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US Debt Ceiling: Fed Starts Planning for Default
Topic Started: 23 Jul 2011, 03:19 PM (6,095 Views)
newjez
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I have to admit I did think it strange that there were so few casualties considering the scale of the accident. I hadn't considered that they run the trains empty. Europe and China are still grumbling while the US fiddles. The three parts to this equation seem to be taking turns to flare up. I'd hate to see what will happen when they are fire together.


China's economic miracle may be about to come off the rails
Largely invisible to a radar screen dominated by concerns over the US and eurozone debt crises, the Chinese economic miracle, one of the few apparent bright spots that remains in a world beset by trouble, has in recent weeks also been showing unnerving signs of strain. Indeed, it may even be about to come off the rails entirely – quite literally.


Last weekend, one of China's new bullet trains rammed into the back of another, killing 39 passengers and injuring nearly 200 more.

Last weekend, one of China's new bullet trains, a showcase of the country's growing economic prowess, rammed into the back of another, killing 39 passengers and injuring nearly 200 more.

The accident has raised questions, not just about the safety of China's vaunting ambition in high-speed rail, but about the sustainability of the country's break-neck pace of economic development in the round.

As Shen Minggao, chief China economist at Citi, has observed: "High-speed rail in some sense represents China's fast growth. When you care so much about speed, you sometimes pay less attention to the quality of the growth."

China's political leadership has long dreamt of an entirely new rail network, from the prosperous eastern seaboard to remotest inland China, and over the past four years they've set about building it with a determination which no other country would seem remotely capable of.

But in so doing, they appear to have put speed before safety, and economic ambition before commercial viability. It is not just the quality of the bastardised foreign designs, copied and botched together to feed China's insatiable appetite for growth, which is now being questioned.

The funding of this grand ambition is beginning to look increasingly shaky too. Financially, the project has already effectively broken the Ministry of Railways. At the last count, the ministry was nearly 2 trillion yuan (£200bn) in debt and clocking up losses at the rate of about £400m a quarter. On any Western definition, the ministry is completely bust. To meet the plan, another 2.8 trillion yuan has to be found in the next three and half years. Where's the money going to come from?

In recent debt issues, the railway has had to pay way above the going rate of interest, despite the fact that its bonds are implicitly and in some cases explicitly underwritten by the state. Of equal concern is that the newly opened links have failed to achieve anywhere near expected traffic levels. In the West, they would be dubbed a massive white elephant.

Concern over the new network's safety has created an even bigger hill to climb in terms of driving the necessary demand. Many of the trains are as empty as the ghost towns that sprout randomly upon China's vast open plains. For many Chinese, both are too expensive to contemplate.

The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners. Last weekend's rail crash can be seen as a harbinger of wider economic catastrophe to come.

As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall.

Nowhere is the unsustainability of Chinese growth more apparent than in its spectacular real estate bubble. Prices have been growing like topsy, despite a growing overhang of vacant new development. Conscious of the dangers, the Chinese authorities have taken a number of steps to cool the overheated housing market. Early evidence is that it seems to be working. Prices have risen by "only" 7pc over the last year and transaction volumes are lower.

Unfortunately, it is not as simple as that. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.

According to the most recent International Monetary Fund staff report on China, the property market directly makes up some 12pc of the country's GDP. Indirectly, it is a lot more, as the property market is highly connected to the output of basic industries such as steel and cement, as well as downstream industries such domestic appliances and other consumer durables.

The banking sector is also highly exposed, having financed much of the recent development. Direct lending to real estate (developers and residential mortgages), accounts for nearly 20pc of all bank lending in China.

For a long time now, the Chinese leadership has been conscious of the economy's dangerously high reliance on investment and net trade to fuel growth. Economic and financial calamities in the West have convinced policy-makers of the need to move more swiftly than they would have liked to address these imbalances.

Yet despite the rhetoric, the country has failed appreciably to wean itself off the dependence. Domestic consumption still accounts for a woefully small proportion of the economy. In the round, public policy still overwhelmingly prioritises investment and exports over higher disposable incomes.

The longer China takes to make the switch, the more likely it is that China's present phase of investment-led growth will end badly. In high-speed rail along with much else, China is trying to run before she has properly learned to walk. Rampant corruption, cronyism and poor governance only add to concern over the sustainability of the present economic and social model.

So when China lectures the US on its absence of economic leadership and the suicidal tendencies the world's richest nation is displaying in putting political infighting before the interests of financial stability, it perhaps ought to look to the mote in its own eye. The imbalances China has deliberately created in its pursuit of economic advancement are a large part of the overall mischief that has taken place in the world economy this past decade.

