Monday, March 28, 2011

Greece's Surging Unemployment May Become ‘Bomb’ to Society, Minister Says

By Marcus Bensasson - Mar 28, 2011 3:03 AM PT

Greece’s increasing jobless rate may become a “bomb in the foundations of society” as the government struggles to lower the country’s budget gap, Economy and Competitiveness Minister Michalis Chrisochoides said.

“The economic problem will at some point be solved but the social problems are getting continually more toxic,” Chrisochoides said in an interview on March 22 in Athens. “At the moment we have a society that is patient and dealing with the problem, but we have to show people that what we are doing is working.”

Greece’s unemployment rate surged to a record 14.8 percent in December, making it the second highest after Spain in the 17- member euro region. The government has been forced to toughen spending cuts and raise taxes in exchange for last year’s 110 billion-euro ($115 billion bailout from the European Union and the International Monetary Fund as the nation grapples with its third year of recession.

A possible doubling of investment under the country’s National Strategic Reference Framework may help shift the growth drivers from consumer spending to exports and output, Chrisochoides said. The funds are unaffected by government efforts to implement deficit-cutting measures equivalent to 0.75 percent of gross domestic product this year, he said.

“We are trying to create a Greece that is friendly to investment,” Chrisochoides said. “Many businesses that didn’t have a healthy foundation will close during this crisis. The issue is to avoid strong ones closing because of a lack of available bank finance.”

Among those at risk is Elefsina Shipyards, which filed for creditor protection on March 10. The shipyard, which builds commercial and military ships, is in talks with the government and its lenders, Alpha Bank SA and Emporiki Bank SA (TEMP) about a restructuring.

Elefsina closing “would be a defeat because it is a very strong operation that employs 700 people and gives work to small businesses,” Chrisochoides said.

Euro May Extend Its Recent Decline, Commerzbank Says: Technical Analysis

By Anchalee Worrachate - Mar 28, 2011 4:05 AM PT

The euro’s decline last week against the dollar may be part of a “failure pattern,” and the currency may drop further if it breaks below $1.3975, Commerzbank AG said, citing trading patterns.

The initial so-called support level is $1.400, which represents the euro’s 20-day moving average, Karen Jones, a London-based technical analyst at Commerzbank, wrote in an e- mailed note today. The next level to watch is $1.3975, she said.

“Failure here will instigate a slide to $1.3752/$13718 and eventually $1.3430,” she wrote. It’s not clear whether the euro’s recent move “is a consolidation or failure pattern at this stage, but we suspect the latter.”

The euro fell 0.7 percent against the dollar last week, the biggest decline since the week that ended on Jan. 7, paring its monthly gain against the U.S. currency to 1.82 percent. It traded at $1.4056 as of 12:20 p.m. in London.

A moving average is an indicator that displays the average value of a security’s price over a period of time. A close below the level suggests the asset may be on a downtrend.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. A support level on a chart is where technical analysts expect orders to buy a bond and its related securities. Resistance is where sell orders may be clustered.

Monday, March 14, 2011

EU Debt-Relief Pact Puts Pressure on Nations to Cut Deficits: Euro Credit

By Simon Kennedy and Anchalee Worrachate - Mar 14, 2011 8:01 AM GMT+0800

European leaders are betting their retooled bailout plan can defuse the region’s debt crisis as they reject costlier remedies and put the onus for stopping the turmoil on cash-strapped governments.

In a pact struck in the early hours of the weekend and two weeks sooner than investors expected, officials broadened the size and scope of their 440 billion-euro ($614 billion) bailout fund and eased the terms of Greek rescue loans. They resisted calls to buy bonds in the open market or finance buybacks.

The test of the accord will be whether investors reverse a slump that sent yields on Greek and Portuguese debt to euro-area records last week. Greece is fighting to show it can remain solvent and Portugal may be the next to seek aid. Further selling may force policy makers back to the drawing board when they reconvene March 24-25.

“Policy makers understand that market sentiment is crucial, and at least in the near-term, these measures are likely to improve sentiment,” said John Stopford, head of fixed income at Investec Asset Management Ltd. in London, which manages $80 billion. “I need to see how they are implemented. I’m happy to stay away from peripheral bonds for now.”

The euro climbed, advancing to $1.3978 as of 6:29 a.m. in Sydney from $1.3903 in New York on March 11.

The weekend agreement, which finance ministers will detail in meetings later today and tomorrow, may boost demand for the short-term debt of strained economies, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London.

‘Genuine Surprise’

“European leaders have delivered a genuine surprise just when the market was starting to fear the worst,” he said.

