Hungary abandons debt auction
Linda Young – AHN News Writer
Bucharest, Hungary (AHN) – The Hungarian government abandoned part of its planned debt auction Thursday after it had to raise interest rates on the bonds to sell them.
Hungary sold only $62 million in debt rather than the $75 million it planned to sell after being forced to increase the average interest rate on the 10-year bonds it auctioned to 9.7 percent from 8.78 percent.
The country’s debt agency, AKK, said that the range of yields offered was too broad.
The country is part of the European Union but not part of the eurozone and its currency is denominated in forints. The target was to sell 18 billion forints in bonds, but it sold only 15 billion forints worth.
Hungary is in talks with the European Commission (EC) and International Monetary Fund over a refinancing package, but negotiators from the EC and IMF have expressed concerns that Hungary’s central bank lacks independence.
Standard & Poor’s expressed the same concerns last week when it downgraded Hungary’s debt rating to junk status. S&P cited changes to the constitution that undermined the independence of the central bank and other institutions as among the factors that led to the downgrade.
Other factors included increased risk that the nation’s weakened domestic outlook coupled with a weak global economic outlook would make it too difficult for Hungary to repay its government debt.
European leaders seek new economic rules in meeting with Obama
Tom Ramstack – AHN News Legal Correspondent
Washington, D.C., United States (AHN) – European leaders met with President Barack Obama Monday at the White House to figure out how to avoid another worldwide economic collapse.
Obama is pressuring the 17-nation European Union to resolve its banking and debt crises before they drag down the U.S. economy’s shaky recovery from recession.
“This is something they need to solve and they have the capacity to solve, both financial capacity and political will,” White House press spokesman Jay Carney said Monday.
At the same time, the European Union is trying to show the United States and other countries that it is managing its economic problems appropriately as the Europeans seek foreign investment.
Few details of the meeting were released publicly after U.S. and European officials said they preferred to keep the negotiations private.
However, they gave a glimpse of what would be discussed in statements before the meeting.
“We need also to develop a transatlantic agenda to growth and jobs,” European Commission President Jose Manuel Barroso said.
He hinted that new regulations could be coming on U.S. and European trade when he said, “…we will also be discussing how to increase our international cooperation and build a stronger and fairer rules-based system.”
The meeting Monday was one of several recent discussions between Obama and European economic leaders.
He has telephoned Italian Prime Minister Mario Monti and Greek Prime Minster Lukas Papademos to talk about strategies for avoiding economic collapse.
First Greece, Ireland and Portugal were facing default on their debt, beginning about two years ago. Now Spain, Italy and France are facing the same kinds of problems.
Obama has called the European debt crisis one of the greatest threats to the U.S. economic recovery.
The European Union’s primary method of handling its debt crisis is through the $440 billion euro European Financial Stability Facility, which provided emergency bailout loans to Greece, Italy and Ireland in exchange for concessions on how their budgets are structured.
European economic ministers still are trying to figure out how they will protect government bond markets.
Foreign investment from the United States could be one of the backstop funding sources they seek.
They also are considering allowing the European Central Bank to buy out at-risk national debt as the lender of last resort for member countries and their banks.
However, advocates of the proposal must overcome opposition from Germany, which has Europe’s largest economy.
Among European economic leaders at the meeting Monday with Obama was European Council President Herman Van Rompuy.
“We will both need to take action to address the near-term growth concerns as well as fiscal and financial vulnerabilities,” Van Rompuy said. “Together, we will also look for ways to use our very strong economic ties for creating growth and jobs on both sides of the Atlantic.”
The meeting at the White House comes less than two weeks before the European economic leaders are scheduled to discuss tighter controls over budgets of European Union member nations.
At the Dec. 9 meeting, Germany, France and Italy are expected to take the lead in a move to change the treaty that governs the European Union.
Their proposed revisions would force member nations to submit to frequent audits of their economic policies and to ask for agreement from other European nations before seeking outside financial assistance.
The proposals would be the broadest rewrite of Europe’s economic policies since the European Union was formed in 1967.
Fitch cuts Portugal’s credit rating
Linda Young – AHN News Writer
Lisbon, Portugal (AHN) – Credit ratings agency Fitch has downgraded Portugal’s sovereign debt rating to “junk” status and warned that it might cut it again.