By supporting its trade surplus through massive purchases of US Treasuries, China, one of the poorest countries in the world, has in effect been lending the US, the richest, the money with which to buy its goods. How stupid is that? Debasement of the vast dollar assets China has accumulated in the process is the least it can expect by way of payback for a flawed economic model.
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newjez
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Global slump warnings if US triggers 'insane' default
A chorus of global banks has warned that Washington risks triggering a global slump and may suffer permanent loss of credibility by flirting with default on America's $14.3 trillion (£8.8 trillion) federal debt.

By Ambrose Evans-Pritchard
8:54PM BST 28 Jul 2011
187 Comments
The dangers are almost as great if the US fails to lift the debt ceiling and avoids default by enacting the most drastic fiscal squeeze in modern history.

"Default would be an act of collective insanity," said Willem Buiter, Cititgroup's chief economist. "Even if a default were cured promptly, it would severely dent the credibility of the US as a global financial player and the provider of the world's leading reserve currency. There would be an immediate repricing of the dollar and an increase in medium and long-term nominal and real interest rates. Asset, credit, and funding markets in the US and the world as a whole would likely suffer and a global recession would likely result, centred in the US, but not restricted to it."

Mr Buiter said brinkmanship on the US debt ceiling had reached a point where tail risk had "morphed" into a serious possibility, with a 5pc likelihood that Washington will pull the trigger on a technical default.

Stephen Roach, head of Morgan Stanley in Asia, said Chinese officials are disgusted by the "astonishing recklessness" of Washington as default looms. "Coming so shortly on the heels of the sub-prime crisis, the debate over the debt ceiling and the budget deficit and is the last straw," he said.

Andrew Garthwaite from Credit Suisse said a default would be catastrophic, causing 5pc contraction in the US economy and a 30pc drop on Wall Street, with "massive" ramifications for the world.

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"It is almost unthinkable to believe the US would miss a coupon payment [$29bn are due on August 15]. If the US does default, the repo market would probably cease to work. It is hard to imagine money market funds operating under this scenario. The inter-bank market would freeze up. The fallout would be far worse than after Lehman's default," he said. "It would be horrible to think what happens to the dollar if the Fed hints it would offset the growth damage with QE3."

Mr Garthwaite said it might not be that much better if the US fails to lift the debt ceiling and enacts a draconian fiscal squeeze equal to 11pc of GDP (annualised) to stave off default.

Such an outcome would at first lead to a 10pc to 15pc drop in equities and a fall in 10-year Treasury yields to 2.75pc. The dollar would slide. The longer it went on, the worse it would be. Each month would mean fiscal tightening equal to 0.9pc of GDP.

Some experts fear that variants of this scenario would spiral out of control. It would drive a string of US states and municipalities into bankruptcy if it lasted more than a few weeks, while the multiplier effect would tip the economy into a self-defeating downward spiral with echoes of 1931.

The US Treasury will announce its emergency plans if there is no deal on the debt ceiling by Thursday night. The government is already stepping up contingency planning and is working on a scheme for how it will operate without borrowing authority. Some on Wall Street believe that because of better-than-expected tax receipts in July, the Treasury has enough money to meet all its bills for at least a week after Tuesday's deadline.

Fathom Consulting said the twin debt crises in the US and Europe risk feeding on each other in a dangerous synergy unless leaders get a grip quickly. "We are on the brink of a major sovereign debt crisis: the latest European bail-out package has done next to nothing to alter that view," said the group.

Fathom said the Washington stalemate risks pushing up yields on US Treasuries, lifting the global benchmark cost of money known as the "risk-free rate" with knock-on effects in Europe.

Eurozone borrowing would rise in lockstep, playing havoc with debt dynamics. Fathom said failure to reach a US deal could drive up yields on 10-year Treasuries by 300 basis points to 6pc by next year. "Ultimately, this could tip the euro into default."

"Such a rise in the 'risk-free' rate would reverberate across the world and across asset classes. It could push both peripheral and core European bonds into default territory. It would almost certainly lead to a renewed global recession and banking crisis - only this time there would be only one country left to absorb the losses - China," it said.

China is clearly not large enough to carry such a burden and is itself trying to navigate a "soft-landing" from its credit boom. The HSBC manufacturing index for China has tipped below the contraction line of 50.

Citigroup said the most likely outcome (60pc chance) of the Washington drama is a rise in the debt ceiling with a small fiscal package below $2 trillion that makes "no material difference" to the US debt trajectory and fails to satisfy rating agencies. This will lead to a downgrade from AAA to AA "initially".

