Wednesday, February 8, 2012

Today's links

1--Vital Signs: Consumers Take on More Debt, WSJ

Excerpt: U.S. consumers ramped up borrowing in December. Consumer debt outstanding rose at a seasonally adjusted annual rate of 9.3% from November to $2.498 trillion. Behind that was a seasonally adjusted 11.8% rise in nonrevolving credit, which includes car and student loans. Revolving credit, mainly credit-card debt, climbed a seasonally adjusted 4.1% in December from the previous month. (see chart)

2--Capturing the ECB, Joseph E. Stiglitz, Project Syndicate


Excerpt: There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance.

None of these explanations is an adequate excuse for the ECB’s opposition to deep involuntary restructuring of Greece’s debt. The ECB should have insisted on more transparency – indeed, that should have been one of the main lessons of 2008. Regulators should not have allowed the banks to speculate as they did; if anything, they should have required them to buy insurance – and then insisted on restructuring in a way that ensured that the insurance paid off.

There is, moreover, little evidence that a deep involuntary restructuring would be any more traumatic than a deep voluntary restructuring...

The ECB’s behavior should not be surprising: as we have seen elsewhere, institutions that are not democratically accountable tend to be captured by special interests. That was true before 2008; unfortunately for Europe – and for the global economy – the problem has not been adequately addressed since then.

3--Shaky Profits Threaten U.S. Stock Rally, WSJ

Excerpt: Margins Are Slipping as Cost Cutting Gets More Difficult at Already-Lean Firms...

Since the beginning of 2009, in the midst of the financial crisis, U.S. companies have been able to increase profits despite a sluggish economy, largely due to aggressive cost cuts: reducing investments, closing down plants and laying off workers.

Those efforts have enabled corporations to boost profits more than their top lines. Revenues for Standard & Poor's 500-stock index companies have risen by around 20% since the fourth quarter of 2008, but per-share profits have quintupled over that same period....

Corporate America has been running extremely lean," said Maulin Thaker, the firm's earnings analyst.

But in recent months some investors have become increasingly concerned that companies might have squeezed the last drop of profits out of cost-cutting.

"There's not a lot of fat left to cut," says Nicholas Bohnsack, strategist and partner at Strategas Research Partners.

One important indicator is flashing red: Profit margins took a tumble during the last three months of 2011, suffering their biggest quarter-to-quarter drop since the crisis. Profit margins—which measure how much of a company's sales falls to the bottom line, once costs are subtracted—are a gauge of how efficiently a company runs its operations.

In the second quarter of 2011, the profit margin for the S&P 500 companies, excluding financials and utilities, hit 8.95%, the highest since at least 2006 and up from a low of 5.77% in early 2009.

But since then, the S&P 500 profit margin has fallen back to 8.23% for the companies in the index that have reported fourth-quarter 2011 profits so far, according to Brown Brothers, which had been expecting at least 8.60%.

"Margins clearly reached an inflection point," said Barry Knapp, chief equity strategist for Barclays Capital. He said seven of the S&P 500's 10 sectors are on track for margin contraction this quarter. That's an ominous sign "because margins typically peak two to three quarters before recession."...

If margins have indeed peaked, companies will have to boost profits by increasing revenues, a tall order at a time when the global economic outlook remains tenuous. Many investors expect Europe to be mired in a recession for much of 2012 and fear a sharp slowdown in China. In the U.S., economic growth remains fragile.

If companies aren't able to sustain their profit momentum, the stock market would be deprived of a key support. So far in their earnings reports for the last quarter of 2011, the S&P 500 companies have struggled to meet even Wall Street's sharply reduced expectations. About 60% of the 277 companies in the index that have reported earnings have topped Wall Street estimates, below the average "beat" of about 70% in the first three quarters of 2011.

4--IMF Urges Beijing to Prepare Stimulus, WSJ

Excerpt: If Europe's problems turned out to be worse than expected, China should hit the fiscal gas pedal harder. In that case, "China should respond with a significant fiscal package" of about 3% of GDP, the IMF said, including reductions in consumption taxes and new subsidies for consumer-goods purchases and for corporate investments in pollution-control equipment.

However, the IMF warned that Beijing should execute any fresh stimulus through its budget rather than the banking system. China used a four trillion yuan, or about $635 billion, stimulus package in 2008 to help blunt the impact of the financial crisis, in large part through bank lending. Economists now worry China's response to new economic threats could be hobbled if a significant slowdown in growth leads to bad debt on the balance sheets of China's major state-controlled banks....

A number of economists within the government and in the private sector say spending could help reduce China's reliance on monetary stimulus and help the government transition to a more consumer-driven economy.

As previously reported, the IMF forecast that China's growth rate, which stood at 9.2% last year, will decelerate to 8.2% in 2012. The IMF expects the world's No. 2 economy to gather speed next year and grow at 8.8%.

Still, China is especially vulnerable to a downturn in Europe and slow growth in the U.S., which together account for nearly half of China's exports. A sharp decline in growth in those markets could reduce Chinese growth by four percentage points below IMF projections, the fund said, unless China were to roll out a big stimulus plan.

