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In Auctions, Reassurance For Europe

January 13, 2012 by Leave a Comment

And while the central bank left its benchmark interest rate unchanged at 1 percent Thursday, the bank’s president, Mario Draghi, indicated he was prepared to take further steps to ease credit, if necessary.

The Italian Treasury found brisk demand Thursday in selling 8.5 billion euros ($10.9 billion) of 12-month bills at an interest rate of 2.735 percent. It was the lowest interest rate Italy has been able to sell one-year debt at since an auction in June — and less than half the 5.952 percent Italy had to offer at the last sale, in early December.

In Madrid, the Spanish Treasury said Thursday it sold a total of 10 billion euros ($12.8 billion) of bonds — twice the amount it had set as a target — with yields down from previous auctions. For example, $4.3 billion in three-year notes were sold at a yield of 3.384 percent, compared with 5.187 percent in December for three-year notes.

Both Spain and Italy have been under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

Both countries’ longer-term debt yields, which reflect higher risk and uncertainty, remain relatively high. Another bellwether of the crisis comes Friday, when Italy tries to auction more than $9 billion in longer-term debt. The question remains whether enough investors will bid on that debt and feel confident enough in Italy’s fiscal health to justify declining yields.

The interest rate on Italy’s 10-year debt has dipped to 6.6 percent from 7.1 percent earlier this week, though it is still unsustainably higher than the 4 percent to 5 percent it traded at for much of the last two years.

But Thursday’s solid auctions were the latest sign that shorter-term government debt has become more attractive to commercial banks and other investors since the central bank last month began a program of offering low-interest three-year loans to commercial banks in the euro currency region.

While a large portion of that money has been used simply to pay off other lenders, it has clearly eased pressures on the banks and helped free up cheap money the banks can use to purchase sovereign debt.

“We do think this decision has prevented a credit contraction that would have been much more serious,” Mr. Draghi said Thursday.

He said the central bank would continue to support commercial banks in the euro zone and predicted that the bank’s next refinancing operation, in February, would attract even more lenders.

The central bank, based in Frankfurt, left its benchmark interest rate unchanged Thursday, after having cut rates by a quarter point twice since Mr. Draghi became its president at the beginning of November. The rate cuts have been meant to help slow an economic downturn in the 17 countries in the European Union that use the euro. Mr. Draghi said the bank was pausing in its rate cutting amid what it called “tentative” signs of increased economic stability. But he indicated the central bank was prepared to take further steps, if necessary.

Analysts took Mr. Draghi’s comments as a clear sign that the central bank stands ready to reduce its benchmark interest rate below the already historic low of 1 percent to counter a recession.

“He kept the door open,” said Jacques Cailloux, the chief European economist for Royal Bank of Scotland. “He made a very clear statement that the E.C.B. stands ready to act.”

Earlier Thursday, in London, the Bank of England kept its benchmark interest rate at a record low of 0.5 percent as the British government’s tough fiscal measures and the crisis in the euro zone exacerbated economic problems.

The Bank of England also voted to continue with its existing bond purchasing program of £275 billion ($422 billion). Many economists expect the British central bank to expand the asset-buying program at its next meeting in February in a bid to pump more capital into the economy.

Some economists expect the central bank to move as early as next month for a rate cut. But others predict that the governing council will hold off until March, when a fresh growth forecast for the euro zone is to be issued.

Reporting was contributed by Julia Werdigier from London, David Jolly from Paris and Raphael Minder from Madrid.

Article source: http://www.nytimes.com/2012/01/13/business/global/bank-of-england-holds-main-rate-steady.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Modest Expectations Urged on Deficit Cuts

August 25, 2011 by Leave a Comment

The report from the nonpartisan budget office underscores the high stakes for a special 12-member Congressional committee created to figure out by December how to achieve up to $1.5 trillion of the $2.4 trillion in maximum 10-year savings promised by the deal.

It comes as Mr. Obama and Democrats, like many economists, are calling for a mix of larger long-term deficit reduction measures with immediate additional job creation measures. While the latter would add to deficits in the short term, proponents argue that they would prevent another recession and avoid the associated costs in lost revenues and safety-net spending. But Republicans oppose any stimulus measures or long-term increases in tax revenues.

The budget office, in its annual summer snapshot of the nation’s fiscal health, projected annual deficits from the 2012 fiscal year, which begins Oct. 1, through 2021 totaling $3.5 trillion. That is just over half of the $6.7 trillion shortfall it forecast in March.