Fitch lowered Portugal’s rating Thursday to BB+ from BBB- and issued a “negative outlook,” meaning it is likely to downgrade the rating again. Fitch said it had downgraded the rating because of Portugal’s “large fiscal imbalances, high indebtedness across all sectors and adverse macroeconomic outlook.”
Portugal has received $104 billion in bailout funds from the eurozone and International Monetary Fund this year and is slated to receive more funds through at least the end of 2013. Greece and the Irish Republic have also been bailed out.
However, many Portuguese have objected to the austerity measures the government has instituted in an effort to gain control of its finances and cut government spending in an effort to balance the budget. Protesters were in the midst of a 24-hour strike when news came that Fitch had downgraded the nation’s credit rating.
No thanks in pre-Thanksgiving Day trading
Diane Alter – AHN News Reporter
New York, NY, United States (AHN) – The day before Thanksgiving looks like a turkey for investors.
U.S. stocks sank in early pre-Thanksgiving trading as worries about global growth and debt fears persist.
Right after the opening bell, the Dow Jones Industrial Average was down 100 points, the Standard & Poor’s 500 Index was lower by 10 and the NASDAQ fell 18 points.
Oil was trading lower by $1.82 to $95.52 a barrel and gold shed $10 to $1,692 a troy ounce.
Weighing on U.S. markets was a disastrous German bond sale on Wednesday that sparked fears Europe’s debt crisis was even beginning to threaten Berlin, with leaders of the eurozone’s two strongest economies still firmly at odds over a longer term solution.
Financial markets were also rattled by reports that Belgium may be pressing France for an expansion of a €90 billion ($120 billion) bailout of failed bank Dexia.
Another jolt to stocks was the China Purchasing Managers’ Index report that showed Chinese manufacturing has slowed to a 32-month low.
In Thanksgivings past, global markets typically have taken cues from U.S. equities, and American investors may be able to enjoy their Thanksgiving feat relatively undisturbed.
Historically, European indexes have risen on Thanksgiving. The Friday following has been one of the best days of the year in S&P 500 Index performance, according to Beespoke Investment Group.
This Thanksgiving could be different however, as U.S. stocks have instead been taking cues from Europe. Any bad news from overseas could have investors crying foul come Friday.
EU leaders open to Greece leaving eurozone
Cannes, France (AHN) – European Union (EU) leaders meeting in Cannes for the G20 Summit are now open to Greece leaving the eurozone if only to save the single currency bloc.
However, the G20 discussions have gone beyond Greece’s continued use of the euro, but on how to craft a sustainable solution to the area’s debt crisis. Among the initiatives the G20 leaders are considering is to increase the firepower of the International Monetary Fund (IMF) to support struggling nations that belong to the eurozone.
Greek Prime Minister George Papandreou on Thursday made an about-face from his previous stand that he would submit the debt deal to a referendum after pressure from EU officials. Instead of a referendum, the embattled prime minister sought to form a national unity government. However, the attempt appears headed for doom following rejection by the Greek opposition of the call, which instead pushed for Papandreou to step down and to hold a snap election immediately.
Following Papandreou’s backtrack on the referendum, share prices rose at the end of the day when it became clear that Greeks would no longer vote on the debt deal.
French President Nicolas Sarkozy, who is hosting the summit, said Papandreou was convinced not to push through with the referendum because of EU’s progress on dealing with the Greek debt crisis. Sarkozy said the zone wants to keep Greece in the one-currency bloc, but if Athens wants out, EU leaders must defend the currency.
Sarkozy said the EU cannot accept the breakup of the eurozone because it would be tantamount to breaking up Europe.
U.S. President Barack Obama said on Thursday that finding a solution to the eurozone debt crisis would be the most important task of the G20 Summit over the next two days.
After Papandreou announced the referendum, eurozone leaders withheld $11 billion (€8 billion) of fresh bailout funds to Greece, which would cause the embattled government to run out of funds in the next few weeks and default.
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German Parliament approves hike in EU loan guarantees
Berlin, Germany (AHN) – The Bundestag, Germany’s Parliament, agreed on Thursday to increase the country’s guarantees on European Union loans to $284 billion (€211 billion) from $167 billion (€124 billion).
The 523 to 85 vote gave the European Financial Stability Facility (EFSF) power to purchase bonds in secondary markets, enable bank recapitalization and offer precautionary credit lines.