Thirteen months since they began crisis-fighting, euro leaders find themselves still needing to assure investors they have the tools and the will to protect the single currency.

The latest salvo of measures sends “an important message on the political pledge of the euro members to fight for the euro’s stability,” German Chancellor Angela Merkel said after the Brussels talks. “Everyone had to make a contribution. I hope that this will also be a good message to the world in terms of the euro as a major currency.”

The European Financial Stability Facility will now be able to spend its full 440 billion-euro capacity and buy bonds directly from governments after collateral rules required to secure an AAA credit rating previously limited its lending power to about 250 billion euros and Germany opposed asset purchases.

The primary-market purchases will still just be used as an exception and only in return for austerity commitments.

They would hand a backstop to indebted nations should a Greek restructuring spook markets and threaten to derail other government bond auctions, said Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich.
Greek Return

Dimitris Drakopoulos, an economist at Nomura International Plc in London, said such purchases may also ease the way for Greece to begin selling bonds again in the first quarter of 2012. The yield on the country’s 10-year debt touched 12.5 percent on March 11. Germany’s comparable bund was 3.2 percent.

Almost doubling the amount available in the fund frees up enough money to support Ireland, Portugal and Spain for about two and half years, although it would not be large enough to bail out Italy and Belgium, said Bosomworth, who used to work at the European Central Bank.

“I’m positively surprised, for a change,” he said. “The agreement contains important elements of a firewall” that could stop the crisis worsening.

Where the leaders held back was in rejecting the lobbying of ECB President Jean-Claude Trichet to allow the facility to buy bonds in the open market. The ECB has pushed such a decision to enable it to withdraw from markets after buying about 77 billion euros of bonds since last May.
Missing Detail

The commitment wasn’t matched with detail as Merkel indicated states will increase their guarantees. She herself may face political obstacles at home with an electorate and lawmakers opposed to putting more German money at stake and bond purchases, said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London.

“The risk that the parties backing Merkel may possibly lose a string of regional elections on March 27 does not make the situation easier,” said Schmieding. “Still, German politicians have a record of living up to their pro-European credentials whenever it really counts.”

In a reward for its austerity program and 50 billion euro privatization program, leaders made a provisional agreement to lower Greece’s interest rates of about 5 percent for aid by 100 basis points. They also extended the repayment period of the loans to 7 1/2 years from three years. Greek Prime Minister George Papandreou estimates the moves would save about 6 billion euros over the life of the loans.
Irish Bind

Ireland failed to secure similar relief on its 85 billion- euro bailout as recently elected Prime Minister Enda Kenny refused to yield to calls to raise its 12.5 percent company tax rate, calling the proposal of Germany and France “harmonization of taxes through the back door.” Negotiations will continue with the aim of a deal at the March-end talks.

Among the other deals done at the summit was a plan to tighten economic cooperation -- committing nations to enact budget rules into law, a core German demand. A basic accord was also reached on a permanent 500 billion euro safety net from 2013, the European Stability Mechanism, with a mix of guarantees and capital.

The immediate focus for investors is now whether to keep avoiding the debt of Portugal, pushing it closer to pressing the aid button. With the yield on his government’s five-year debt surging to 8 percent on speculation a bailout will be tapped, Prime Minister Jose Socrates’s government last week announced new commitments on deficit reduction amounting to 0.8 percent of gross domestic product for this year.
Pressure on Portugal

“The measures are not specific enough at this stage to allow us to formulate a clear assessment, but we would not be surprised to see markets put Portugal to the test in the coming weeks,” Goldman Sachs Group Inc. economists including London- based Francesco Garzarelli said in a note to clients.

David Mackie, chief European economist at JPMorgan Chase & Co. in London, says the weekend sent a “powerful signal” that countries willing to do all they can to restore budgetary order will be supported by neighbors and debt restructurings could still be avoided, said.

That leaves the responsibility for ending the crisis with individual countries and whether they can cut budget deficits enough to again enjoy the trust of investors, said Charles Morris, who oversees $2.5 billion as head of HSBC Global Asset Management’s Absolute Return Fund.
Debt Load

Greece, for example, faces a debt that the European Commission forecasts will reach 159 percent of GDP next year and which Moody’s Investors Service last week cut by another three levels. On the eve of last week’s talks its 10-year bond yields rose to a record and it cost more than ever to insure against a default.