A stimulus plan of around 3% of GDP, spread over 2012-13, would limit the decline in anticipated growth to about one percentage point lower than the IMF forecasts.

5--Francois Hollande will spark next euro crisis, Marketwatch

Excerpt: In the upcoming French presidential election, the Socialist candidate Francois Hollande is virtually certain to take power from the incumbent, Nicolas Sarkozy.

The Merkozy double act that has been managing the euro-zone crisis will suddenly become the Merllande or the Hokel, or whatever the wags of the bond markets decide to call it. But Hollande’s only executive experience is eight years as mayor of the tiny town of Tulle.

As president, he will be a catastrophe for the European economy. He has no experience of running anything, he is pushing an old-fashioned borrow-and-spend policy, he will have a poisonous relationship with Germany’s Angela Merkel, and he has shown no sign of understanding the scale of structural change France needs.

As he takes charge, the euro /quotes/zigman/4867933/sampled EURUSD -0.07% may be entering a summer of maximum danger....

With a first round in April, and a second in early May, Hollande seems a near-certainty to be the next president. The latest polls show the Socialist candidate beating Sarkozy by 45% to 30% in the first round, with the rest of the votes going to the centrist Francois Bayrou and the far-right, anti-euro candidate Marine Le Pen. In the runoff, the polls show Hollande winning by 15 to 20 points....

Hollande has pledged himself to renegotiating the new fiscal treaty that Merkel has just imposed on the rest of Europe, demanding strict adherence to balanced budgets over the medium term — a decision that almost certainly means the treaty will not be passed. A strong Franco-German alliance has been the key to keeping the euro together so far, but these two will hate each other.

Thirdly, Hollande has pledged himself to an old-fashioned borrow-and-spend program. What’s on the agenda? An extra 60,000 teachers, at a cost of 20 billion euros. Another 150,000 state-aided jobs. Higher taxes on the rich, and a financial transactions tax on the banks (although surprisingly, banking is a relatively successful French industry). A reduction in the retirement age from 62 to 60, when every other developed country has decided that longer life expectancy means people need to work longer as well. France just lost its AAA rating. But it doesn’t look like anyone told Hollande yet.

Finally, France faces huge structural challenges. Public spending is now 56% of gross domestic product, a level at which it is impossible for a country to grow. Its trade deficit has grown to 2.7% of GDP, even though it ran a surplus before joining the euro. It has steadily lost competitiveness against Germany, with wages that rise steadily higher, while productivity stagnates. But Hollande is hardly the man to work out how to restore that.

6--Greek Premier Pushes Party Leaders on Bailout Deal, Bloomberg

Excerpt: Greek Prime Minister Lucas Papademos is set to negotiate with leaders of the political parties supporting his caretaker government after he missed another deadline to secure a second aid package.

Papademos will meet with the chiefs in Athens today after delaying the meeting for a second time in as many days while Greek officials and international creditors haggle over the terms. The talks are scheduled for 3 p.m. local time, his office said. He held an unscheduled meeting late last night with the so-called troika, comprising the European Commission, the European Central Bank and the International Monetary Fund, to put the final touches on terms required for a 130 billion-euro ($172 billion) rescue package.

Yesterday’s delay was yet another hitch in completing a package that’s been on the table since July. The Greek government, facing a 14.5 billion-euro bond payment on March 20, is struggling to arrange financing to avert a collapse of the economy, risking a new round of contagion in the euro area.

“The situation is getting more problematic for Greece day by day,” Michael Meister, the deputy floor leader and finance spokesman in parliament for Chancellor Angela Merkel’s party, said today in a telephone interview. “A day wasted in failing to tackle Greece’s administrative, budget and competitive problems is a bad day.” Greeks need to reform “not for Brussels, Berlin or the IMF, but for their own sake.”...

While the prime minister and party chiefs have agreed to make further cuts this year equal to 1.5 percent of gross domestic product, they have yet to close gaps over measures demanded by creditors for the rescue. Unions, which struck yesterday, have derided the conditions as “blackmail.”...

Efforts to win a second bailout from the troika have hung in the balance over the past five days as lenders demand officials sign up to measures ranging from a cut in the minimum wage, lower pensions and immediate layoffs for as many as 15,000 state employees.

Merkel, speaking in Berlin late yesterday at an event on Europe’s future, said the impact of a Greek exit from the euro would be “incalculable,” and restated her determination to keep Greece in the single currency region.

“I don’t want Greece to leave the euro and therefore the question doesn’t arise,” Merkel said. “I won’t take part in any effort to push Greece out of the euro. It would have incalculable consequences.”

Even so, the chancellor, who heads Europe’s biggest economy and the biggest contributor to euro-area bailouts, said there is “no way around” Greece carrying out reforms. Greece is in a “very complicated situation,” she said.....

The troika argues that lower wage costs and pension cuts are among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.

