Nunez Report

Tuesday, August 2, 2011

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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