October 28, 2021

Cries of Betrayal as Detroit Plans to Cut Pensions

Now there is a new worry: Detroit wants to cut the pensions it pays retirees like Ms. Killebrew, who now receives about $1,900 a month.

“It’s been life on a roller coaster,” Ms. Killebrew said, explaining that even if she could find a new job at her age, there would be no one to take care of her husband. “You don’t sleep well. You think about whether you’re going to be able to make it. Right now, you don’t really know.”

Detroit’s pension shortfall accounts for about $3.5 billion of the $18 billion in debts that led the city to file for bankruptcy last week. How it handles this problem — of not enough money set aside to pay the pensions it has promised its workers — is being closely watched by other cities with fiscal troubles.

Kevyn D. Orr, the city’s emergency manager, has called for “significant cuts” to the pensions of current retirees. His plan is being fought vigorously by unions that point out that pensions are protected by Michigan’s Constitution, which calls them a contractual obligation that “shall not be diminished or impaired.”

Gov. Rick Snyder of Michigan, a Republican who appointed Mr. Orr, signed off on the bankruptcy strategy for the once-mighty city, which has seen its tax base and services erode sharply in recent years. But the governor said he worried about Detroit’s 21,000 municipal retirees.

“You’ve got to have great empathy for them,” Mr. Snyder said in an interview. “These are hard-working people that are in retirement now — they’re on fixed incomes, most of them — and you look at this and say, ‘This is a very difficult situation.’ ”

On Sunday, Mr. Snyder fended off the notion that the city needed a federal bailout. “It’s not about just putting more money in a situation,” the governor said on “Face the Nation” on CBS. “It’s about better services to citizens again. It’s about accountable government.”

Many retirees see the plan to cut their pensions as a betrayal, saying that they kept their end of a deal but that the city is now reneging. Retired city workers, police officers and 911 operators said in interviews that the promise of reliable retirement income had helped draw them to work for the City of Detroit in the first place, even if they sometimes had to accept smaller salaries or work nights or weekends.

“Does Detroit have a problem?” asked William Shine, 76, a retired police sergeant. “Absolutely. Did I create it? I don’t think so. They made me some promises, and I made them some promises. I kept my promises. They’re not going to keep theirs.”

Vera Proctor, 63, who retired in 2010 after 39 years as a 911 operator and supervisor, said she worried that at her age and with her poor health, it would be difficult to find a new job to make up for any reductions to her pension payments.

“Where’s the nearest street corner where I can sell bottles of water?” Ms. Proctor asked wryly. “That’s what it’s going to come down to. We’re not going to have anything.”

Officials overseeing Detroit’s finances have called for reducing — not eliminating — pension payments to retirees, but have not said how big those reductions might be. They emphasized that they were trying to spread the pain of bankruptcy evenly.

When the small city of Central Falls, R.I., declared bankruptcy in 2011, a state law gave bondholders preferential treatment — effectively protecting investors even as the city’s retirees saw their pension benefits slashed by up to 55 percent in some cases.

Detroit, by contrast, wants to spread the losses to investors as well as pensioners, and hopes to find cheaper ways to cover retirees through the subsidized health exchanges being created by President Obama’s health care law.

Bill Nowling, a spokesman for Mr. Orr, said the emergency manager’s restructuring plan would treat bondholders the same as retirees in bankruptcy.

Steven Yaccino reported from Detroit, and Michael Cooper from New York. Erica Goode and Monica Davey contributed reporting from Detroit, and Mary Williams Walsh from New York.

Article source: http://www.nytimes.com/2013/07/22/us/cries-of-betrayal-as-detroit-plans-to-cut-pensions.html?partner=rss&emc=rss

News Analysis: Effect of Cyprus Exit From Euro Seen as Limited

But for the broader financial system in Europe, the losses resulting from a Cypriot banking collapse and the country’s return to its former currency would be minimal compared with the havoc that Greece would have created had it not been bailed out.

