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Greek and Cyprus Credit Ratings Cut

July 28, 2011 by Leave a Comment

S. P.’s rating for Greece, already in junk territory, was reduced two notches to CC, with a negative outlook. In a statement, S. P. said that the proposed restructuring of Greek government debt as part of a second bailout was a selective default — a prospect that ratings agencies had warned about when the plan was being discussed.

S. P. also said that despite the new aid package agreed on last week, there was still a good chance that Greece would default on its debt.

Under the second bailout, banks and other private investors are to contribute about 50 billion euros ($72 billion), by swapping their existing debt for new bonds.

“Standard Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” the agency said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policy makers, it is likely to result in losses for commercial creditors.”

Moody’s cut Cyprus’s long-term government bond rating two levels to Baa1 — still an investment grade — from A2. It assigned a negative outlook, signaling that the next move may be another downgrade, and cut its short-term ratings.

An explosion at a naval base this month badly damaged the Vasilikos power plant in Cyprus. That has caused blackouts, and Moody’s said that the power shortage was likely to hurt the economy, which it now expects to stagnate this year and expand only 1 percent next year.

Moody’s also cited the “increasingly fractious domestic political climate” and “the material risk that at least some Cypriot banks will require state support over the medium term as a result of their exposure to Greece.”

Cypriot bonds fell on Wednesday and Italian and Spanish bonds dropped as investors became increasingly concerned whether the package assembled by European leaders to help Greece’s troubled finances and restore confidence in the euro zone would be enough. The yield on Cyprus’s 10-year bond rose 0.13 percentage points to 10.043 percent.

Banks in Cyprus continue to hold “substantial” Greek debt and will be affected in the case of a sovereign debt default, Moody’s said.

Moody’s also said it was concerned about the large role the banking sector plays in the Cypriot economy. Bank assets amount to about 600 percent of gross domestic product in Cyprus, excluding foreign bank subsidiaries, it said.

The July 11 explosion that destroyed the plant and killed 13 people also rattled the government. Costas Papacostas, the defense minister, and Lt. Gen. Petros Tsalikidis, chief of the national guard, resigned amid criticism that they had failed to take steps that could have prevented the accident. Some 98 containers of explosives were left stacked for more than two years in an open field near the power station.

The political friction might make it harder for the center-left government, which does not have an absolute majority in Parliament, to push through spending cuts and privatizations announced on July 1.

“This adverse development increases implementation risk to the government’s plans, many of which will require not just cross-party support but also acceptance by the trade unions,” Moody’s said.

On Tuesday, a number of parties accused the government of backtracking on reforms, Reuters reported from Nicosia.

Cyprus, which adopted the euro on Jan. 1, 2008, is seeking to bring down a budget deficit that hit 5.3 percent of gross domestic product last year.

“The Cypriot banks have been considered safer than the Greek banks and have received a lot of the deposit outflow from Greece,” Panicos Demetriades, a professor at the University of Leicester in England, said, adding that the banks have large businesses in Russia. “However, the problem is that a small country like Cyprus cannot afford to support such a large banking system if it gets into trouble.”

Article source: http://www.nytimes.com/2011/07/28/business/global/moodys-downgrades-cyprus-over-economic-woes.html?partner=rss&emc=rss

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House Panel Plans to Question Rating Agencies Over Downgrade Threat to U.S.

July 27, 2011 by Leave a Comment

A House Financial Services oversight panel on Wednesday will give lawmakers their first chance to ask senior executives at Standard Poor’s and Moody’s about their judgments in putting the government on notice that its top-flight credit rating is at risk.

The hearing had been called to discuss the impact of new financial regulations on the major rating agencies. But as the possibility of a credit downgrade becomes increasingly likely, representatives from both political parties are expected to take a closer look at the record of those issuing the reviews of United States government debt.

Representative Randy Neugebauer, a Texas Republican who leads the Financial Services Oversight Subcommittee, said he believed the agencies were acting properly to raise questions about the nation’s debt problem. Still, he added, the financial crisis showed that the rating agencies did not always get it right.

“A lot of folks feel the agencies failed,” he said. “Their credibility is somewhat in question.”

Representative Barney Frank, the ranking member of the House Financial Services Committee, who is a Massachusetts Democrat, said he believed the rating agencies had made flawed assessments on ratings of state and municipal debt over the years. Now, he said, he thinks they may be misjudging Congress’s political will to rein in the deficit.

“I don’t think that in judging how the political system is going to respond, going forward, that they have any credibility,” he said. “They are terrible at that.”

Wednesday’s hearing will be the latest act in a week of political drama over an agreement to raise the debt ceiling and lower the federal deficit. Even as Democrat and Republicans work on competing plans to get the nation’s financial house in order, the judgments of the major credit rating agencies hang over any deal. Moody’s, Standard Poor’s and Fitch Ratings have all warned that they might lower the American credit rating. S. P. has gone a step further, suggesting that the uncertain political climate could lead it to take action by mid-October even with an agreement to cut the deficit.

S. P. has indicated that the Obama administration and the Congress will need a “credible plan” to cut the deficit by $4 trillion to keep its top rating.

Few believe that such a plan is now possible. Critics of the rating agencies charge that they are inserting themselves in a highly charged political debate.

“For them to weigh in with such specificity of what needs to happen seems to be outside their mission and charter,” said Joshua Rosner, a managing director at Graham Fisher Company, a research firm. “It feels much more like a rating agency consulting business than a ratings business.”

Ratings can be useful in helping investors evaluate the performance of complex and lightly traded securities. But, ever since the financial crisis, the ratings agencies’ own track record has come under attack.

