NEWS,03.08.2012

Argentina shows Europe how it's done

Bond payoffs are supposed to be boring, but Argentina's president is celebrating Friday's final $2.3bn payment on a bond given to people whose savings were confiscated a decade ago, calling it a lesson for European countries now mired in foreign debt. The nation's economic disaster left thousands with a grim choice after the government seized their dollar-denominated deposits to stop bank runs in 2002. They could switch to devalued pesos and regain access to what was left of their savings, or accept a piece of paper promising to repay the money in dollars over the next 10 years. Few had any faith in the government's promises back then. Argentina had just defaulted on more than $100bn in foreign debt, banks were shuttered, the economy was in ruins and streets were filled with pot-banging protesters whose chants of "throw them all out" would send five presidents packing. But Argentina has mostly paid up after all, making good on 92.4% of that defaulted debt so far, including $19.6bn in US currency over the years to cancel the Boden 2012 bond. Most of the hard-luck account-holders later sold the bonds at a loss, but as the government makes its last $2.3bn payment on Friday, the few stalwarts who kept the faith have been made whole, while earning a modest 28% profit over the years. "It was good business" for anyone who got the bonds early and held them, said Jorge Oteiza, a bond trader with Banco Comafi in Argentina. "To have the same buying power you had back then isn't bad." President Cristina Fernandez praised her government for meeting its commitments and blamed multinational financial institutions for the debt crises that afflicted Argentina back then and threaten Europe today. "This is the money that the banks should have returned to the Argentine citizens," she said during a national address from the Buenos Aires stock exchange Thursday night. Showing charts and rattling off numbers, she argued that her government has shown the world how to emerge from default without imposing austerity measures, growing its economy and strengthening the social safety net. This debt relief "has given us an immense independence from the activity of the market," she said to applause from the hundreds of guests she had invited onto the exchange floor. Argentina's foreign-currency debt has dropped from a daunting 166% of GDP at the end of 2002 to a more manageable 42% of GDP at the end of 2011, said Ramiro Castineira of the Econometrica consulting firm. "If before it was a burden to shoulder, now it's just a handbag. It doesn't restrict the economy as it did in the past," he said. However, the debt has grown in nominal terms during the same period, from $137bn to $179bn. Many economists suggest the official story is misleading at best, since the government has refused to pay billions of dollars in other bad debts while borrowing freely within Argentina, taking money from pension funds, provinces, state-owned banks and the central reserve to stimulate the economy and reduce its foreign debt exposure. In her determination to make Argentina financially independent, critics say Fernandez has only shifted the debt burden onto her citizens, imposing terms that could stunt the country's future growth. For example, the government promised to pay negative 0.25% interest over ten years for the $27.9bn it took from the treasury for debt relief, the central bank said. "It's wonderful to see Argentina pay down debt, but for every dollar they're paying down, they're borrowing two or three through the other window, and increasingly from their own people," said Arturo Porzecanski, an expert on emerging markets at American University in Washington. Economy Minister Hernan Lorenzino proudly described the Argentine recipe in a column Wednesday published by Telam, the government news agency: Spurn the requirements of the International Monetary Fund and World Bank. Strong-arm the so-called "vulture funds" into accepting lower returns on their risky bets. Nationalise private pension plans, the airline and now the YPF oil company, putting their assets to use creating jobs. And tap central bank reserves to pay down international debts. Frozen out of international markets as a consequence of the 2002 default, this government made breaking their rules a point of pride, Lorenzino suggested. "At first, they called us heretics and the international community turned its back on us," he recalled. But "this government makes policies today without conceding to international pressure, thinking first of those on the inside, and later on those outside." Lorenzino has said this government will not take on more international debts. Not that it could: Friday's payoff still doesn't resolve nearly $7.5bn it owes the US and other Paris Club nations, or the $11.2bn claimed in US courts by bond holdouts. Argentina also owes millions in court judgments to US companies, and Spain's Repsol Group wants $10.5bn for its shares in YPF that Fernandez expropriated this year. Many of these investors would try to seize any newly borrowed money before it reaches Buenos Aires. Lorenzino suggested that Argentina's renegade approach makes it better prepared to confront global crises because the portion of its debt held by the private sector has dropped from 124% of GDP a decade ago to 14% last year. "This was possible only under the concept of economic independence, political sovereignty and social justice," Lorenzino wrote. But this shift from private to public debt means that the government is essentially borrowing from Argentine taxpayers and bank account holders to stimulate its economy, at rates far below inflation, which is estimated at 25% a year or more. Unless this changes soon, the money could run out and there will be few other places to turn for help. "This is no longer an 'us-versus-them' problem," Porzecanski said. "At first they went after the big multinationals, then the 'filthy-rich bondholders,' then powerful institutions like the IMF. Now it has become a fight for financial resources within Argentina. That's why I think the end is coming."

