general trend in ISM dating back to around February has been one of slowing activity in the manufacturing space,” Mr. Porcelli said.
It’s questionable whether the debt ceiling talks alone could influence the sub-category of new orders into slipping below the break-even level to 49.2%, the first time it has hit that level since June 2009, he noted.
“We have recently scaled back our second-half expectations for growth in the U.S.,” he said, adding that the likelihood of the country slipping back into recession, while still low, has increased.
“It’s certainly not part of our forecast horizon, but I think we have to recognize that the odds have risen.”
Meanwhile, Andrew Busch, global currency and public policy strategist with BMO Capital Markets in Chicago, said the ISM numbers — along with recent soft PMI data in countries like Australia, South Africa and the influential China — point to a possible worldwide slowdown.
“I would say we’re in the slowest growth point of the year for the global economy. If it does not return to faster growth in the third quarter, this is going to be a pretty horrific year,” he said.
“So much of the debt crisis in the U.S. is obfuscating the bigger issues, which are slowdown in global growth and truly the European debt crisis, which is not over yet.”
Financial Post
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$2.4 Trillion Would Be Largest Debt-Limit Increase in U.S. History
(CNSNews.com) - The bill to increase the federal debt limit that has been put before Congress today would increase that limit by up to $2.4 trillion, which would be the largest increase in the debt limit in U.S. history by a margin of half a trillion dollars, according to records published by the Government Accountability Office and the Congressional Research Service.
In fact, according to records published by the Congressional Research Service, if the current bill is passed and the debt limit is increased by $2.4 trillion, the two largest debt-limit increases in U.S. history would come in back-to-back years, both during the presidency of Barack Obama.
Up until now, the largest increase in the debt limit was the $1.9 trillion increase passed by Congress and signed by President Obama on Feb. 12, 2010. That law increased the debt limit from $12.394 trillion to $14.294 trillion.
Up until now, the second largest historical increase in the debt limit was enacted on March 27, 2003, when President George W. Bush signed a law that lifted the limit by $984 billion—from $6.400 trillion to $7.384 trillion.
The third largest historical increase in the debt limit was enacted on Nov. 5, 1990, when the senior President George Bush signed a law that lifted the limit by $915 billion—from $3.230 trillion to $4.145 trillion.
Prior to Sept. 28, 1987, the Treasury did not have the legal authority to run a national debt of $2.4 trillion—let alone increase the debt limit by that amount. On that date, President Reagan signed a law lifting the debt limit by $448 billion—from $2.352 trillion to $2.8 trillion.
The total debt of the federal government did not hit $2.4 trillion until November 1987, according to the U.S. Treasury Department. According to Treasury’s Monthly Statements of the Public Debt, the national debt equaled $2.3848 trillion at the end of October 1987 and $2.409572 trillion by the end of November 1987.
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Debt deal needs a QE3 plan
Most of the spending cuts won't kick in until 2013, but it's not clear the U.S. economy will be ready to handle the blow even then.
FORTUNE -- Markets today initially cheered the rough sketches of a highly anticipated deal to raise the U.S. government's debt limit, but how the nation's fragile economic recovery responds will depend on the final details of the plan and how it eventually rolls out.
After weeks of political wrangling, President Obama and congressional leaders reached a deal late Sunday night – thereby avoiding a default. The Senate and House are expected to vote on a plan later today, but needless to say, the drama isn't over yet.
The deficit-reduction plan sets the stage for months of debates over how Washington taxes and spends. And it's uncertain how a plan centered on spending cuts without tax increases will impact GDP growth, which has faltered since the summer of 2010. The question now is how much weaker could things get and could the scale of spending cuts prolong the incredibly soft patch?
An outline of the deal would raise the debt ceiling by $2.4 trillion in two stages. First, it would cut spending by $917 billion over the next 10 years. Then, a special committee would be tasked to find another $1.5 trillion in savings, which could come through tax overhauls and changes to social programs.
It appears lawmakers have tried to avoid any unforeseen hiccups to the plan. And who can blame them, given the political disaster that's played out over the past few weeks? If the committee doesn't find at least $1.2 trillion in savings, or Congress doesn't adopt its proposals, a pre-set array of spending cuts would kick in. This could include cuts in military spending and Medicare payments to health-care providers.
However well intentioned, the plan doesn't address the extent of today's weak economic recovery. To be sure, the bulk of spending cuts wouldn't kick in until 2013 and wouldn't affect programs for low-income households, Social Security or Medicaid. Surely this gives the economy some time to heal before reeling in government spending, which currently makes up about 20% of GDP and the largest share of the U.S. economy next to consumption.
But judging by the latest reports on GDP growth, it has become increasingly uncertain when the economy will really starting picking up. During the second quarter, it grew by only 1.3% and revisions to previous quarters show a deeper recession and a weaker recovery than previously portrayed, according to forecasting firm Global IHS Insight. For the past six months, GDP grew at an annual rate of only 0.8%.
Prospects for a pickup during the second half of the year are fading fast. Even if the economy is no longer depressed by 2013, it will likely just have started growing in any meaningful way.