About two-thirds of the difference reflected projected savings from the bipartisan deficit deal; the rest was due to technical and economic revisions. The lower deficits would leave the nation’s accumulated public debt at $14.5 trillion in 2021, or 61 percent of the gross domestic product — a level that many economists consider the maximum level of debt that is sustainable in a growing economy.

But such projections “understate the budgetary challenges facing the federal government in the coming years,” Douglas Elmendorf, director of the budget office, wrote on its Web site.

Annual deficits would be $5 trillion higher for the decade, or a total of $8.5 trillion, assuming the White House and Congress continue several policies as in years past — keeping the lower income-tax rates of 2001 and 2003, which already were extended by two years last December; adjusting the alternative minimum tax annually so it does not hit middle-class taxpayers, and blocking a mandated cut in Medicare payments to doctors. The result would be deficits averaging 4.3 percent of gross domestic product instead of 1.8 percent, the budget office said; economists generally say annual deficits should not exceed 3 percent of gross domestic product.

The higher deficits would bring total public debt through 2021 to 82 percent of gross domestic product rather than 61 percent, higher than in any year since 1948 when debt peaked after World War II.

Mr. Obama and Congressional Democrats have called for ending after 2012 the Bush-era rates on annual taxable income above $250,000 for couples and $200,000 for individuals. That would save about $1 trillion over the decade, including interest. But they want to extend a one-year payroll tax cut, some business tax cuts and emergency unemployment aid.

The budget office as expected said the deficit for the current fiscal year, which ends Sept. 30, would be $1.3 trillion.

At 8.5 percent of gross domestic product, it will be the third consecutive deficit exceeding $1 trillion; as a percentage of the economy, the three deficits spanning the end of the George W. Bush administration and the Obama administration are the largest of the past 65 years.

That “stems in part from the long shadow cast on the U.S. economy by the financial crisis and the recent recession,” Mr. Elmendorf wrote. “Although economic output began to expand again two years ago, the pace of the recovery has been slow, and the economy remains in a severe slump.”

The current deficit could be the peak, but only for the short term. The budget office repeated a longstanding warning: While annual shortfalls will decline through the decade — presuming the economy recovers — deficits will climb after 2021 to unsupportable levels as the aging population and rising health care costs drive up spending for Medicare and Medicaid.

Each party seized on the latest report to buttress its position, evidence of the partisan divide facing the special House and Senate budget committee.

“The C.B.O. outlook underscores the need for the joint committee to propose a plan to help put America back to work, coupled with a blueprint to reduce the long-term deficit,” said Representative Chris Van Hollen of Maryland, a Democratic member of the panel.

Representative Eric Cantor, Republican of Virginia and the House majority leader, said, “Despite a nearly trillion dollar so-called stimulus program, this administration’s policies have resulted in anemic growth, record unemployment and underemployment, and millions of Americans remain out of work.” All the Democrats offer, he added, “is lofty rhetoric, tax hikes and more of the same stimulus spending.”

Article source: http://feeds.nytimes.com/click.phdo?i=1f1ef0054a34a539efc740ae4671cde7

Filed Under: Business News Tagged With: , ,

S.&P. Downgrades Japan’s Outlook to Negative

April 27, 2011 by Leave a Comment

HONG KONG — Nearly seven weeks after a powerful earthquake and tsunami hit northeastern Japan, the Japanese economy is still struggling to return to normal, and the country faces reconstruction costs that could severely strain its already stretched public finances.

The latest warning about the country’s fiscal health came on Wednesday, when Standard Poor’s lowered its outlook on Japan to negative, saying that the massive costs of rebuilding the devastated areas — which it estimated as high as ¥50 trillion, or $612.6 billion — could lead to a lower credit rating unless the government steps up its efforts to keep high government debt levels from rising much further.

The ratings agency kept its long-term rating for the Japanese economy, which it had downgraded in January, unchanged at AA-. But its now negative outlook highlighted the huge uncertainty that overshadows the country’s recovery from the March 11 disaster.

Nearly 26,000 people are missing or have died, tens of thousands of buildings were flattened and hundreds of thousands of cars destroyed. The flow of components and spare parts needed by manufacturers was thrown into disarray, and damage to the Fukushima Daiichi nuclear power station severely disrupted power supplies in key parts of the country.