 

A Better Job Report But Challenges Remain

 

When it comes to economic data, I have been dreading the employment report issued on the first Friday of every month. And I am not the only one.For the last few years, this release from the Department of Labor has signaled insufficient job creation. It has also pointed to an increasingly segmented labor market, where the highly educated and affluent do well while vulnerable segments of society see little improvement. In the process, the unemployment crisis has gotten more embedded into the structure of the American economy.So it was a major relief this morning that the July report was a lot better than prior ones.At 163,000, job creation came in ahead of consensus expectations of 100,000. Long-term joblessness fell from 5.4 million to 5.2 million. The employment gains were broad based in terms of sectors. And average weekly earnings rose slightly.This is all good news... and especially after way too many months of disappointments. Yet, and unfortunately, it is too early to relax.The report still contains flashing yellow lights; and the future is still too uncertain with respect to both domestic and international conditions.In July, the unemployment rate edged up slightly to 8.3% despite more Americans falling out of the labor force. In fact, the participation rate declined from 64.0% to 63.7%; and the employment-population ratio, which is the most comprehensive measure out there, slipped from 58.6% to 58.4%.Then there are the compositional issues. There was little relief for those who need it most, including too many Americans who risk slipping from being unemployed to being unemployable.For example, teenage unemployment rose from 23.7% to 23.8% while joblessness among those with less than a high school diploma increased from 12.6% to 12.7% (compared to a stable 4.1% for those with bachelor degrees and higher).Put these numbers together and what you get is a picture of an economy that is healing, but doing so gradually and unevenly.So much for the past and present; how about the future?Left to its own devices, the economy would continue to heal and, concurrently, job creation would accelerate. But will they?For the improvement in the labor market to continue and broaden, America needs to minimize the risk of derailment by three clear and present dangers: the reluctance of Congress to deal with the fiscal cliff, Europe's inability to get ahead of its crisis, and a possible geo-political shock emanating from Iran.In such circumstances, it would be reasonable to expect Congress to be giving the unemployment crisis the attention it needs and deserves. Our elected representatives should be working hard on ways to accelerate the economic healing and also minimize vulnerability to these potential shocks.Unfortunately they are too polarized to do so; and it looks like they won't until the November elections are behind them, at the earliest.So despite the latest monthly improvement, America's unemployment situation will remain a challenge. And many of us will continue to nervously await the monthly data releases.

