Three more investors warn U.S. of losing AAA credit rating; IMF Chief Lagarde urges immediate resolution
New York, NY, United States (AHN) – Just six days away from the Aug. 2 deadline for the U.S. to increase its national debt ceiling, more investors are warning Washington that is risks losing its AAA credit rating as American political leaders remain deadlocked on a solution.
The latest to issue the warning on Tuesday were investors BlackRock, Loomis Sayles and Company and Franklin Templeton Investments.
A BlackRock official said the debt ceiling will likely be increased, but despite a last-minute agreement, the threat of a downgrade remains.
A Loomis Sayles Bond Fund executive believes a deal won’t be reached and predicted at least one rating agency will downgrade Washington’s credit rating to AA.
Because of those possibilities, the chief investment officer of Franklin Templeton’s fixed-income group, said that investors may question the U.S.’s creditworthiness. The officer made an assessment of the situation and distributed by email on Tuesday the report.
All three major ratings agencies – Moody’s Investors Service, Standard & Poor’s and Fitch – have warned Washington that they may cut the U.S.’s debt rating after evaluating the situation.
On Monday, Pimco, the world’s largest bond trader similarly warned the U.S. government of a credit rating cut.
Another powerful voice who also warned Washington of the ticking clock is newly appointed International Monetary Fund Managing Director Christine Lagarde.
The IMF chief also warned of drastic cuts in federal spending, which would lead to a jobless recovery. She urged American lawmakers and Obama to break their deadlock because the issue needs an immediate resolution.
Lagarde also warned that another major sovereign debt crisis, referring to the eurozone, needs to be addressed immediately. She called on European Union leaders to implement right away their plan on how to solve the currency crisis which had led to recent credit rating downgrades for Greece, Ireland and Portugal.
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Turkey grows nervous over economy
Ankara, Turkey David Rosenberg – Turkish politicians are expressing concern that the country’s booming economy is at risk as the nation’s consumers binge on buying and borrowing while Europe struggles to put out the debt fire in Greece.
Deputy Prime Minister Ali Babacan warned on Wednesday that Turkey must take steps to prepare for a possible fallout from debt crises in the U.S. and Europe. A day earlier, Bulent Gedikli, deputy president of the ruling Justice and Development Party (AKP) and its point man on economic matters, said “black clouds” are gathering over the global economy and urged Turkish consumers to “not spend too much.”
“This will have negative effects on Turkey,” Gedikli said in an interview for the TV8 channel. “Thus, be cautious. Hold on to what you’ve got.”
On the surface, Turkey’s economy is wracking up an impressive performance this year. Gross domestic product grew by 11 percent year-on-year in the first quarter, outstripping China, the benchmark for the world’s boom economies. Annual inflation slowed to 6.2 percent in June from 7.2 percent in May and unemployment dropped 2.1 percentage points in the past year to 9.9 percent in April, the first single-digit figure since July 2008.
But other numbers are worrying, mainly a yawning deficit in the country’s current account. The deficit widened to $7.75 billion in May, or about 9 percent of GDP over the past 12 months. The International Monetary Fund (IMF) forecast this week it will touch 10.5 percent in 2011 and only shrink marginally next year.
“This is the Achilles heel of the Turkish economy. The problem is that there are no easy solutions. It’s a structural problem that can only be solved in time,” Yarkin Cebeci, chief economist for Turkey at JPMorgan Chase Bank, told The Media Line.
The Turkish lira testifies to the extent of the problem. Even though Turkey is one of the few economic bright spots in the region, investors have been shy about putting money into the economy. The lira declined to its lowest in more than two years against the dollar this week while the Istanbul Stock Exchange is down for the year.
Tackling the deficit presents a dilemma for Prime Minister Recep Tayyip Erdoğan, who rode to victory in June elections in large part due to the strength of the economy and is now seeking broad political support to reform the constitution. Bringing down the deficit would probably require him to take unpopular measures such as raising interest rates and cutting government spending.
In fact, Turkey’s superfast growth is at the root of its current account problem. Turkey’s growth has been dominated by expansion in the financial, retail and construction sectors, pushed along by consumer spending and credit growth. Turkey’s central bank has powered the boom by lowering interest rates even as the economic growth accelerated.