Antonis Samaras, the head of the second-biggest party, New Democracy, has indicated he will oppose measures that will deepen the country’s downturn. George Karatzaferis, the head of Laos, one of the three supporting Papademos, said he would seek assurances that the measures would lead the country out of the crisis.

Guarantees from Greek leaders such as Samaras, who is ahead in opinion polls, are key to securing the funds. International lenders want assurances that whoever wins the next election will stick to pledges made now to receive financing.

Samaras’s party has 31 percent support from voters, according to a Public Issue poll, compared with 8 percent for the socialist Pasok party, which is the biggest party in the current parliament. The survey of 1,002 Greeks showed a growing number of Greeks wanting elections immediately and waning support both for Papademos and the parties that back him.

7--Greece default closer amid warnings of “social explosion”, WSWS

Excerpt: Leaders of the political parties comprising the Greek coalition government will meet the premier, Lucas Papademos, later today to give him their reply to demands for sweeping austerity measures in return for a further €130 billion in bailout loans.

If agreement to the demands, imposed by the so-called troika—the European Commission, European Central Bank and International Monetary Fund—is not forthcoming, Greece could default on its loans as early as next month.

Speaking after extensive talks with Papademos on Sunday, leaders of the three government parties said they had not accepted demands for the cuts.

The measures are believed to include a 25 percent cut in the minimum private sector wage and a 35 percent reduction in supplementary pensions. In addition, 100 state-controlled enterprises could be closed, leading to immediate jobs losses and the sacking of 150,000 public sector workers by 2015.

While no final agreement has been reached, Papademos said the coalition partners had agreed to some “basic issues,” including spending cuts this year equivalent to 1.5 percentage points of gross domestic product, or about €3 billion.

Clearly fearful of the political consequences, however, members of the coalition are voicing opposition over the extent of the latest “troika” demands.

Emerging from the talks, Antonis Samaras, leader of the centre-right New Democracy Party, said: “They’re asking for more recession than the country can take.” Samaras warned that the wage cuts would deepen the slump which has already lasted for five years.

George Karatzaferis, the leader of the right-wing Laos party, the junior partner in the coalition, was the most explicit on the possible consequences. “I am not going to contribute to a revolution that will humiliate us and that will burn Europe,” he said.

Last week, the Laos party leader warned of a “social explosion” in Greece as a result of the cuts. In a letter to European Commission President Jose Manuel Barroso, he said the next round of austerity measures would cause an economic collapse and social unrest “of a kind that Europe has not seen for decades.”

Karatzaferis added: “Reform cannot happen at gunpoint, especially when it requires the participation of the complex structure of an entire society. It is a time bomb for the entire western world.”

Socialist Party Finance Minister Evangelos Venizelos is trying to get agreement on the cuts on the basis that the alternative—bankruptcy—would be worse. “Yes, it is terrible to be forced to cut pensions and wages, but what we are trying to avoid is indescribable,” he said in response to criticism of the proposed measures.

The cut in the minimum wage would see a reduction from about $1,000 per month to $750, approximately the same level as in Portugal. This will have a devastating impact on wide layers of the population in conditions where consumer prices are relatively high. Petrol, for example, retails for about $8 a gallon. Unemployment in Greece is already 20 percent, businesses are closing every day and homelessness is on the rise.

The cut in wages is being promoted on the grounds that it is needed to improve competitiveness. These claims are disputed, however. “The effect on competitiveness is very small but the social impact is huge,” economist Yannis Stournaras told the New York Times.

The latest cuts are part of a €4.4 billion package of reductions that the “troika” insists must be met at once. Unless agreement is reached, Greece will move one step closure to default on a €14.5 billion bond repayment due on March 20. A default could trigger a crisis throughout the euro zone, with contagion spreading almost immediately to Portugal and Italy. Despite the injection of funds into the financial system by the European Central Bank, which calmed market turbulence in January, interest rates on Portuguese bonds have remained at or near record levels.

The deepening Greek crisis has been accompanied by warnings from European officials of the disastrous consequences of a default. Such statements are partly aimed at placing the maximum possible pressure on the parties in the Greek government. They are also a reflection of the fear that the financial crisis could rapidly spiral out of control.

The head of the euro zone group of finance ministers, Jean-Claude Juncker, told Der Spiegel that the possibility of bankruptcy should encourage Athens to “get muscles” when it came to implementing the austerity measures.

In addition to the crisis over long-term measures, the issue of how much of a “haircut” bondholders should take on their investments as part of Greece’s debt restructuring has yet to be settled.

Deutsche Bank Chief Executive Josef Ackerman warned at the weekend that failure to agree on a voluntary debt rescheduling for Greece would open “a new Pandora’s box” in the euro zone crisis. “We are in a make or break situation,” he said.

A default by Greece would not only reverberate throughout Europe, but could have a major impact on American banks and financial institutions which, while not heavily involved in direct loans, face large payouts on credit default swaps if bankruptcy is declared.

The depth of the austerity measures being demanded is a warning to the working class of social devastation that will be imposed by the financial aristocracy in Europe and internationally.

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