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US and EU dance the dance of debt - Mar 16

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Moody’s Says U.S. Debt Could Test Triple-A Rating

David Jolly and Catherine Rampell, New York Times
The gold-plated credit rating of the United States — an article of faith across America and, indeed, around the world — may be at risk in coming years as the nation copes with its growing debts.

That sobering assessment, issued Monday by Moody’s Investors Service, provided a reminder that even Aaa-rated United States Treasury bonds, supposedly the safest of safe investments, could be downgraded one day if Washington failed to manage the federal debt.

Moody’s said the United States and other major Western nations, particularly Britain, have moved “substantially” closer to losing their gilt-edged ratings. The ratings are “stable,” but “their ‘distance-to-downgrade’ has in all cases substantially diminished,” the credit ratings agency said.

A downgrade would affect more than American pride. The bigger risk would be to the country’s ability to keep borrowing money on extremely favorable terms, and therefore to keep spending more money than it takes in from tax revenue.

A credit rating lets lenders and investors know how likely it is that a borrower can pay back a loan. A sterling rating means there is little for lenders to worry about. A lower one typically results in bond investors demanding higher interest rates on debt.

Those higher rates, in turn, add to the country’s overall debt burden and can force the government to reduce spending, increase taxes or both. That difficulty has been well-illustrated recently in Greece and Portugal, with strikes and protests as citizens march in the streets to oppose tough austerity measures that directly reduce entitlements and state benefits.
(15 March 2010)




Europe and America Wrestle over Tighter Financial Regulation

Beat Balzli, Wolfgang Reuter, Michael Sauga and Hans-Jürgen Schlamp, Spiegel
In the wake of the financial crisis, governments in Europe and the US sought to rein in the global banking sector. One year later, little has been accomplished -- and success in the near future seems doubtful. Competing oversight visions could increase trans-Atlantic tensions.

German Chancellor Angela Merkel isn't one for using aggressive language. Normally at least. But when it comes to the international financial industry these days -- particularly the dealings of investment banks, hedge funds and currency speculators -- she doesn't shy away from a bit of bellicosity. Words like "excesses" and "abyss" have become standard fare in her comments on the economy.

The chancellor, it would seem, is in combat mode. "The banks are trying to strike back, once again," she complains. Last Wednesday, Merkel decided to go on the offensive herself.

In a letter that was also signed by three of her European counterparts-- French President Nicolas Sarkozy, Luxembourg Prime Minister Jean-Claude Juncker and Greek Prime Minister Georgios Papandreou -- Merkel proposed a Europe-wide approach against so-called Credit Default Swaps (CDS), the highly complex form of credit default insurance that is believed to have been partly responsible for triggering and exacerbating the financial crisis, as well as fueling recent speculation over a Greek national bankruptcy. In the future, the letter reads, such financial products should be examined carefully, monitored more effectively and, if necessary, even partially banned. To put a stop to speculators, "Europe must assume a leading role."

While European governments were still hopelessly divided over the consequences of a looming Greek national bankruptcy, Merkel seemed determined to put a stop to the unbridled activities of the financial industry. Only a week ago, the US magazine Newsweek mocked the German chancellor, calling her "slow-motion Merkel." Her latest move was intended to show the world a different sort of chancellor: a crisis manager.

...US President Barack Obama, for example, called his country's bankers "a bunch of fat cats" last fall, and then demonstratively backed the radical reform proposals of his crisis advisor, former US Federal Reserve Chairman Paul Volcker.

Next to Nothing

Among other things, the Volcker proposal would have barred banks from using private customer deposits to engage in speculative trading aimed at padding their earnings. Volcker hoped this would ensure that the failure of a financial services firm like Lehman Brothers could no longer shake the global financial system. It was a smart plan, but within a few weeks it was clear that its chances were next to nothing.
(16 March 2010)




Gazing Through The Long Tall Grass

ilargi, the automatic earth
Greece is saved, the Euro will be fine, so will the eurozone, it was all a storm in a teacup. Even Paul Volcker sounds less negative about the Euro than about America’s own finances. Maybe that should tell us something. There will be a European monetary fund down the line (perhaps many years), but since the power structure in the EU is overly clear, it doesn’t really matter. German influence in the union, both economical and political, will increase, but the Germans know very well what their limits are, so maybe that's not such a bad thing. Greece will certainly benefit from better accounting practices.

And then they’ll have to adapt to what is now called austerity, which is in reality nothing but a misnomer for what will befall us all, as it becomes everyday life in the 21st century. And not just for the Greeks, Portuguese, Irish and Icelanders, either, but for all everyday people all over the world. If they are among the lucky ones.