So while Congress might be breathing a slight sigh of relief once the debt ceiling is raised, this will likely put pressure on the Fed to act in an effort to – once again – jumpstart the economy. Perhaps Congress needs to pair this debt deal with a back-up QE3 plan?
CNN
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U.S. global economy 'parasite' - Putin
The U.S. spends beyond its means and "lives like a parasite off the global economy," Russian Prime Minister Vladimir Putin said on Monday.
U.S. President Barack Obama said earlier in the day he had reached a deal with Republican and Democratic leaders to raise the nation's debt ceiling by at least $2.1 trillion and avoid a default.
The proposed legislation is expected to be put to a vote in Congress later on Monday.
Speaking at a Russian political youth camp, Putin said the U.S. exists to build up its debt by relying on credit.
"It lives beyond its means, taxing the global economy with its problems and living like a parasite off the global economy and the monopoly of the dollar," he said.
At the same time, the Russian head of government admitted that in the present day situation the United States took a "balanced" decision as a possible default would also have affected the global economy, which would have been "no good at all," he concluded.
RIANOSTOVI
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Italy in eye of the storm as cash runs low
Italy's 10-year yields spiked through 6pc in wild trading and hit a record post-EMU spread over German Bunds, snuffing out a brief relief rally following Washington's debt deal. Spain's yields once again flirted with danger at 6.2pc.
"The markets know that the EU's bail-out find (EFSF) won't be able to buy Italian and Spanish bonds on the secondary market for another three or four months because the deal has to be ratified by national parliaments," said David Owen from Jefferies Fixed Income.
The summit accord did not increase the EFSF's firepower above €440bn (£380bn), leaving it unclear how EU leaders expect to cope as contagion engulfs the eurozone's bigger players. The fund has just €275bn left after pledges to Greece, Ireland, and Portugal. City analysts say it may take €2 trillion and a clearer German commitment to halt the panic.
"The longer this paralysis goes on, the more investors fear a break-up scenario where the core countries pull out and leave the rest with the euro," Mr Owen said.
JP Morgan warned clients that Italy has a thin margin of safety and risks running out of cash to cover spending as soon as September. "Italy and Spain will run out of cash in September and February respectively, if they lose access to funding markets," said the bank's fixed income team of Pavan Wadhwa and Gianluca Salford. Worries about Italy's immediate cash level risks leading to "a self-fulfilling negative spiral."
While Italy has low private debt and avoided much of the credit bubble, it suffers from economic stagnation and a steady loss of competitiveness. Monetary tightening by the European Central Bank has compounded the problem, triggering a collapse of all key measures of the Italian money supply.
The warning came as the eurozone's PMI manufacturing data for July dropped to a 21-month low, with clear signs of a slowdown spreading to Germany, Austria and Holland.
"It makes pretty dismal reading," said Howard Archer from IHS Global Insight. "It points to a marked loss of momentum in the previously healthily expanding core northern eurozone economies, as well as deepening growth problems in the struggling southern periphery."
JP Morgan said Italy had €44bn in liquidity for government operations at the end of May. It did not follow other countries in "front-loading" debt auctions while the going was good.
Spain is fully-funded until next year, but its fate may hang on what happens in Italy. "We believe the fate of the two countries is linked. It is very hard to imagine only one of the two losing market access," said the report.
Martin van Vliet from ING said Spanish borrowing costs are just 80 basis points shy of the level that "could cause margin requirements at central clearing houses", creating risks for Spanish banks that rely on €100bn in foreign repo financing.
The Milan and Madrid bourses both suffered a black Monday, led by bank shares. Intesa Sanpaolo slid 7pc and is now down almost 40pc since March. Unicredit and Fiat were both suspended briefly.
The manufacturing index for Spain fell yet further below the contraction line to 45.7. "There are high chances the economy has again entered recession," said Luigi Speranza from BNP Paribas.
The Internaional Monetary Fund said last week that Spain "is not out of the danger zone" and needs to take urgent measures to stave off contagion. "The outlook is difficult and the risks elevated. Risks are tilted to the downside and potentially severe. Many of the imbalances and structural weaknesses accumulated during the boom remain to be fully addressed," it said.
Spain's exports are holding up well and the budget deficit has been slashed in half. However, the fund warned that Spain's debt profile is sensitive to "growth shocks" and rising interest rates. Each 40 basis point rise in funding costs would raise Spain's public debt by a further 14pc of GDP over the next five years, and a 0.6pc erosion of growth would add a further 7pc.
Critics have warned that austerity measures may abort recovery and short-circuit any improvement in public accounts, echoing the debate underway in Britain and other countries.
The Telegraph
http://www.telegraph.co.uk/finance/economics/8675928/Italy-in-eye-of-the-storm-as-cash-runs-low.html
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GOLD AND SILVER BEYOND THE LIMIT
by Peter Schiff
Perhaps the debt ceiling should be renamed the "national debt target," for it seems Washington is always trying to reach it. One could say it's their only reliable, time-tested achievement. And without fail, upon reaching their national debt target, they promptly extend it further in order to discover how quickly it can once again be attained!