NEWS,02.08.2012

 ECB signals bond-buying stint

The European Central Bank indicated today it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but the conditions it set and the dissenting voice of its key German member disappointed markets.In the latest move to contain the eurozone crisis, ECB President Mario Draghi indicated that any intervention would not come before September - and only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds."The Governing Council ... may undertake outright open market operations of a size adequate to reach its objective," Draghi told a news conference after the central bank's monthly meeting, using the central bank's code for bond-buying.The ECB kept euro zone interest rates at a record low 0.75 percent but Draghi said the council did consider a further rate cut on Thursday amid signs that an economic recession in peripheral European countries is spreading across the continent.A poll of nearly 50 economists after Draghi spoke found t hat most expect the ECB to start buying Italian and Spanish bonds in September and to cut rates t o 0.50 percent. .Draghi was under intense pressure from investors, European leaders and the United States to deliver on a pledge he made last week to do whatever it takes to preserve the euro by bringing high borrowing costs down.But shares and the euro fell after the ECB chief's remarks, and Spanish and Italian bond yields jumped, with Spain's 10-year paper vaulting over the 7 percent danger level."It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians," said Ioan Smith, strategist at Knight Capital.Draghi said t hree ECB committees would now work on detailed methods of intervention and a decision on whether to go ahead would be taken at a later stage.If the central bank did step in to buy bonds, it would act to assuage investors' concerns raised when it asserted seniority over private bondholders by refusing to join a writedown on Greek debt this year, Draghi said. He did not say how.The ECB would also consider other "non-standard" measures to rein in the euro zone crisis, he said, hinting it might move to quantitative easing - or printing money - by not withdrawing all the money it creates to buy bonds.Unlike the U.S. Federal Reserve and the Bank of England, which have engaged in QE since 2008 by creating money to buy securities, the ECB has so far "sterilised" all its purchases by taking in an equivalent amount in interest-bearing deposits.The bank has already spent 210 billion euros buying bonds under its now dormant Securities Markets Programme (SMP) since May 2010, with limited effect, but Draghi said the new effort would be different in scope and conditionality.Any new ECB action would be focused on shorter-term debt and was conditional on euro zone governments using their bailout funds first, and on beneficiaries accepting conditions."Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist," he said.Italian Prime Minister Mario Monti said after talks with his Spanish counterpart Mariano Rajoy in Madrid that Draghi's statement marked "several steps forward", bu t it was premature to say whether Rome would apply for such help.Rajoy called the ECB decisions positive but repeatedly declined to say whether S pain would request an assistance programme, which he has so far resisted.The Washington-based International Monetary Fund said it welcomed the ECB's willingness to act."As we have also emphasised, monetary policy alone cannot solve the problems facing the euro area. But further monetary easing and unconventional support would ease tensions as other policies are implemented and take effect," an IMF official said.The ECB chief repeated that the euro was "irrevocable" and warned markets it was pointless to bet against the 17-nation single European currency. He also said the central bank was determined to counter any risk of "convertibility" - code for a possible break-up of the euro.But analysts were underwhelmed by his announcement of possible future action subject to conditions.Marchel Alexandrovich, senior vice president at Jefferies, added: "What Draghi has basically indicated is that the problem in the bond markets has to get considerably worse before the ECB steps in to help."The outcome of Thursday's ECB meeting mirrored Wednesday's U.S. Federal Reserve policy-setting meeting, which also dashed expectations of immediate new measures to revive the economy.The Fed stopped short of offering new monetary stimulus, though it signalled more strongly that further bond-buying could be in store to help a U.S. economic recovery that it said had lost momentum this year.ECB action is hamstrung by European treaty rules forbidding it from financing governments. Draghi said an ECB legal opinion had ruled out another possible "big bazooka" - giving the ESM bailout fund the right to tap ECB funds to boost its firepower.The ECB also has to find a way to get any measures past Germany, the euro zone's largest economy and its principal paymaster. The Bundesbank issues regular reminders of inflationary dangers stemming from bond purchases and the limits central banks face.Draghi said all members of the Governing Council endorsed Thursday's statement with one exception and he took the unusual step of mentioning Weidmann by name as the dissenter, suggesting he was prepared to outvote the German if necessary."It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted."Council members who have voted with Weidmann in the past, such as the Dutch and Luxembourg central bank chief and the German member of the ECB's executive board, did not side with him this time, suggesting the Bundesbank chief was isolated.But his acquiescence in ECB policy is widely seen as vital to preserve public support for the euro zone in Germany.

 

ECB Responds To Europan Recession, Debt Crisis By... Doing Nothing

Another day, another central bank failure.