“To solve the debt crisis, these countries will have to lower their debt proportion to GDP, and interest rate payments will have to be low,” said Morris. “The measures show leaders are serious about tackling the problem and it will improve sentiment in the near term. It remains to be seen if it will solve the problem. We are not in a hurry to buy bonds from peripheral countries.”

Tuesday, March 8, 2011

Europe May Face More Ratings Cuts, Greek Default, S&P Says

By Anchalee Worrachate - Mar 8, 2011 12:45 PM PT

Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s.

Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.”

The debt ratings of Portugal and Greece remain at risk of being cut due to concern about how a European Union rescue fund may affect holders of the two nations’ sovereign bonds, S&P said March 1. Ireland retained a negative outlook after S&P cuts its ratings on Feb. 2. Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1, and assigned a negative outlook to the rating.

“We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview at a EuroMoney conference in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”

Greek 10-year bond yields and credit-default swaps surged to a record as borrowing costs increased at a debt sale and before European leaders begin meetings aimed at containing the sovereign debt crisis.
Recovery Levels

Spanish bonds also slid as the government sold debt through banks. Greek bond losses extended declines to a ninth day after the nation’s credit rating was cut by Moody’s. Portuguese 10- year bonds fell for a second day before a notes auction tomorrow. German 10-year bonds dropped amid speculation the nation’s economic growth will add to pressure on central bankers to increase interest rates.

A debt default by the Greece’s government is “a possibility” and that investors may recover between 30 percent and 50 percent of the total value if that happens, Kraemer said. Greece is rated BB+ by S&P, or one level below investment grade.

“We do rate Greece as a non-investment grade for about a year now, so clearly a default is a possibility,” said Kraemer. “Defaults out of investment grade are extraordinarily unlikely and we don’t think there will be any.”
Further Downgrades

The Greek Finance Ministry said yesterday that Moody’s decision was “incomprehensible.” Moody’s didn’t heed the progress Greece made in cutting the deficit by 6 percentage points of gross domestic product last year, according to a ministry statement.

Ireland, also at risk of further downgrades based on its outlook at S&P, may fare better than Greece as the country has the “economic resilience and adaptability to face up to its challenge,” Kraemer said.

European Union policy makers intends to approve “comprehensive” package of measures at a March 24-25 summit in a bid to restore confidence in bond markets. This may include setting up a permanent rescue facility, known as the European Stability Mechanism, which will take over the existing mechanism after 2013.

Credit ratings of some euro-region countries, particularly Greece and Portugal, will also depend on the outcome of the summit, Kraemer said.
Yields Climb

“Our concerns about features that we believe will be part of it have to do with the preferred credit status effectively subordinating senior bondholders, and also the possibility to introduce conditionality for lending that would entail the restructuring of commercial debt,” said Kraemer. “Both of those we would consider bad news for bondholders.”

As a consequence, S&P “would consider downgrading ratings of countries that are possible clients of the ESM after 2013,” he said. “These countries, in the first instance, are Portugal and Greece.”

The yield on 10-year Greek bonds jumped as much as 52 basis points to 12.85 percent, the most since Bloomberg began collecting the data in 1988, with the increase in yields the biggest since Oct. 27. It was at 12.84 percent as of 5 p.m. in London. The 6.25 percent securities maturing in June 2020 fell 2.04, or 20.4 euros per 1,000-euro ($1,389) face amount, to 65.29.

The extra yield investors demand to hold the securities instead of German bunds widened to as much as 956 basis points, the most since Jan. 10. The euro fell 0.4 percent to $1.3912.

Credit-default swaps insuring Greek government bonds rose five basis points to an all-time high 1,037 basis points, meaning it costs $1.04 million annually to insure $10 million of debt for five years. They ended the day seven basis points lower at 1,025 basis points.

Wednesday, March 2, 2011

Fed: Labor Market Strengthened on Manufacturing, Retail

By Joshua Zumbrun - Mar 2, 2011 2:28 PM PT

The Federal Reserve said the labor market improved throughout the country early this year, driven by rising retail sales and “solid growth” in manufacturing.

“Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement,” the Fed said today in its Beige Book report, an anecdotal account of the economy released two weeks before meetings of the Federal Open Market Committee. Its last survey, released Jan. 12, said the job market was “firming somewhat.”

Overall, the economy “continued to expand at a modest to moderate pace,” the central bank said in Washington. Eleven of the Fed’s 12 regional banks, including San Francisco and Philadelphia, described their regions as expanding, improving or experiencing moderate growth. Only Chicago reported growth “at a pace not quite as strong” as before.