And that, economists and investors contend, is why Germany and its Dutch stalking horse, Jeroen Dijsselbloem, the president of the Eurogroup of finance ministers, were so adamant that depositors — large and small, Cypriot and Russian — contribute 5.8 billion euros ($7.5 billion) toward the 10 billion euro bailout of Cyprus’s largest banks.

Greece may well have been too big to fail last year, but Cyprus, which creates less than one-half percent of the euro zone’s gross domestic product, is certainly not.

From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.

As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that a signal must be sent that citizens and investors must start accepting losses for the euro zone to survive in the long run.

“There have been too many bailouts in Europe; it’s time to remove the air bags,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “This is not a Lehman,” he said, referring to the disastrous chain reaction touched off by the collapse of Lehman Brothers in 2008.

Eric Dor is a French economist who has studied the mechanics of how a country might remove itself from the monetary union. By his calculations, the euro zone — through its central banking system and its national banks — has just 27 billion euros in outstanding credit exposure to Cyprus. That is a mere rounding error compared with the euro zone G.D.P. of 9.4 trillion euros.

Estimates of the potential cost if Greece had been forced into a disorderly euro exit have ranged from 200 billion euros to 800 billion euros, given the larger exposure that the European Central Bank and European banks had to the country.

“This explains why Germany and others are putting so much pressure on Cyprus,” said Mr. Dor, head of research at the Iéseg School of Management in Lille, France. “They are saying we can take the risk of pushing Cyprus out of the euro zone, and that Europe can take the losses without going broke.”

Mr. Dor notes that the current euro zonewide system of insuring bank deposits up to 100,000 euros was put in place after the financial panic that followed the Lehman collapse. Those deposits are supposed to be insured by national governments.

So when the president of Cyprus admitted this week that his country did not have the money to backstop the 30 billion euros of guaranteed bank deposits — a figure greater than the Cypriot economy itself — a crucial bond of trust between a government and its citizens was snapped.

“It is the first time ever that the leader of a euro zone country has admitted that he could not afford to pay the guarantee,” Mr. Dor said.

A hasty expulsion from the euro zone would make the savings of the Cypriot people all the more evanescent, once they are converted back into Cypriot pounds, the currency Cyprus used before adopting the euro in 2007.

Article source: http://www.nytimes.com/2013/03/22/business/global/a-cyprexit-might-not-hurt-euro-zone-much.html?partner=rss&emc=rss

News Analysis: A ‘Cyprexit’ Might Not Hurt Euro Zone Much

A messy Cyprus exit from the euro currency union would have a devastating effect on the country’s citizens, who are among the most indebted in the euro zone. And for European unity and diplomacy, the Cyprus debacle has already been at least a short-term disaster.

But for the broader financial system in Europe, the losses resulting from a Cypriot banking collapse and the country’s return to its own currency would be minimal compared with the havoc that Greece would have created had it not been bailed out and instead returned to the drachma last year.

And that, economists and investors contend, is precisely why Germany and its Dutch stalking horse, Jeroen Dijsselbloem, the uncompromising leader of Eurogroup of finance ministers were so adamant that depositors — large and small, Cypriot and Russian — contribute €5.8 billion, or $7.5 billion, toward the €10 billion bailout of Cyprus’s largest banks.

Greece may well have been too big to fail last year, but Cyprus, which creates less than one-half percent of the euro zone’s gross domestic product, is certainly not.

From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.

As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that — especially in the wake of the latest Greek rescue — a signal must be sent that for the euro zone to survive in the long run, citizens and investors must start accepting losses.

“There have been too many bailouts in Europe; it’s time to remove the air bags,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund based in London. “This is not a Lehman,” he said, referring to the disastrous chain reaction triggered by the collapse of Lehman Brothers in 2008.

With Cyprus, “the links are psychological, not mechanical,” Mr. Jen said. “In Greece the links were both mechanical and psychological.”

Eric Dor is a French economist who has studied in detail the mechanics of how a country might remove itself from monetary union. By his calculations, the euro zone — via its central banking system and its national banks — has just €27 billion in outstanding credit exposure to Cyprus. That is a mere rounding error compared with the overall euro zone G.D.P. of €9.4 trillion.