Meanwhile, many gamblers have lost fortunes shorting the Euro, while journalists like the FT’s Wolfgang Münchau - along with many of his peers in the English and American press- have once more shown that their knowledge and insights are exceedingly limited to their own few square inches of land and vision. The Euro lost about 10% of its value from the most recent top, but Europe’s export countries were shooting for a -much- bigger drop than that on the Greek scare. They’ll now have to find the next finance horror flick. A consolation for Germany is that the crisis will give them increased leverage to pressure southern Europe to buy more German instead of Asian products.

And that was why they all entered the European Union to begin with. Germany and Holland needed markets for their products, so they built them in their own backyards. Buy more German may sound like protectionism, but when your currency is 20-25% overvalued, the global playing ground is not exactly level to start with. And then you try to make it level. We've just seen part 1 of that film. America wants to China to to raise its currency, Europe wants America to do the same. beggar they neighbor.

...PS: I realize there’s many of my American and British readers who feel I’m biased in favor of the EU, and against their countries, or even can’t be trusted to understand these countries. Me, I think I need to provide for those exact same readers a balance versus the anti- EU bias inherent in British and American media, simply in order to paint the most realistic picture. We’ll see what happens through the rest of 2010, but for now, I can say that I’ve always from the beginning maintained here that Greece would never be allowed to fail, and the Eurozone is much stronger than some papers would have you believe, and so far I’ve quite simply been proven right. I think the players that went after Greece are looking even more eager than before for the next wounded animal, and that they won’t find it in continental Europe, that George Soros would never dare take on Berlin. And that means the pride have to move on, while their appetite keeps on growing. I’ll be the first to admit this is an intuitive call, but I can't see how they can stop now. They need food to maintain their status.
(8 March 2010)


Berlin and Paris Take Aim at Speculators

Wire reports, Spiegel
Chancellor Angela Merkel and French President Nicolas Sarkozy are considering measures to limit the kind of speculation that has targeted the European common currency in recent weeks. If Brussels doesn't take action, France and Germany are prepared to go it alone.

For now, Greece may have managed to assuage doubts about its ability to remain solvent by passing yet another painful package of austerity measures last week. But the European Union remains concerned, and has launched an intensive search for mechanisms to ensure that such a risk to the European common currency is avoided in the future.

On Tuesday, one day after proposals for a European Monetary Fund (similar to the International Monetary Fund) grabbed headlines on the Continent, a German-French plan has emerged that would significantly limit speculation and the trading of so-called Credit Default Swaps. According to the business daily Handelsblatt, German Chancellor Angela Merkel plans to discuss measures to limit speculation with Luxembourg Prime Minister Jean-Claude Juncker -- who also chairs the round of euro zone finance ministers -- on Tuesday.

According to the Süddeutsche Zeitung newspaper, Merkel and French President Nicolas Sarkozy intend to write a letter to European Commission President Jose Manuel Barroso encouraging him to take action against damaging financial speculation. The paper also wrote that, should the EU not take action, Merkel, Sarkozy, Juncker and Greek Prime Minister Georgios Papandreou would be prepared to take unilateral action against such speculation...
(9 March 2010)


Finance Superstars Talk About the Massive Fraud in Our Economic System

Joe Costello, alternet
Last Wednesday, I attended a conference initiated by the Roosevelt Institute on the financial mess, called Make Markets Be Markets. The conference's speakers included people with experience on Wall Street, the banking industry, government and academia; Nobel Prize-winning economist Joe Stiglitz, Elizabeth Warren, and other luminaries who have offered an alternative and reformist narrative to our recent financial crisis. At two and half hours, it was relatively short, giving each speaker the opportunity to make their points and providing a sharp focus. One underlying theme of the event was fraud, the great elephant in the room, that neither the press or our government officials acknowledge, though it is a fundamental element to the financial crisis and its solutions.

Joe Stiglitz started the conference and stated how reducing transparency and hiding information was an essential element to the crisis. Stiglitz concluded, "Innovation was regulator and tax arbitrage." Wall Street and the banks deliberately added opacity and complexity to confuse clients and consumers. Elizabeth Warren pointed out, “complexity made a lot of profits," for example, she showed how the average credit card contract in 1980 was one page, today it is thirty.

This opacity and complexity helped make the financial industry predatory against their clients and customers. Not only did government regulatory agencies fail in stopping this confidence game of historical magnitude, but so did markets. NYU's Lawrence White pointed out the credit agencies such as Moody's and S&P, whose role is to provide independent analysis, essentially became co-conspirators as their business model changed from being paid by investors to being paid by the Wall Street issuers, making it against their interests to issue dour ratings on investments.

...The conference put out a very excellent report available here. If we're going to get our economy up and running again, the first thing we're going to have to do is end the fraud.
(8 March 2010)

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