Fed policy makers at their last meeting in January took a more optimistic view of the economy while maintaining their dissatisfaction with job growth. Policy makers, who are pressing ahead with their plan to buy $600 billion in Treasuries through June, raised projections for economic growth this year and made little change to forecasts after 2011 for unemployment and inflation.

The Beige Book reported that all districts except St. Louis “experienced solid growth in manufacturing production” and noted an increase in retail sales in every district except Richmond and Atlanta.
‘Just Great’

“The manufacturing sector is doing just great,” Michael Moran, Chief Economist at Daiwa Securities America Inc., said in an interview on “Bloomberg Bottom Line” with Mark Crumpton, adding that the report wouldn’t dissuade Fed Chairman Ben S. Bernanke from completing the asset-purchase plan, known as QE2 for the second round of quantitative easing.

“He’s planning to go ahead with QE2,” said Moran. “There’s nothing in the Beige Book today which would suggest they should back away from that either.”

The Standard & Poor’s 500 Index rose 0.2 percent to 1,308.44 at the 4 p.m. close of trading in New York. The yield on the 10-year Treasury note rose to 3.47 percent as of 4:48 p.m. in New York, from 3.39 percent yesterday.

The Beige Book followed a report earlier in the day from ADP Employer Services showing that U.S. companies added more workers in February than forecast by economists. Employment increased by 217,000 after a revised 189,000 gain in January. The median estimate in the Bloomberg News survey called for a gain of 180,000 last month.

Jobs Report

The Labor Department will report March 4 that the world’s largest economy added 190,000 jobs in February, the most since May 2010 when the government was hiring to conduct the decennial census, according to the median forecast of a Bloomberg News survey. The unemployment rate will rise to 9.1 percent.

Bernanke, in congressional testimony today, said he’s still not satisfied with the strength of the recovery from a recession that the National Bureau of Economic Research describes as the longest since the Great Depression.

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” Bernanke said in semiannual testimony to the House Financial Services Committee.

Responding to a question, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.”
Economies Growing

The Beige Book’s characterization of growth was little changed from January, when six Fed regions, including Atlanta and Chicago, showed local economies expanding “modestly to moderately,” and four, including New York and Boston, reported “improving” conditions.

The Commerce Department last week reduced its estimate of fourth-quarter growth to a 2.8 percent annual pace from 3.2 percent as state and local governments made deeper cuts in spending. Consumer purchases rose at a 4.1 percent rate, the most since 2006, providing a boost for retailers.

Last week Target Corp., the second-largest U.S. discount retailer, projected sales at stores open at least a year may rise as much as 5 percent this year, after a 2.1 percent gain the prior period.

“Retail spending strengthened compared with a year ago across all Districts except Richmond and Atlanta,” today’s report said, while noting that winter weather “had a negative impact on retail activity” in Boston, New York, Philadelphia, Atlanta, Kansas City and Dallas.

The Beige Book report released today reflects information collected on or before Feb. 18 and summarized by the Atlanta Fed.
Labor Demand

Boston, Cleveland, Minneapolis, and Dallas cited “noticeable improvements” in manufacturing, and Boston and Cleveland “also observed increased labor demand in the health- care and medical sectors,” the report said.

Four districts, including Dallas and Boston, described the manufacturing outlook as “optimistic” and four, including Philadelphia and Atlanta, reported “more rapid improvement in factory orders.”

Manufacturing grew in February at the fastest pace in almost seven years, driven by gains in orders, employment and exports that signal factories will continue to propel the expansion, according to a report this week from the Institute for Supply Management.

Auto dealers are seeing improved demand. General Motors Co. yesterday said U.S. sales of its four remaining brands rose 49 percent in February, topping analysts’ estimates.
Berkshire Hathaway

Berkshire Hathaway Inc.’s quarterly profit rose 43 percent to the highest since 2007, boosted in part by Chairman Warren Buffett’s purchase last year of Burlington Northern Santa Fe, the second biggest railroad in the United States.

The Beige Book described the real estate market as “varied, but overall sales and construction remained at low levels across all districts.”

The improvement in the job market has not translated to pay increases, the report said, describing wage pressures as “minimal across all Districts.”

The report noted that “non-wage input costs increased for manufacturers and retailers” and that many manufacturers “reported having greater ability to pass through higher input costs to customers.”

“Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months,” the Fed said.
Price Gauge

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

Oil and crop prices have soared even as core inflation has remained low. The price of gasoline, among the most visible expenses consumers, has risen 25 percent in the last year, according to an index from the American Automobile Association.

Experience with such price gains in recent decades, along with currently stable labor costs, suggests a “temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke told Congress today.