Estimates of the potential cost if Greece had been forced into a disorderly euro exit have ranged from €200 billion to €800 billion, given the much larger exposure that the E.C.B. and European banks had to the country.

“This explains why Germany and others are putting so much pressure on Cyprus,” said Mr. Dor, head of research at the Iéseg School of Management in Lille, France. “They are saying we can take the risk of pushing Cyprus out of the euro zone, and that Europe can take the losses without going broke.”

Mr. Dor notes that the current euro zone-wide system of insuring bank deposits up to €100,000 was put in place following the financial panic that followed the Lehman collapse. Those deposits are supposed to be insured by national governments.

So when the president of Cyprus admitted this week that his country did not have the funds to backstop the €30 billion of guaranteed bank deposits — a figure greater than the Cypriot economy itself — a crucial bond of trust between a government and its citizens was snapped.

“It is the first time ever that the leader of a euro zone country has admitted that he could not afford to pay the guarantee,” Mr. Dor said.

By that reckoning, whatever grievances the Cypriot people have toward the euro zone finance ministers might be better directed toward their own national leaders who have failed to protect their savings.

Article source: http://www.nytimes.com/2013/03/22/business/global/a-cyprexit-might-not-hurt-euro-zone-much.html?partner=rss&emc=rss

Bucks: A Financial Plan for Misbehaving Lottery Winners

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

First, congratulations! You’ve just won more money than most of us could ever imagine.

And you’re probably thinking that your financial problems are over. That’s true – as long as you avoid costly mistakes.

Let’s be clear: Your financial life is no longer about spreadsheets and managing money. Now it’s about managing behavior.

You see, I have a pretty good idea of what will happen to you. It’s not a secret. On average, 90 percent of lottery winners go through their winnings in five years or less.

And I know there’s a temptation to think you’re different from everyone else. All those other lottery winners? They were foolish.

Which brings us to the first mistake you need to avoid: Overconfidence.

Think about what happens when you ask a room full of men how many of them believe they are above-average drivers. You’ll probably see over 60 percent of the hands go up. It’s just not possible for 60 percent of the men in a room to be above-average drivers, unless you’re at a Nascar convention.

Recognize that there’s a high probability that your life after winning the lottery will turn out like other average lottery winners. You will indeed be broke and back at work within five years, unless you do something different.

So what can you do differently?

After splitting this particular jackpot between two winners and accounting for a generous estimate of federal and state taxes, let’s say you end up with around $55 million each.

Go ahead and do anything you want with $5 million of that. Want to pay off debts or take trips? Fine. Want to invest in your brother-in-law’s “sure thing?” Go for it. Or, maybe you want to start your own business. It requires some capital and might also be a little risky. Don’t worry about it.

But take that other $50 million and put it in good, safe investments and spend only the interest. Let’s say, hypothetically, you earn only 1 percent a year on those investments — you’ll still have $500,000 a year before taxes to spend for the rest of your life. And the money will still be there for your children and their children (if you’ve also taught them how to behave).

You’re going to be tempted to do crazy or even stupid things with that money. That’s why you have to put something in place to make sure you stick to that commitment. Maybe you can have a lawyer or a financial adviser put that money into something like a blind trust. The goal is to put one or two steps between you and your ability to spend the principal.

Another idea is to find someone you trust, like that lawyer, financial adviser or even just a committee of three of your best friends. Then make a commitment that you’ll talk to them before ever touching the money.

One idea I like a lot: Write a letter to yourself or record a video that describes how much you love your life now and how you never want to go back to work again. Tell yourself that you’re going to be different than all those other lottery winners. Then, put that video or letter some place safe and pull it out at least once a year, or anytime you think about spending the money.

With these guardrails in place, you’re increasing your odds that you don’t become like the other lottery winners who blew through their money. It’s pretty simple, really. You’ve got to put something between you and stupid.

And this advice doesn’t just apply to lottery winners. The rules apply to anyone with sudden money, like people who receive an inheritance, sell a business or even get a tax refund they didn’t expect. Think about your latest windfall. Can you even remember where it went?