The Bundestag also approved the increase in the EFSF to $599 billion (€440 billion). The measure was approved because of the support of the Christian Democrats, Free Democrats, Social Democrats and Greens.
The approval of the hike represents a victory for German Chancellor Angela Merkel, who spent weeks campaigning for approval of the July 21 agreement by eurozone leaders. Germany holds the largest amount of Greek government bonds.
However, German Finance Minister Wolfgang Schauble and Economics Minister Philipp Roster said any further increase was out of the question.
With the European Commission expecting the larger EFSF in place by mid-October, zone leaders are now focusing on how to prevent the region’s debt crisis from spreading further. One of the measures they are eyeing is the establishment of a permanent rescue fund that would provide more capital and tools to manage defaults.
However, the chairman of a private-equity firm said the newly approved bailout package would not be enough to solve the eurozone’s debt problems. He suggested that the amount should be in the trillion-euro level, not just billion.
Austria is expected to ratify the expanded rescue fund on Friday, while four other countries have yet to vote on it.
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U.S. slapped with Standard & Poor’s rating downgrade
Washington, D.C., United States (AHN) – Standard & Poor’s on Friday downgraded the U.S. government”s “AAA” sovereign credit rating while other two major rating agencies Moody’s and Fitch kept the U.S. at “AAA” but Chinese rating agency Dagong Global Credit Rating Co. on Wednesday cut the U.S. from A+ to A with a negative outlook as Washington went through long-drawn inter-party political bickering before raising the country’s debt limit.
With the U.S. economy already facing an uphill task of recovery, Washington got more worried after the announcement of the downgrade and the U.S. President Barack Obama met the Treasury Secretary Timothy Geithner before he left for Camp David Friday afternoon.
China with its largest hold of U.S. Treasuries commented, by proxy, through its official Xinhua news agency saying that Washington needed to “come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone”.
“We have lowered our long-term sovereign credit rating on the United States of America to “AA+” from “AAA” and affirmed the “A-1+” short-term rating. “We have also removed both the short- and long-term ratings from Credit Watch negative,” the credit rating agency said in a statement.
The downgrade, it said, reflects its opinion that the fiscal consolidation plan which Congress and the administration recently agreed to “falls short of what, in our view, would be necessary to stabilize the government”s medium-term debt dynamics.”
“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011,” the agency said.
“Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government”s debt dynamics any time soon.”
S&P statement said: “The outlook on the long-term rating is negative. We could lower the long-term rating to “AA” within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”
“When comparing the U.S. to sovereigns with “AAA” long-term ratings that we view as relevant peers “Canada, France, Germany, and the UK” we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others,” it said.
Including the U.S., S&P estimated that these five sovereigns would have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (Britain), with the U.S. debt burden at 74%.
By 2015, S&P projects that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%.
“However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015,” it said.
On Monday, S&P will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors, the statement added.
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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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Obama’s approval ratings drop as economy stagnates
New York, NY, United States (AHN) – After slowly inching upward, President Barack Obama’s approval rating has once again dropped, based his handling of the nation’s economy. The downward move ties his lowest rating ever, in of October of last year.
Based on a recent Harris Poll, one-quarter of Americans (27 percent) give the President positive ratings on the overall job he is doing on the economy while almost three-quarters (73 percent) give him negative marks. Last month, one-third (32 percent) gave him positive marks and 68 percent gave the president negative ratings on the economy.
The future of the economy is also seen in a negative viewpoint. In February, more than one-third of Americans (34 percent) said they expected the economy to improve in the coming year, one-quarter (25 percent) thought it would get worse and two in five (42 percent) believed it would stay the same. This month, just one-quarter (26 percent) expect the economy will improve in the coming year, one-third (33 percent) say it will get worse and two in five (41 percent) believe it will stay the same.
One thing the White House also has to deal with in the next few months is the issue of the debt ceiling and whether it should be raised. Only one in five Americans (21 percent) are in favor of raising the debt ceiling while almost half (45 percent) are not in favor of raising it. However one-third of U.S. adults (34 percent) aren’t completely sure if it should be raised nor have a firm grasp of what it is.
If the debt ceiling is not raised, the government will be forced to temporarily stop paying for certain things to conserve funds.
With the presidential election 16 months away, one of the main areas expected to be hotly debated and used as a political hammer will be the economy.
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