Exports are growing, too, but imports are growing faster and the outlook for exports is growing dimmer, according to the latest survey of Turkish executives. The foreign trade expectation survey was down 3 percent in the third quarter, which the economy minister, Zafer Caglayan, attributed to the debt crisis in Europe. Some 57 percent of Turkey’s exports went to Europe in the January-May period of 2011.
Not only government officials but some economists have expressed concern about Turkey’s economy overheating. The IMF confirmed that this week by revising its 2011 GDP forecast for Turkey to 8.7 percent from a previous 4.6 percent.
Murat Ucer, adviser for Turkey for the U.S. firm GlobalSource, agreed that the economy was “overstretched” at the end of 2010 and early this year, but that growth is probably slowing and may prove to have been negative in the second quarter because of Turkish elections and a more tepid global economy. Loan growth has probably reached a plateau, he said.
All that will help moderate the current account deficit, which tends to widen as the economy grows.
“But if Europe gets another hit, growth-wise Turkey will pay the price. It’s a big risk. More importantly, if the European banking sector gets a big hit from sovereign debt, then that could be a big issue. We need bank lending with the current account deficit,” Ucer told The Media Line.
But Ucer and other economists agree that Turkey has a long-term problem of bringing down the current account deficit. Ucer said the government has to slow growth, tighten fiscal policy and raise interest rates. “The prime minister obviously doesn’t want to do that,” he added.
Emre Alkin, an Istanbul-based economist, said the government also has to take measures to lower manufacturers’ costs because industry, the pride of the country’s economy, is being hit by cheaper competition and relies too much on imported raw materials, machinery and components. Manufacturers have to move up the value change from the current focus on textiles and appliances to sectors such as avionics and optics, he said.
“As production costs are rising in Turkey’s businesses are thinking twice about whether to invest or enlarge domestic capacity,” he told The Media Line. “Right now, they would rather go abroad, to Southeast Asia, Eastern Europe – Bulgaria and Hungary.”
Zafer Caglayan, the minister responsible for exports and manufacturing, seems to agree. He said last week that incentives to boost the use of Turkish-made inputs in manufacturing will be “at the core” of the agenda of the government that was re-elected June 12, and “will solve the current-account deficit permanently.”
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Seniors May See Changes in Medigap Policies
Washington, DC, United States (KaiserHealth) – As debt limit talks drag on, lawmakers are eying possible changes in Medicare supplemental plans – moves that could increase seniors’ out-of-pocket costs.
Photo by toastbrot81 via FlickrTraditional Medicare, the federal health program for the elderly and disabled, requires beneficiaries to pay hospital deductibles and a portion of the cost of tests and doctor visits. To protect themselves from those out-of-pocket costs, about 17 percent of beneficiaries buy Medigap plans. Another 34 percent get such coverage through a former employer.
But some health policy experts say such “first-dollar protection” drives up demand for Medicare services, costing the government money for what may be unnecessary care. One proposal would bar supplemental insurance from completely eliminating out-of-pocket costs – or charge enrollees a $530 a year extra if they want to keep such protection. That change could save up to $53 billion over 10 years, according to a chart used during the bipartisan talks led by Vice President Joe Biden.
What is Medigap and why do people buy it?
Unlike most job-based health insurance, traditional Medicare does not include “catastrophic” coverage, an annual maximum upper limit on the amount beneficiaries could pay. So enrollees can be liable for thousands of dollars each year, including: $1,132 per-episode deductible for hospital admissions; hundreds of dollars in daily charges for hospital stays of longer than 60 days; a $162-a-year deductible for doctor care, plus 20 percent of charges for office visits or equipment like wheelchairs.
Ten standardized types of supplemental plans offered by private insurers – including AARP’s UnitedHealthcare policies – cover all or most of such deductibles and copayments. Some employers also pay all or part of such costs for their retirees.
What changes are under consideration?
It is not clear exactly what’s on the table in the negotiations between congressional leaders and the White House. But the charts released show that one such proposal under consideration would bar insurers from offering supplemental policies unless the policies came with an annual deductible. People who didn’t want a deductible could pay $530 a year in additional premium to ensure that they won’t be hit with costs before their coverage kicks in.
Is this a new idea?
No. It is a subset of a larger discussion about spending on Medicare and other entitlements. In recent years, the National Commission on Fiscal Responsibility and Reform (The Bowles-Simpson Commission), the Debt Reduction Task Force, the Medicare Payment Advisory Commission and lawmakers, including Sen. Joe Lieberman, a Connecticut independent, and Sen. Tom Coburn, an Oklahoma Republican, have all suggested changing traditional Medicare.