Probably not. In fact, there’s actually research that says we tend to spend a windfall more than once. Need a new television? Hey, we’ll spend the tax refund. Need a vacation? That tax refund will help cover it!

It’s easy to make too big a deal of windfalls, regardless of their size. But when we receive any sort of unexpected money, we’ve got to put something in place to control our behavior and make sure we don’t lose that money.

So again, congratulations on your new wealth. If you can manage your behavior, you won’t have to worry about managing money ever again.

Article source: http://bucks.blogs.nytimes.com/2012/12/03/a-financial-plan-for-misbehaving-lottery-winners/?partner=rss&emc=rss

Hedge Funds May Sue Greece if It Tries to Force Loss

The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts.

The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so.

Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation — and in Europe, property rights are human rights.

The bond restructuring is a critical element for Greece to receive its latest bailout from the international community. As part of that 130 billion euro ($165.5 billion) rescue, Greece is looking to cut its debt by 100 billion euros through 2014 by forcing its bankers to accept a 50 percent loss on new bonds that they receive in a debt exchange.

According to one senior government official involved in the negotiations, Greece will present an offer to creditors this week that includes an interest rate or coupon on new bonds received in exchange for the old bonds that is less than the 4 percent private creditors have been pushing for — and they will be forced to accept it whether they like it or not.

“This is crunch time for us. The time for niceties has expired,” said the person, who was not authorized to talk publicly. “These guys will have to accept everything.”

The surprise collapse last week of the talks in Athens raised the prospect that Greece might not receive a crucial 30 billion euro payment and might miss a make-or-break 14.5 billion euro bond payment on March 20 — throwing the country into default and jeopardizing its membership in the euro zone.

Talks between the two sides picked back up on Wednesday evening in Athens when Charles Dallara of the Institute of International Finance, who represents private sector bondholders, met with Prime Minister Lucas Papademos of Greece and his deputies.

While both sides have tried to adopt a conciliatory tone, the threat of a disorderly default and the spread of contagion to other vulnerable countries like Portugal remains pronounced.

“In my opinion, it is unlikely that this is the last restructuring we go through in Europe,” said Hans Humes, a veteran of numerous debt restructurings and the president and chief executive of Greylock Capital, the only hedge fund on the private sector steering committee, which is taking the lead in the Greek negotiations.

“The private sector has come a long way. We hope that the other parties agree that it is more constructive to reach a voluntary agreement than the alternative.”

At the root of the dispute is a growing insistence on the part of Germany and the International Monetary Fund that as Greece’s economy continues to collapse, its debt — now about 140 percent of its gross domestic product — needs to be reduced as rapidly as possible.

Those two powerful actors — which control the purse strings for current and future Greek bailouts — have pressured Greece to adopt a more aggressive tone toward its creditors. As a result, Greece has demanded that bondholders accept not only a 50 percent loss on their new bonds but also a lower interest rate on them. That is a tough pill for investors to swallow, given the already steep losses they face, and one that would be likely to increase the cumulative haircut to between 60 and 70 percent.

The lower interest rate would help Greece by reducing the punitive amounts of interest it pays on its debt, making it easier to cut its budget deficit.

To increase Greece’s leverage, the country’s negotiators have said they could attach collective action clauses to the outstanding bonds, a step that would give them the legal right to saddle all bondholders with a loss. This would particularly be aimed at the so-called free riders — speculators who have said they will not agree to a haircut and are betting that when Greece receives its aid bundle in March, their bonds will be repaid in full.

Article source: http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html?partner=rss&emc=rss

Euro Zone Leaders Weigh New Budget Rules

Investors clearly are not persuaded by the intermittent efforts that Europe has made to protect major countries like Italy and Spain from the crisis, which started in smaller, more fragile economies like those of Greece and Ireland. The leaders of Germany, the mainstay of the euro zone, want a new treaty that would stop euro nations from posing a threat by running large deficits or amassing crushing debts, but France, the zone’s second-largest economy, believes that amending treaties would take too long to help now.