The damage to confidence would stifle growth for the next two quarters and open the way to fresh Fed stimulus early next year.

Mr Buiter said the chances of a "rosy scenario" where the debt ceiling is lifted, the US implements a credible bipartisan package, and there is no US downgrade, is a miniscule 1pc.

Credit Suisse sees a 50-50 chance of a US downgrade even if the debt ceiling is raised, but doubts that this would have "much effect" since regulators would not force AAA funds to sell their debt holdings.

Credit Suisse said that if the US defaults then the best safe havens are companies such as Pearson, Compass, Centrica, Basf, Siemens and Sanofi, all deemed by markets to be safer than G7 average sovereign debt, based on credit default swap prices. Switzerland's Novartis trades at 34 basis points, below the CDS of the US, Japan, Britain, France or Germany.
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newjez
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The US debt result is not looking as good as some people had hoped.

China coming off the rails too.

Europe sucks big time - manufacturing slowing down.

I love it when a plan comes together. All this adds up to Aussie housing market being under pressure.


China manufacturing growth contracts in July - HSBC
Manufacturing activity in China contracted for the first time in a year in July due to Beijing's efforts to slow the economy and weakening overseas demand, HSBC data showed on Monday.


HSBC said its survey confirmed the slowing growth momentum of China's manufacturing sector in July. The HSBC purchasing managers index fell to 49.3 in July from 50.1 in June, the British banking giant said in a statement. A reading above 50 indicates the sector is expanding, while a reading below 50 points to contraction.

The July reading, which is higher than HSBC's preliminary figure of 48.9 released last month, fell below 50 for the first time since July 2010.

"This has confirmed the slowing growth momentum of the manufacturing sector against the backdrop of sustained tightening and lacklustre external demand," HSBC chief economist Qu Hongbin said.

The official purchasing managers index released earlier Monday showed manufacturing activity slowed for the fourth straight month in July to 50.7 from 50.9 in the previous month - the lowest level in more than two years.

Both surveys showed inflationary pressures eased in July, with an official index measuring the cost of raw materials used to make products falling slightly to 56.3 in July from 56.7 in the previous month.

HSBC said "cost inflation remained muted" last month.

Chinese officials have been pulling on a variety of levers to prevent the economy from overheating and rein in inflation - which hit a three-year high of 6.4 percent in June - amid fears high prices could trigger social unrest.

In a bid to stop money flooding the system Beijing has increased the amount banks must hold in reserve several times - which cut lending 10 percent in the first half of 2011 - while interest rates have risen five times since October.
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http://www.smh.com.au/business/after-the-debt-binge-the-mother-of-all-hangovers--and-its-not-going-to-be-pretty-20110801-1i86l.html

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After the debt binge, the mother of all hangovers - and it's not going to be pretty

August 2, 2011

Global equity markets behaved according to script yesterday and rocketed ahead when news broke that the US had moved closer to a debt deal.

But scratch the surface and the compromise reached shows that times will get tough as the Obama administration takes a knife to spending to get its budget deficit under control.

After the debt binge that the global economy has fed on, it is now time for austerity - deep austerity. It is sweeping through Europe, with Greece backing a €78 billion ($101 billion) austerity plan as part of an agreement to receive a bailout, and Ireland, Portugal and Spain forced to take their own medicine. Now it is the US's turn.

As in Europe, the danger in the US is far from over. If the doomsayers are right and the US economy is on the brink of recession, then severe cuts will tip it into recession.

But it is a bullet the US has to bite, or face defaulting on debt repayments, which would have happened if it had not reached a compromise.

The news a deal had been reached pushed the Australian market 1.7 per cent higher. The Nikkei gained 1.3 per cent. Other markets are expected to play catch-up.

The Aussie dollar surged as well, as did crude oil prices, after investors endured a rollercoaster ride in recent days as they weighed the implications of a US default.

With those fears abated, gold prices, which hit record highs last week, slumped as investors tempered their demand for safe haven assets.

While the deal still has to be approved in both houses of Congress, and needs the backing of the Tea Party faction of the Republican movement, it looks like approval will be reached before tonight's deadline.

The proposed deal will raise the $US14.3 trillion ($13 trillion) debt ceiling by $US900 million, slash almost $US1 trillion from spending over the next decade and appoint a special committee to identify another $US1.5 trillion in deficit savings by the year's end.

Obama said the compromise would result in domestic spending falling to the lowest level - relative to the size of the economy - since the 1950s. It will be interesting to see what he does about taxes, which could become an issue after he earlier called for increases.