Most of the ideas would create a single annual deductible – generally around $550 – after which beneficiaries would pay about 20 percent of medical costs up to a maximum annual cap, ranging from around $5,000 to more than $7,500.
Would changing supplemental coverage save money?
Some economists and policy experts say that supplemental coverage insulates beneficiaries from medical costs, driving up demand for unnecessary care. A study done for MedPAC in 2009 found that beneficiaries with supplemental insurance used more care and cost the program more money. The increased spending wasn’t for emergency hospitalizations, but for other services such as elective hospital admissions, preventive care, doctor office visits and some types of tests.
Supporters of the insurance say it shields seniors from unpredictable costs and reduces big-ticket expenses by encouraging them to seek help for medical problems before they become severe.
What else do people say about the idea?
Advocacy groups like the Medicare Rights Center oppose restricting Medigap plans, saying it would simply shift more costs from the government to elderly and low-income people who can least afford it. “Some in government feel people in Medicare don’t have enough ‘skin in the game,’” says Ilene Stein, federal policy director for the center. In fact, she says, people on Medicare already pay 15 percent of their incomes for health care, well above the level paid by non-Medicare households. While the proposals would cap maximum annual spending per enrollee to $5,500 or $7,500, “that’s a lot of money for someone making $22,000,” the median household income for those on Medicare, she says.
Still, Joe Antos of the conservative American Enterprise Institute says many of those people already pay large premiums for Medigap coverage – and would likely see those premiums decline if “first-dollar” protections are barred. Antos and Jonathan Gruber, an economist at MIT and consultant to Democrats, both think that if Congress were to change supplemental coverage – or the traditional program itself – that lawmakers would create exemptions for lower-income beneficiaries.
How would the proposal affect a Medigap policy I already own?
Congress would have to decide whether to impose restrictions only on new policies or include existing coverage.
What about people who don’t have a Medigap plan?
Only about 10 percent of seniors don’t have some sort of supplemental coverage. Some people have military/VA benefits, others are in Medicaid, and some have coverage through Medicare Advantage plans, which are insurance policies offered by private insurers as an alternative to traditional Medicare.
What are the chances that these ideas will be adopted by lawmakers?
Because making any change that could be seen as a cut in Medicare benefits carries huge political risk, previous calls for changing the traditional Medicare program or limiting first-dollar coverage through supplemental insurance have not picked up support. But now, when failure to lift the debt ceiling could result in widespread economic problems, a middle-of-the night compromise between warring factions in Congress could put it back on the table.
“Normally, this would be dead on arrival. But this is such a dicey environment that these guys are going to cut some kind of deal at midnight either before or after Aug. 2 in such a hurry that they won’t be worried about the kinds of things people normally worry about when they cut senior benefits,” says Robert Laszewski, an Alexandria-Virginia-based consultant to the health care industry.
Antos is less sure. He says the potential savings of $53 billion over 10 years would be just a tiny slice of any deficit-reduction deal and might not be worth the political hit Congress would take from seniors.
“You can’t sugar coat it,” says Antos. “It would be much easier to do what lawmakers have always done in Medicare, which is lower payment rates (to doctors and hospitals) or restrict services in ways that are subtle and complicated. But to do something that looks like changing benefits, I don’t see it this time.”
– Provided by Kaiser Health News.
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HUD helps American homeowners with mortgage problems through $1 billion emergency loan fund
Washington, D.C., United States (AHN) – The U.S. Department of Housing and Urban Development has made available a $1-billion lifeline to American homeowners who have problems with their mortgage payments.
The fund, launched in June, is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its aim is to help homeowners who face foreclosure because they lost their jobs, suffered income reduction, had an economic reversal or a medical condition which make it difficult for them to pay their monthly dues.
The emergency interest-free loan covers a portion of their monthly mortgage up to 24 months or a maximum of $50,000.
According to HUD Secretary Shaun Donovan, the emergency loan program covers 27 states and Puerto Rico. He estimated the program would assist about 30,000 distressed borrowers through an average loan of $35,000.
If recipients of the loan stay in their homes and be current on their payments, the interest-free loan would be written off.