France, Germany and Italy are ready to agree on new rules and encourage more coordination of economic and fiscal policy, the French budget minister and government spokesman, Valérie Pécresse, said Sunday.

The idea would be “a governance with real regulators and real sanctions, that would give real confidence,” she told the television channel Canal Plus. “Germany, France and Italy want to be the motor of a Europe that is much more integrated, much more solid and with regulatory mechanisms that are virtuous, that don’t allow a cheater, so that there is no one who can exempt themselves from the rules that are set.”

When members make a complete commitment to the new rules, Ms. Pécresse added, “then European institutions will be able to play their full role,” including the central bank. The agreement would include as many as possible of the 17 European Union nations that use the euro, she said.

Still, it is unclear whether such an agreement would persuade the markets that the European Union, the central bank and fellow euro zone nations stand fully behind Italy and Spain, which both have new governments striving for austerity and structural reform. Meanwhile, signs are accumulating that the crisis is continuing to spread, including a weak German bond sale on Wednesday and a contraction in interbank lending in Europe.

Chancellor Angela Merkel of Germany has firmly opposed two ideas for solving the crisis: an expanded role for the central bank and new bonds to be issued jointly by the euro zone countries, known as eurobonds. But Germany has become increasingly isolated in its stand on the bank, as fellow deficit-hawk nations have wavered. The Finnish finance minister, Jutta Urpilainen, told reporters in Berlin on Friday that “if there is nothing else left, then we can think about strengthening the role of the E.C.B,” and the chancellor of Austria, Werner Faymann, told the APA news agency on Saturday that the bank could play “a stronger role.”

France agrees with Germany that eurobonds are a bad idea now, because they would put too much burden on the euro zone countries whose credit remains sound, though they may make sense once new budget strictures are in place and members are coordinating their policies more tightly. But the government of President Nicolas Sarkozy is frustrated with Mrs. Merkel’s refusal to allow the supposedly independent central bank to act as a lender of last resort, to lend to the new European bailout fund or to intervene more forcefully to hold down sovereign bond rates.

Bypassing the European Union treaty process may bring an outcry from European Union members like Britain that do not use the euro and that have warned against widening the gap between countries inside and outside the currency union. And there are worries that the euro zone itself will divide into a German-led fiscal-rectitude bloc and everyone else. A headline in the German newspaper Welt am Sonntag declared: “Merkel and Sarkozy Found a Club of Super-Europeans,” after what they described as secret talks over bilateral deals.

“There are no secret German-French negotiations,” a German government official said Sunday. “There is the previously announced, intense cooperation between Germany and France on proposals for limited treaty changes as the necessary political answer to the debt crisis.”

Though to some degree they go against the principles of solidarity and consensus in the 27-nation European Union, intergovernmental agreements among some but not all members have always been an option. A precedent is the Schengen agreement, allowing visa-free travel; it now covers 22 of the 27 members of the union and three nonmember nations.

Germany believes that the long-term answer to the crisis is to create “more Europe” and more federalism. That may mean setting up a common treasury and finance ministry for the euro nations, central intervention into national budgets, and more uniform pension and tax policies. Such a transformation would require a new treaty, which would take at least three years to draft and ratify, most analysts agree.

An intergovernmental agreement among the main countries of the euro zone could be reached much faster, and unlike a treaty, would not involve holding any national referendums.

Article source: http://feeds.nytimes.com/click.phdo?i=b9b94d084abfe7a121dc5e274379db51

Harrisburg’s Bankruptcy Filing Is Rejected by Judge

The ruling, by Judge Mary D. France, was a blow to the Council. A majority of its members had fought Harrisburg’s mayor, Linda D. Thompson, for months, saying she was seeking too little from creditors. A failed trash incinerator project has saddled the city with about $310 million in debt, more than quadruple its annual budget.

Brad Koplinski, a Council member who had voted to file for bankruptcy, said he and his colleagues were trying to decide whether to appeal Wednesday’s decision.