But it is worth remembering that the United States' AAA credit rating is still in danger. On July 14, the ratings agency Standard & Poor's warned there was a 50 per cent chance the rating could be cut even if an agreement was reached.

S&P will take up to 90 days to make its decision, and will weigh up whether the compromise deal includes "a credible solution to the rising US government debt burden".

Tough talk, but it is hard to imagine S&P cutting its rating as it would have profound implications across the globe, not just because it would be the first time in that the US rating would fall below the top notch, but because many pension funds have a mandate that only allows them to invest in AAA investments. The cost of borrowing would also likely increase, adding more strain to the budget.

THE well regarded Australian Securities and Investments Commission commissioner Shane Tregillis has pulled up stumps 15 months after rejoining the corporate watchdog after missing out on the top job.

Tregillis has taken up the role as chief ombudsman at the Financial Ombudsman Service (FOS), which resolves disputes between consumers and financial services providers such as banks, general insurance, financial planning stockbroking and managed funds.

FOS has had a reputation of being ineffectual, particularly when it comes to the fast and loose end of the industry, but the appointment of Tregillis, who has an intricate knowledge of the financial services market as well as market integrity rules, could be a sign that the ombudsman is ready to get serious.

Shadow brokers are proliferating. This is a potential problem as it is an area that is lightly regulated and has had a number of blow ups in recent years, including Sonray, Chartwell and Lift Capital.

And if speculation is right then another is about to hit the dust. Talk in broking circles yesterday was that a shadow broker, which BusinessDay knows the identity of, was on the brink of appointing voluntary administrators. It follows a series of problems in recent weeks including a creditor seeking to wind it up, ASIC suspending its Australian Financial Services Licence last month for a short time due to a breach, and the operator itself seeking to oust its auditor. The company didn't put any trades through yesterday, which could mean anything.
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davel
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Now that the bill has been passed, the real story begins -

US economic growth is already anaemic, what is a couple of tril in govt cutbacks going to do on top of that??

If you're a Tea Party believer, it will create space for the private sector and the economy will boom. If you're not an astronaut though, its difficult to see positive possibilties...
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newjez
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davel
2 Aug 2011, 11:11 AM
Now that the bill has been passed, the real story begins -

US economic growth is already anaemic, what is a couple of tril in govt cutbacks going to do on top of that??

If you're a Tea Party believer, it will create space for the private sector and the economy will boom. If you're not an astronaut though, its difficult to see positive possibilties...
I guess the real question is - was this 'economic crisis' just a smoke screen to deflect attention away from Rupert Murdoch's phone hacking scandel?

It seems to have worked. How powerful is this man?
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Lefty
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davel
2 Aug 2011, 11:11 AM
Now that the bill has been passed, the real story begins -

US economic growth is already anaemic, what is a couple of tril in govt cutbacks going to do on top of that??

If you're a Tea Party believer, it will create space for the private sector and the economy will boom. If you're not an astronaut though, its difficult to see positive possibilties...
It will probably lead to the US steadily deteriorating further.

If the private sector is unwilling/unable to spend enough to maintain enough demand in the economy to keep unemployment low and growth strong, then there is only one sector left - the government.

But the politcs of the US situation means that government filling the spending gap left by the private sector is all but impossible - politically and ideologically speaking. So the US is probably in for a long stagnation at best.
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newjez
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This is like a game of international tennis - all eyes on Europe. It's starting to get serious now.


Italy calls emergency meeting as eurozone crisis resurfaces
A fresh wave of eurozone panic prompted Italian authorities to call an emergency meeting on Tuesday and Spain's prime minister to delay his holiday as borrowing costs hit fresh highs.


Italy's economic and finance minister Giulio Tremonti is due to meet officials from the Bank of Italy and market regulators less than two weeks after ministers agreed a €159bn (£140bn) second bail-out for Greece.

Italy's economic and finance minister Giulio Tremonti is due to meet officials from the Bank of Italy and market regulators less than two weeks after ministers agreed a €159bn (£140bn) second bail-out for Greece.

Concerns that Spain and Italy will be the next victims of the eurozone crisis drove benchmark bond yields to all-time highs and unsettled stock markets.

Yields on 10-year Spanish government bonds rose 25 basis points to 6.426pc, while Italy's 10-year bonds also hit highs of 6.219pc -edging closer to the 7pc levels that forced its smaller Greek and Portuguese neighbours to ask for a bail-out.

With Europe's politicians on summer break, analysts said markets were renewing their fears that Europe’s aid package for Greece and other bailed-out nations was not enough to prevent wider contagion.