Expected power shortfalls during the hot summer months could set back businesses in many parts of the country for months to come, analysts say.

Statements from Sharp, the electronics manufacturer, and All Nippon Airways, one of the country’s biggest airlines, on Wednesday shed light on the pain and uncertainties felt by many Japanese companies.

“It is extremely difficult at this time to reasonably estimate the impact of the earthquake on our financial results, which will be broad across our entire business activities from production to sales,” Sharp said in a statement. ANA said a sharp fall in air traffic after the quake had cost it ¥19 billion in revenue.

Earlier this week, Canon lowered its annual profit and sales forecasts, while Toyota has said it will take months until production at its plants can return to pre-quake levels.

Consumer spending, meanwhile, also has been badly hurt by the disaster. The Japanese government reported Wednesday that retail sales in March slumped 8.5 percent from the same period a year earlier, the biggest drop in 13 years, and a larger fall than analysts had expected.

A large rebound in consumption “looks unlikely in the near future,” Masamichi Adachi, an economist at JPMorgan Chase in Tokyo, commented in a research note. “The concern on the development at the Fukushima Daiichi nuclear plant is expected to persist for while, and consumers appear to be reluctant to spend.”

All of this has bludgeoned an economy that was already burdened by feeble growth, deflation, an aging population and high government debt levels before the earthquake struck on March 11.

Standard Poor’s estimated Wednesday that Japan’s reconstruction costs could be in the range of ¥20 trillion and ¥50 trillion.

The extent of environmental contamination in northeastern Japan remains unknown, and although supply chains are expected to normalize, some manufacturers could decide to move a greater share of production offshore

In addition, the massive disruption to manufacturers’ supply chains could undermine the dominant positions that many companies have in their sectors, said Takahira Ogawa, ratings analyst at Standard Poor’s, in a conference call.

Although the disasters are unlikely to hurt the economy’s long-term growth potential, that potential is in any case muted. Growth in the medium term is unlikely to rise much above an annual rate of 1 percent, S.P. said.

The ratings agency forecast that net general government debt could reach 145 percent of gross domestic product in the business year that ends in March 2014 — up from its previous projection of 137 percent.

The vast majority of Japanese government debt is held by domestic investors, and despite its other problems, Japan continues to run a current account surplus. Analysts say that this means any debt rating downgrade would be unlikely to badly undermine the Japanese debt markets or sharply raise government borrowing costs.

Indeed, Japanese government bond yields were little changed after the ratings agency’s move, while the Nikkei 225 stock index ended the day 1.4 percent higher.

Still, government officials on Wednesday rushed to reassure investors about the state of Japan’s public finances.

“The government at present is doing its utmost for disaster relief and reconstruction. It is important to pursue fiscal reform at the same time,” Finance Minister Yoshihiko Noda said, according to Reuters. “Fiscal reform is something we cannot avoid.”

However, Japan’s options for stimulating the economy without raising more debt in the long run are limited.

The central bank cannot lower interest rates, which are already near zero, meaning that the support measures it has announced in the wake of the earthquake have focused on facilitating lending and pouring liquidity into the financial markets. Economists say that at the Bank of Japan’s policy meeting on Thursday the central bank may further beef up a program to purchase government and corporate bonds.

Parliament, meanwhile, is expected to pass a supplementary budget of ¥4 trillion. Debate on a much larger secondary budget covering full-scale rebuilding has started, said Mr. Adachi, the JPMorgan economist, but there is as yet little clarity about how big this will be and how it will be financed.

Meanwhile, the downgraded outlook for Japan again spotlighted the huge debt levels at many of the world’s developed economies. Government debt in Japan, the United States and several European countries — notably Greece, Portugal, Spain and Ireland — have soared in recent years, intensifying the pressure on policy makers to introduce painful fiscal reforms.

Last week, S.P. issued a similar warning to the United States, saying that the country’s AAA rating was under threat because of budget deficits and the lack of clarity about how the government intends to reduce the debt burden.

Article source: http://www.nytimes.com/2011/04/28/business/global/28yen.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Disabled, but Looking for Work

April 7, 2011 by Leave a Comment

Though he has been collecting disability checks for three years, Mr. Howard, who is just 36, desperately wants to work, recalling dredging for gravel rather fondly and repairing cell towers less fondly.