“We’re disappointed,” Mr. Koplinski said by telephone from Harrisburg. “Bankruptcy is the only thing that would guarantee a solution with shared pain.”

The City Council had tried to muscle in on the process of fixing the city’s chaotic finances, which had been run by Mayor Thompson, who is backed by the state and Gov. Tom Corbett. The Council had argued that filing for bankruptcy would be fairer to the city’s taxpayers, as it would give the city more control over how it pays off its creditors.

Council members said that creditors should have to write down part of their debts, in addition to the city’s selling off its assets to pay creditors. The highly unusual filing ran against the plan the state had enacted, which essentially designates the city as financially distressed and places its finances under state control. On Wednesday, the Council lost that fight.

The ruling in federal bankruptcy court in Harrisburg paved the way for Gov. Tom Corbett to move ahead with plans to take over the city’s finances by placing it in the hands of a state-appointed financial receiver.

Harrisburg is one of several municipalities that have filed for bankruptcy protection this year, along with Jefferson County, Ala., and Central Falls, R.I.

The state filed a petition on Nov. 18 in the Commonwealth Court of Pennsylvania laying out its arguments for why the city meets the criteria for receivership. A hearing in that case is scheduled for Dec. 1. David Unkovic, a Pennsylvania lawyer, was named in the petition as the receiver.

Kelli Roberts, a spokeswoman for Governor Corbett, said the state welcomed the ruling. She said Judge France affirmed the position of state officials that the city did not get the state or the mayor to sign off on the bankruptcy filing.

The ruling on Wednesday had little effect on the city’s current financial situation. It dismissed a stay against claims from creditors, but creditors had not been actively pursuing those claims in court, so there was no immediate effect.

“Most people predicted the judge would rule this way,” said William W. Kannel, a partner at Mintz Levin in Boston, who is an expert on bankruptcy law. “It’s very clear, states are entitled to control their municipalities’ access into Chapter 9 bankruptcy.”

Article source: http://feeds.nytimes.com/click.phdo?i=626acc7bca5fff8bd9d5dc2bd43ad7db

High & Low Finance: How Greece Could Escape the Euro

So why not get out now?

One answer is the same one that was given when Greece’s cheating was revealed: Legally, there is no way out. The euro was designed to be the Roach Motel of currencies. Once you enter, you can never leave. There is no provision for departure.

But, of course, there is a way out. It would be messy, and perhaps disastrous. But no one is going to send an army to Athens to force it to keep the euro.

If Greece were to follow the example set by Argentina nearly a decade ago, it would simply convert its debts from euros into its old currency, the drachma, at the old exchange rate of 340.75 drachmas to one euro. It could also convert euro currency in the country at the same rate. So if you owned one million euros in Greek bonds, they would be converted to bonds with a face value of 340.75 million drachmas.

With a printing press available, Greece could meet those obligations. Of course the drachma would soon be worth a lot less — perhaps 1,000 to the euro. So bondholders would have lost two-thirds of face value. Greece might do O.K., but for reasons we will see, the move could be devastating to the rest of Europe.

In 2002, Argentina’s currency, the peso, was officially tied to the dollar at a one-to-one parity. There was a “currency board” that was supposed to assure the tie could never be broken, and it had worked for a decade. But Argentine inflation had outpaced that of the United States, and the peso was seriously overvalued.

In early 2002, a new Argentine government ended the peg and did much more. It defaulted, and it required its citizens to do the same. If you had a dollar deposit in an Argentine bank, it became a peso deposit, soon to be worth about 30 United States cents to the peso. That was true regardless of who owned the bank. If you wanted to get dollars back from your Citibank deposit in Buenos Aires, you were out of luck.

Argentina was cut off from international credit. Imports plunged and the country entered a deep — but relatively brief — recession. The peso lost two-thirds of its value within a few months. Argentina was sued by everyone in sight.