“This has all the features of a self-fulfilling crisis,” Harvinder Sian, a senior bond strategist at Royal Bank of Scotland, told Bloomberg. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.”

Events forced Spanish prime minister Jose Luis Rodriguez Zapatero to delay his planned three-week holiday so he could keep a closer eye on the unfloding crisis.

European stock markets were also heavily hit by the uncertainty. Italy's benchmark FTSE Mib stock index dropped 1.5pc to a 27-month low of 17,463.92, as bank shares slid.

Bourses in London, France and Germany followed Asian markets lower, sliding around 0.6pc.

Economists are now looking to see how the two countries could prevent the eurozone crisis escalating to the next level. Italy is especially viewed as 'too big to bail' because of its giant debt to GDP ratio - the highest of any eurozone country except Greece.

"Perhaps Italy will have to look at the funds available through the European Financial Stability Facility (the eurozone's bail-out fund), and maybe on Italy's part they will have to announce some further austerity measures, but of course that will take time," said Charles Jenkins, director for Western Europe at the Economist Intelligence Unit.

Italy has already pushed through a €48bn package of austerity measures in an attempt to reach a balanced budget by 2014.

Its central bank recently forecast the country's gross domestic product would grow by 1.1pc next year, less than the government's previous estimates of 1.3pc growth.
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newjez
3 Aug 2011, 02:50 AM
This is like a game of international tennis - all eyes on Europe. It's starting to get serious now.


Italy calls emergency meeting as eurozone crisis resurfaces
A fresh wave of eurozone panic prompted Italian authorities to call an emergency meeting on Tuesday and Spain's prime minister to delay his holiday as borrowing costs hit fresh highs.


Italy's economic and finance minister Giulio Tremonti is due to meet officials from the Bank of Italy and market regulators less than two weeks after ministers agreed a €159bn (£140bn) second bail-out for Greece.

Italy's economic and finance minister Giulio Tremonti is due to meet officials from the Bank of Italy and market regulators less than two weeks after ministers agreed a €159bn (£140bn) second bail-out for Greece.

Concerns that Spain and Italy will be the next victims of the eurozone crisis drove benchmark bond yields to all-time highs and unsettled stock markets.

Yields on 10-year Spanish government bonds rose 25 basis points to 6.426pc, while Italy's 10-year bonds also hit highs of 6.219pc -edging closer to the 7pc levels that forced its smaller Greek and Portuguese neighbours to ask for a bail-out.

With Europe's politicians on summer break, analysts said markets were renewing their fears that Europe’s aid package for Greece and other bailed-out nations was not enough to prevent wider contagion.

“This has all the features of a self-fulfilling crisis,” Harvinder Sian, a senior bond strategist at Royal Bank of Scotland, told Bloomberg. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.”

Events forced Spanish prime minister Jose Luis Rodriguez Zapatero to delay his planned three-week holiday so he could keep a closer eye on the unfloding crisis.

European stock markets were also heavily hit by the uncertainty. Italy's benchmark FTSE Mib stock index dropped 1.5pc to a 27-month low of 17,463.92, as bank shares slid.

Bourses in London, France and Germany followed Asian markets lower, sliding around 0.6pc.

Economists are now looking to see how the two countries could prevent the eurozone crisis escalating to the next level. Italy is especially viewed as 'too big to bail' because of its giant debt to GDP ratio - the highest of any eurozone country except Greece.

"Perhaps Italy will have to look at the funds available through the European Financial Stability Facility (the eurozone's bail-out fund), and maybe on Italy's part they will have to announce some further austerity measures, but of course that will take time," said Charles Jenkins, director for Western Europe at the Economist Intelligence Unit.

Italy has already pushed through a €48bn package of austerity measures in an attempt to reach a balanced budget by 2014.

Its central bank recently forecast the country's gross domestic product would grow by 1.1pc next year, less than the government's previous estimates of 1.3pc growth.
And there are people around who keep insisting that all the worlds woes will be solved by returning to a gold standard monetary system.

Yet this is effectively what the Eurozone countries are running. They can't issue their own currency as they see fit, they have to procure it from elsewhere, just as they would with physical gold.

Imagine millions of perfectly good and useful goods and services and the labour of millions lying involuntarily idle, simply because for one reason or another, it wasn't possible to secure enough supply of a rare, soft yellow metal in order to be able to facilitate the exchange of such a volume.
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newjez
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This is not looking good - Nasdaq down nearly 3% - there will be blood in Asia in the morning.

Has it started? Is this the beginning of the GFC2?

It's been building since May. This doesn't feel good.
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