The 30,000 homeowners expected to be helped by the program, however, is only a fraction of the estimated 1.8 million homeowners battling foreclosure. With the HUD expected to be deluged with applications, the department would likely spend the entire fund by the end of Washington’s fiscal year on Sept. 30.
Applicants have until July 22 to submit complete applications. If there are more applicants than what the fund could accommodate, the HUD would use a lottery system to determine beneficiaries of the loan.
There are five additional states that have slightly different rules because they started accepting emergency loan applications earlier under similar programs run by the states. One of them, Maryland, committed $4.2 million to 121 troubled homeowners. Aside from that amount, the state was allocated another $40 million by the HUD.
Another state is Virginia, which has a separate fund aimed to assist 1,223 homeowners. Virginia got another $46.6 million from HUD.
The $1-billion fund complements the Hardest Hit Fund, which made available a larger $7.6-billion fund to troubled homeowners in 18 states and the District of Columbia – which are considered the states hardest hit by the housing crisis.
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Moody’s hints of ratings downgrade for Ireland
Dublin, Ireland (AHN) – Ratings agency Moody’s Investors Service is still on a credit downgrade mode. After cutting Portugal’s rating to junk on Tuesday, Moody’s hinted its next target of another downgrade may be Ireland.
The ratings agency lowered in April Ireland’s credit rating to the lowest investment grade of Baa3 and said the country’s outlook was negative.
The hint of a ratings cut caused the yield on Irish two-year notes to go up 239 basis points to 15.27 percent by mid-afternoon in London. It was the first time that the yield went beyond 15 percent.
Moody’s downgrade of Portugal’s rating to Ba2 from Baa1 resulted in yields on 10-year Portuguese bonds going up to 12.44 percent on Wednesday. It is a eurozone record-high despite Lisbon’s agreement to a rescue package in November with the European Union and the International Monetary Fund.
However, unlike Portugal, Ireland reached the targets of its rescue agreement with the EU and IMF, Irish Junior Minister Brian Hayes said ahead of Ireland’s talks with representatives of the IMF, European Central Bank and European Commission for the quarterly review of Ireland’s bailout.
Aside from downgrading Portugal, Moody’s also warned earlier this week of China’s local government’s bad debt. In 2010, Chinese banks lent $1.3 trillion (CNY 8.4 trillion) to local governments to boost growth of Chinese provinces and towns.
However, the debt burden could be $541 billion (CNY 3.5 trillion) larger than previous auditors’ estimates, prompting Moody’s to warn that the bad debt could reach from 8 to 10 percent of total loans.
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Indiana bans texting while driving
Indianapolis, IN, United States (AHN) – Indiana’s state-wide texting ban goes into effect Friday. Starting today motorists will no longer be able to text and drive simultaneously without the possibility of garnering a fine.
The violation of texting or reading a text while driving is a fine up to $500 and the act is considered a Class C infraction.
Critics say the law will be difficult to enforce because officers will not be able to look at a driver’s text log. Additionally because it’s classified as a secondary law an officer can’t pull you over just on the suspicion of texting while driving.
Drivers, however, can still use their cell phones to make calls, surf the web and navigate with GPS while mobile.
This law was first conceived in 2009 to ban texting for teenage drivers under the age of 18. That law garnered only five tickets in its two years.
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Dodgers reportedly paid $5M “commitment fee” to secure financing
Los Angeles, CA, United States (AHN Sports) – The Los Angeles Dodgers reportedly had to shell out $5 million to secure the hedge fund financing obtained by team owner Frank McCourt to keep the baseball club afloat.
According to a Wall Street Journal.com, the financially embattled Dodgers had to pay a previously undisclosed fee of about $5 million to secure the said financing package.
Robert Siegfried, a spokesman for McCourt, indicated in the WSJ.com report that the payment was a customary commitment fee for securing the $150 million loan.
Meanwhile, Highbridge Principal Strategies, a hedge-fund unit of J.P. Morgan Chase & Co., which provided the loan, known as debtor-in-possession financing, declined to comment on the reported initial fee.
It is separate from the interest rate of at least 10 percent and a $4.5 million fee in the loan obtained by McCourt, who was granted interim approval Tuesday to use the bankruptcy financing arrangement.
A hearing scheduled for July 20 to determine whether McCourt can utilize the full amount of the $150-million loan he obtained or MLB’s alternative loan offer should be approved instead.
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