But devaluation worked, as it often does. Argentine exports became competitive thanks to lower costs, and the economy rebounded. There are international judgments still outstanding against the country, but when it comes to sovereign states it can be easier to get judgments than to collect on them. Diplomatic assets are off limits — no one can grab the Argentine Embassy in Washington — and monetary assets can be kept with the Bank for International Settlements in Switzerland, which will not allow them to be seized.

Argentina’s decision to abrogate private contracts was a crucial part of the package, said John Hempton, an Australian hedge fund manager who has studied what happened. “The Argentine banks all had lots of U.S. dollar funding,” he said. If they had to repay those dollars, while their assets were devalued, “then they would all have uncontrolled defaults, a true disaster, and the country would lose its institutions.”

The Argentine experience was not pretty, but it may well be more attractive than the seemingly endless rounds of austerity, strikes and missed fiscal targets that seem to be leaving the Greek economy in a permanent recession. From the Greek perspective, the course could seem attractive.

There are some important differences, of course. Argentina had a currency that still existed, and there were peso notes. There are no drachma notes floating around Athens or anywhere else. If the drachma suddenly became the legal currency again, currency would be needed. Printing new notes in secret would be a challenge.

Would the bond switch be legal? For some bonds, clearly it would not be. British courts “would enter judgments saying Greece owes x billion euros,” said Whitney Debevoise, a lawyer with Arnold Porter, “but would then have to find assets.”

But British courts would have jurisdiction only over the minority of bonds issued under British law. Most Greek bonds were issued under Greek law, and presumably Greece can change that law to legalize what it does. Greek bonds already trade for less than 40 percent of face value, so it is possible that their actual value might not decline all that much, assuming investors believed the drachmas would be repaid.

Greece would suddenly be forced to run a balanced budget, or to borrow from its own citizens, whose savings would have lost much, if not most, of their value.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=f415e2d9f82500afe61b90ebd856e55d

Economix Blog: Casey B. Mulligan: When Times Get Tough, the Elderly Work

Casey B. Mulligan is an economics professor at the University of Chicago.

The elderly are one group whose work hours now exceed what they were before the recession began. This pattern is most evident in the most depressed regions of the United States.

Today’s Economist

Perspectives from expert contributors.

The recession has varied in different regions of the United States. In some areas – including Arizona, California, Florida, Hawaii, and Nevada – housing prices surged more dramatically in the early part of the 2000s than they did in the rest of America, and their economies fell hard when housing prices collapsed.

One view is that such areas experienced a deeper recession because their banks became overwhelmed with defaults and were unable or unwilling to make new loans to consumers and businesses. Without those new loans, demand collapsed more than it did nationwide, and jobs were especially difficult to find, even while people living in the area were especially eager to work.

Absent demand, just about all workers will have a tough time retaining a job or finding a new one.

Another view is that old loans are the problem, not newer ones. A significant fraction of households and businesses are typically so burdened with the debts they accumulated during the housing surge that they have little incentive to produce and work, because their creditors would get most, if not all, of the fruits of their labor.

In contrast to the no-new-loans-and-no-demand theory, old loans do not affect all workers; some are less burdened by debt. The elderly may fall in this category, because they are more likely to have saved money over their lifetimes and to have paid off their mortgages. Although some elderly working for debt-burdened employers may have lost jobs, on average the elderly in these areas should be working more because they have better incentives to do so.

The chart below compares 2007-10 changes in work hours for two areas –- the regions where housing prices rose and fell the most, on the left side of the chart, and the rest of the United States on the right. For middle-aged and younger people (blue bars), hours worked fell 12 percent in the large cycle regions and about 9 percent in the rest of the United States.

Hours worked by elderly people increased in both regions.

As I noted a few weeks ago, the average American elderly person worked more in 2010 than did the average elderly person before the recession began, even while work hours were down sharply for middle-aged and young people. The chart above shows that this is true even in the states that generally experienced the largest collapse during this recession.

Demand is not the only factor driving employment patterns.

Article source: http://feeds.nytimes.com/click.phdo?i=a6b1f9ed4fb70bf8c2554795faa4e60c

Investors Scramble to Prepare for the Unthinkable

Some debt traders said they were looking for evidence of progress toward a deal before markets open on Monday.