The European Central Bank on Thursday stared a recession and financial crisis in the face and decided to do absolutely nothing about it. It was a page right out of the Federal Reserve's playbook, which on Wednesday stared a slowing economy and high unemployment in the face and decided to do absolutely nothing about it.Both banks hinted strongly at some sort of action coming after August, when Europeans come back from vacation. But then they have been hinting at action for months now, without taking any, so you can excuse financial markets for being a little disappointed."The lack of action from either the Fed or the ECB this week stands in stark contrast with their dour economic assessments," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, wrote in a note. "The assessment and action will be brought into line, but not as soon as investors want."Just last week, for example, ECB chief Mario Draghi said his central bank would do whatever it took to save the euro. Apparently he just didn't mean they'd do it in a hurry or anything.The ECB kept its target interest rate on hold at 0.75 percent, or about half a percentage point higher than the Federal Reserve's own target rate. At a press conference, Draghi said the bank was preparing a plan to buy more European sovereign bonds to help ease funding pressures on Spain and Italy. But it also said those governments would have to ask for it first, preferably saying pretty please, with sugar on top. Spain and Italy could use the help sooner rather than later. At last check, Spanish 10-year bond yields had jumped back above 7 percent, a sort of Death Zone for government borrowing costs. You can't stay above that level for very long without needing a bailout. Italy's 10-year bond yield jumped above 6 percent, uncomfortably high.Investors fear the enormous economies of Spain and Italy will soon need bailouts, which could put a strain on all of Europe's finances. Such worries have brought manufacturing around the world, including in the U.S., to nearly a screeching halt.The response by policy makers has been noticeably lacking, marked by "Coordinated inaction by the world's leading central banks: The Fed, the ECB, the Bank of England, [Peoples Bank of China]," Wharton economics professor Justin Wolfers tweeted.In the Fed's possible defense, it has already slashed interest rates to nearly zero and launched multiple rounds of bond-buying. Some on the Fed worry the risks of further action outweigh the benefits. The ECB, meanwhile, is handcuffed by a single mandate, to worry endlessly about inflation, even when said inflation is non-existent. And the ECB has Germany, the continent's paymaster, looking over its shoulder and constantly pushing back against aggressive action.Draghi tried to put the ball back in the courts of the European politicians, all of whom are currently on vacation. Maybe while they're on the beach they're thinking hard about a dramatic fix to their problems, but history offers little reason to hope.Similarly, the U.S. Congress could take steps right now to help the U.S. economy, but again, history offers little hope.The only policy makers with free rein to do anything right now are the central banks, and they have taken the rest of the summer off.

Spain debt auction a success

Spain passed a key test on Thursday by easily selling €3.1bn of debt despite investors doubts that the European Central Bank will be in a position to help struggling eurozone economies when it holds its monthly meeting later in the day.Although the Treasury was forced to pay the second highest yield on its 10-year paper since the launch of the euro in 1999, analysts said the auction was solid in the current context. The cost of borrowing was nearly a full percentage point below the peak yield in the secondary market last week.The results lifted market sentiment, with the premium which investors pay to hold Spanish over German debt falling after the auction.Spanish bond yields, which had hit euro-era highs due to the possibility that Madrid would have to be bailed out, fell last week after President Mario Draghi said the ECB would do whatever it takes to save the common currency, within its mandate.But concerns that the ECB will now fail to meet the market's expectations when Draghi announces decisions of the Governing Council's monthly meeting at 12:30 GMT sent them up again in the last two days."The auctions were good, with better demand at the shorter maturities which looks to me like the auctions were driven by more short-covering demand," said Peter Chatwell, rate strategist at Credit Agricole in London."Certainly there is still a lot of doubt whether the ECB has the mandate to do anything which structurally tightens Spanish or Italian spreads."Sources have told Reuters that bold action - such as the ECB resuming controversial purchases of government debt issued by the most troubled eurozone economies to curb their borrowing costs - is at least five weeks away. However, Draghi may offer some clues on what is in the offing. On Thursday, Spain sold €.1bn of bonds, beating its target of €2bn to €3bn, though it paid higher rates than the last time the bonds were sold at a primary auction.The Treasury raised €1bn of the longer-dated, benchmark bond, due January 31, 2022, at an average yield of 6.647% compared to 6.43% when it was last sold in the primary market on July 5. The yield in the secondary market had reached 7.639 on July 24, before Draghi spoke last week.Demand was lower than the previous auction, with the bid-to-cover ratio at 2.4 compared to 3.2 a month earlier.A bond due July 30, 2014 sold €1.1bn at a yield of 4.774% and bid-to-cover ratio of 3.0. The same bond was last sold at a primary auction in March, 2011, at an average yield of 3.592%.A bond maturing October 31, 2016 sold at a yield of 5.971%, after 5.536% July 5. The Treasury sold €1bn of the paper which was 2.7 times subscribed compared to 2.6 times last month.