“It makes me feel like I am doing something,” said Mr. Howard, a burly man with a honey-colored goatee. “Instead of just being a bum, pretty much.”

Programs intended to steer people with more moderate disabilities back into jobs have managed to take only a small sliver of beneficiaries off the Social Security rolls.

Yet, at a time when employers are struggling to create spots for the 13.5 million people actively looking for jobs, helping people like Mr. Howard find employment — or keeping them working in the first place — is becoming increasingly important to the nation’s fiscal health.

For the last five years, Social Security has paid out more in benefits to disabled workers than it has taken in from payroll taxes. Government actuaries forecast that the disability trust fund will run out of money by 2018.

About 8.2 million people collected disabled worker benefits totaling $115 billion last year, up from 5 million a decade earlier. About one in 21 Americans from age 25 to 64 receive the benefit, according to an analysis of Social Security data by Prof. Mark G. Duggan, an economist at the University of Maryland, compared with one in 30 a little over a decade ago. In Mr. Howard’s home state of Arkansas, the figure is one in 12, among the highest in the nation.

Along with monthly checks that are based on the worker’s earnings history, beneficiaries generally qualify for Medicare — otherwise reserved for those over 65 — two years after being admitted to the disability rolls.

There are several reasons for the increase in beneficiaries. Baby boomers are hitting the age when health starts to deteriorate, and more people are claiming back and other muscular-skeletal ailments and mental illnesses than claimed those as disabilities a generation ago. Lawyers who solicit clients on television and on the Internet probably play a role. And administrative law judges say pressure to process cases sometimes leads to more disability claims being accepted.

But given the difficult job market, some economists say they believe that an increasing number of people rely on disability benefits as a kind of shadow safety net.

The program was designed to help workers who are “permanently and totally disabled,” and administration officials say that it is an important lifeline for many people who simply cannot work at all.

But Social Security officials can take into consideration a claimant’s age, skills and ability to retrain when determining eligibility. So one question is: How many of these beneficiaries could work, given the right services and workplace accommodations? Social Security officials say relatively few.

Nicole Maestas, an economist at the Rand Corporation, has examined Social Security data with fellow economist Kathleen J. Mullen, and concluded that in the absence of benefits, about 18 percent of recipients could work and earn at least $12,000 a year, the threshold at which benefits are suspended.

Other economists say that even among those denied benefits, a majority fail to go back to work, in part because of medical problems and a lack of marketable skills.

“In an atmosphere in which there is a concern about fiscal problems, it’s always easy to point the finger at groups and say, ‘These people should be working,’ ” said Prof. John Bound, an economist at the University of Michigan, “exaggerating the degree to which the disability insurance program is broken.”

Even if claimants have more ambiguous medical cases, once they are granted disability benefits, they generally continue to collect. Of the 567,395 medical reviews conducted on beneficiaries in 2009, Social Security expects less than 1 percent to leave because of improved health.

The benefits have no expiration date, like the current 99-week limit for collecting unemployment. And because many people spend years appealing denials and building their medical case before being granted benefits, their skills often atrophy and gaps open on their résumés, making it more difficult for them to get back to work.

Beneficiaries, who also fear losing health care coverage, may view their checks as birds in the hand. “Even if you’re taking just $800 or $900 a month, that’s better than nothing,” said Bruce Growick, an associate professor of rehabilitation services at Ohio State University.

Shortly after Mr. Howard’s benefit checks started arriving, he received a four-by-six-inch card from Social Security informing him of services to help him return to work. Confused by the bureaucratic language and fearing the loss of medical coverage, he discarded it. When he called the local office, he said a staff member did not seem to know what his rights were or what help was available.

“I thought it is just better to get what we are getting,” he said.

Article source: http://www.nytimes.com/2011/04/07/business/economy/07disabled.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Bucks: Things to Do on Your Financial Tuneup Day

March 27, 2011 by Leave a Comment

In this weekend’s Your Money column, I write about my third annual financial tuneup, where I try to cross off as many things as possible on my list of undone money tasks.

For those of you looking for ideas for what to do on your own fiscal health day, you can consult our nifty interactive checklist or look at reader comments and suggestions from two years ago.

Does anybody have anything new to do? What did you do to tune up your financial life recently, and what’s left on your to-do list?

Article source: http://feeds.nytimes.com/click.phdo?i=a2ed1f95d64b2539c8ebe9ce633974ee

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