“This press conference was a pretty significant moment,” said Ajay Rajadhyaksha, head of United States fixed-income strategy at Barclays Capital, referring to President Obama’s announcement after markets had closed for the week that talks had broken down. “I would be pretty surprised if investors did not exhibit a greater degree of worry when we walk in Monday morning than they have shown so far.”

Investors also are increasingly worried that even if a deal is reached, the rating agency Standard Poor’s may reconsider its certification of government securities as an ultrasafe investment. The company has said there is a 50 percent chance it will downgrade the rating in the next three months, depending on whether the federal government adopts a long-term plan to pay down its debts. Such a move could send interest rates higher for a broad range of government and consumer loans.

Some of the options still on the table to raise the debt ceiling, involving smaller packages of spending cuts, might not be sufficient to satisfy S. P. or Moody’s and Fitch, two other rating agencies that have expressed concern over the debt negotiations.

“I think the market still has confidence that the debt ceiling will be raised in time,” said Terry Belton, head of fixed-income strategy at JPMorgan Chase. “The focus is on downgrade risk.”

A downgrade would raise the government’s borrowing costs, exacerbating its financial problems, because investors generally demand higher interest rates to hold riskier debt. Consumers and businesses also would face higher borrowing costs because the rates on Treasuries are widely used as a benchmark to set the rates on other kinds of loans.

The government cannot borrow more than $14.3 trillion, the current debt ceiling, a limit that it reached in May. Since then, however, Treasury has continued to repay securities as they come due and issue new debt in their place, a process known as rolling over debt. Officials are concerned that it will become harder to find investors willing to participate in the weekly auctions, and that the remaining buyers will begin to demand higher interest rates.

Over the last few weeks staff members in the Office of Debt Management, a part of the Treasury, have been phoning the desks of the 20 major Wall Street dealers for Treasury bonds to assess investor demand for coming debt auctions, and to seek assurances that the dealers themselves will buy any surplus.

About $87 billion in federal debt comes due on Aug. 4, and roughly $410 billion comes due throughout the rest of August. If interest rates climbed even a tenth of a percentage point, the added cost to roll over the debt would be an extra $500 million a year.

Wall Street is also worried about the effect that a ratings downgrade would have on various assets that are implicitly backed by the federal government, including agency mortgages or municipal bonds.

That, coupled with the myriad problems that failing to raise the debt ceiling could cause, prompted Wall Street’s main lobbying arm, the Securities and Investment Management Association, to organize an advocacy campaign earlier this week. “Urge the administration and Congress to raise the debt ceiling and protect our economy from additional strain,” it said in an e-mail circulated to member firms.

The heightened uncertainty is prompting financial firms and other companies to stockpile cash. Walter Todd of Greenwood Capital, a wealth management firm in Greenwood, S.C., said that so far he had advised his own worried customers not to do the same, operating under the assumption that a deal would be reached. But after the talks fell apart on Friday, Mr. Todd said he and his partners began to discuss a more pessimistic possibility.

“If nothing changes, if the headline out of the weekend is that the talks have broken down, I think you’ll start to see assets reacting to that,” Mr. Todd said. “It blows my mind that it’s come to this. It’s incredibly irresponsible what’s happening, on the part of both sides.”

Other investors said they did not view the opening of markets on Monday as a critical deadline, as they still expected a deal, but that each passing day would put a little more stress on the markets. Bond prices fluctuated last week on the news from Washington, falling Thursday after S. P.’s latest warning, then rising on Friday amid renewed talk that a deal was imminent.

“Every day without an agreement increases the risk of default,” said Ward McCarthy, chief financial economist at Jefferies Company. “Congress likes to go to the edge of the precipice with the debt ceiling, and we are headed toward the edge again.”

Binyamin Appelbaum reported from Washington, and Eric Dash from New York. Louise Story contributed reporting from New York.

Article source: http://www.nytimes.com/2011/07/24/business/investors-weigh-options-after-debt-talks-stall.html?partner=rss&emc=rss