While I have little doubt that the ceiling will be raised, my readers have been curious as to the implications for gold in each of the debt and "default" scenarios possible after August 2nd. This month, I'll outline how each outcome could affect the price of gold and silver.
BEARISH GOLD CASE #1: DEBT CEILING NOT RAISED - ENOUGH CUTS MADE TO AVERT DEFAULT
My readers know that this scenario is actually what the US government should do. The debt ceiling should not be increased and massive cuts must be made. We know this outcome is extremely unlikely - it would require not only a resolute steadfastness to sound money, but also a 180-degree change of philosophical beliefs by the majority of Congress (and the American public) overnight.
Yet in our fantasy world, if this did occur, it would be bearish for gold. It would mean the US government was shrinking, that debts were being paid, that the entire US economy was becoming more solvent and viable. Gold would be less important to own, as the risk of both currency crises and sovereign debt crises would be lower.
BEARISH GOLD CASE #2: DEBT CEILING RAISED - FEDERAL BUDGET BALANCED
If the debt ceiling is raised in order to avert imminent default, but the spare time is used to truly bring the federal budget into balance, the US economy might still be saved. But when I say "balanced," I mean it. This would mean not only eliminating the entire $1.5 trillion deficit, but also leaving enough of a surplus to cover all outstanding debt and unfunded liabilities. For perspective, Senator Rand Paul's proposal to but $500 billion a year, widely considered more radical than landing a man on Mars, would only address 1/3 of the annual deficit - it would take cuts many times that for the US to return to solvency.
But let's be optimistic: if the budget could be balanced, then the fact that the debt ceiling was being increased yet again would not be so awful. Since the US government's fiscal policies would be completely reversed, we could expect to start seeing a strengthening of the dollar (so long as Bernanke stopped the printing presses too) and a weakening of gold and silver.
However, this is just as much of a pipe dream as the first scenario. No government in history has dug itself out of the hole we now face without defaulting. If Congress even tried to enact a plan like this, people would be rioting in the streets over their lost entitlements. And we'd suddenly have millions of unemployed soldiers. Not exactly a recipe for peace and prosperity.
BULLISH GOLD CASE #1: DEBT CEILING NOT RAISED - US DEFAULTS ON TREASURY DEBT
This is the scenario that President Obama and Secretary Geithner are threatening. They claim that if the debt ceiling is not raised, they will have to immediately begin defaulting on Treasury interestpayments. This is rather unlikely, as interest payments make up only 10% of spending, but let's say they stop paying anyway.
If they do this, market interest rates for US debt would skyrocket, meaning the only buyer left at rates the Treasury could afford would be the Fed. In other words, if they default on August 2nd, QE3 will start on August 3rd. Of course, a default would be absolutely devastating to the dollar and a boon for gold and silver. Global confidence in the invincibility of the United States would be shattered, andthe underlying problem of excessive spending would still remain to be addressed.
Another interesting scenario would be if Congress didn't raise the debt ceiling and the Treasury just kept borrowing anyway. It's not like the Executive Branch follows laws scrupulously nowadays. What if they just ignored it? Someone could challenge the act in federal courts, but the odds are often in the President's favor. In this case, gold and silver might experience less of an initial spike, but their long-term prospects would be elevated as the world recognized that we were one step closer to becoming a banana republic.
BULLISH GOLD CASE #2: DEBT CEILING RAISED - SYMBOLIC CUTS IN SPENDING
This scenario is by far the most likely outcome of the debt talks in Washington; they will raise the debt ceiling and make spending cuts which sound substantial, but which only mange to slow the accumulation of new debt.
The plans on the table suggest cutting a couple trillion in cumulative spending over the next decade. In other words, they propose cuts that only reduce deficits by about 10-20%; they do nothing to reduce actual debt levels. So if these talks are successful, then instead of a $1.5 trillion deficit each year, perhaps we only suffer a $1.2 trillion deficit. Meanwhile, the debt continues growing. This is "success" in Washington.
Clearly, this is bullish for precious metals. It means more of the same - more spending, more debt, and necessarily more money-printing.
THE EMPIRE HAS NO CEILING
Over the past 50 years, the US debt ceiling has been raised over 70 times. In other words, there is no ceiling at all - it is as fictitious as the idea that central planning works, or that the US has anything resembling a "free market."
So, I guess it stands to reason that regardless of the debt ceiling increase, it is likely that the US will be downgraded by one or more ratings agencies. The effect will be massive because the world's largest pension, mutual, and sovereign wealth funds typically mandate investment only in AAA-rated securities. A downgrade of US debt means those funds must immediately sell off their primary reserve asset. The effect of this cannot be overstated, and gold would be the first and best refuge for an onslaught of orphaned capital.
Despite gold once again hitting new highs, I can only recommend my readers continue to keep a healthy portion of their portfolio in precious metals. Given the sad realities of the US fiscal and monetary situation, it's prudent to assume that nothing will be solved by August 2nd.
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