After the mortgage collapse, critics charged that the agencies gave sterling ratings to complex securities based on absurdly optimistic models, only to later watch them falter. They also pointed to the agencies’ unusual compensation structure, in which issuers pay for the ratings of corporate bonds. Critics likened that arrangement to a food critic who is paid by the restaurants he reviews. A Congressional panel examining the causes of the crisis called the ratings agencies “essential cogs in the wheel of financial destruction.”

The agencies’ record on sovereign ratings has been better, but European politicians found them to be useful whipping boys.

Now, Washington is registering its complaints. Within the Obama administration, officials are frustrated with what they see as the rating agencies — especially S. P. — moving the financial goalposts. Last October, an S. P. commentary suggested that the American government would have three to five years to get its fiscal house in order. By April, when the ratings agency changed its credit outlook on the United States to negative, it suggested that the government needed a plan in place by 2013.

Then, on July 14, S. P. warned that if the government did not agree to a deficit reduction package of about $4 trillion, it could be downgraded in the next 90 days.

The agency said on Tuesday that the changing timetables reflected the belief that if lawmakers in Washington could not reach a deal now, they were unlikely to do so in the future. 

“What’s changed is the political gridlock,” said David Beers, its global head of sovereign ratings, in an e-mail. “Even now, it’s an open question as to whether or when Congress and the administration can agree on fiscal measures that will stabilize the upward trajectory of the U.S. government debt burden.”

A spokesman for the rating agency added that it would refrain from commenting on the “many varying proposals” that had arisen in the current debate.

Meanwhile, there is the topic that the hearing was originally called to address. As part of the Dodd-Frank Act, lawmakers pushed for new rules that stopped requiring the use of ratings, forcing investors to do their own analysis instead. But banks and their regulators have fiercely resisted the rules, saying that putting that rule into effect is difficult.

On Monday, for example, the Federal Reserve identified 46 instances in its bank regulation that required investors to rely on credit ratings, but it did not map out how it would adapt those rules so that ratings were no longer necessary. The Securities and Exchange Commission also proposed Tuesday that mortgage bond and other issuers make certain certifications in an effort to reduce investors’ reliance on ratings.

Lawmakers said they planned to question ratings agency officials, financial regulators and other experts on efforts to de-emphasize the importance of credit ratings in the year since the Dodd-Frank rules were passed.

Article source: http://feeds.nytimes.com/click.phdo?i=2170b5d58a239488c38db408cba2925d

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China Urges U.S. to Protect Creditors by Raising Debt

July 14, 2011 by Leave a Comment

Officials in Washington are locked in tense negotiations over the government debt limit, which the Obama administration says must be raised from its current level of $14.29 trillion to allow the government to pay its daily bills and service any debt coming due.

Any failure to pay due debt would effectively amount to a default, which, however brief, could shake confidence in the American economy and severely unsettle global financial markets.

Late Wednesday, Moody’s Investors Service sharpened attention on such an outcome by warning that it might cut its top-notch rating for the United States. Moody’s cited a “rising possibility” that no deal would be reached before the United States government’s borrowing authority hits its limit on Aug. 2.

On Thursday, Ben S. Bernanke, the chairman of the Federal Reserve, repeated a warning that a “huge financial calamity” would occur if President Obama and the Republicans could not agree on a budget deal that allowed the debt ceiling to be raised.

In testimony before a Senate committee, Mr. Bernanke said that lawmakers should consider the fragile state of the economy in their negotiations.

“Not passing — not increasing the debt ceiling and allowing — certainly allowing default on the debt would have very real consequences for average Americans,” Mr. Bernanke said, noting that interest and mortgage rates would jump.

“That would also increase the federal deficit because we have to pay the interest on the debt as part of our spending,” he said.

The authorities in Beijing added their voice of concern Thursday, though in more muted terms.

“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said in response to questions about the Moody’s report.

The comments echoed those made by officials in Beijing in April, when Standard Poor’s lowered its outlook on the United States from stable to negative because of the country’s high budget deficit and rising government indebtedness.

China holds more than $1 trillion in United States Treasury securities, making it highly sensitive to any developments that could lower the value of those holdings.

During his testimony before Congress, Mr. Bernanke told lawmakers that if the United States did not raise its debt limit, the government would need to prioritize its financial obligations by paying its creditors first and stopping benefits like Social Security payments.

“The assumption is that as long as possible, the Treasury would want to try to make payments on the principal and interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy,” he told lawmakers.

Robin Marshall, director of investment management at Smith Williamson in London, said the rating agencies were acting aggressively toward indebted sovereign nations, having failed to foresee the subprime mortgage crisis in the United States, which foreshadowed the current debt explosion.

The current situation, he said, is creating headaches for governments — worried either about where to invest or whether they themselves will be downgraded and face higher financing costs — as well as for investors.

”It raises the question of what is the relevant benchmark?” Mr. Marshall said. “If the U.S. is downgraded, what about Germany, with its increasing liabilities? If you are looking solely at debt-to-G.D.P. levels, you may just be left with countries like Norway, Switzerland and Singapore as triple-A’s.”

In Europe, reaction was muted on Thursday to the threat to the ratings as the European authorities struggled to contain their own debt crisis, which this week threatened to spread from Greece, Ireland and Portugal and engulf the larger economies of Italy and Spain.

European officials have responded to successive downgrades of euro zone ratings — Ireland, for example, was downgraded to junk status this week by Moody’s — by criticizing the grip that the ratings agencies have over investors.

Bettina Wassener reported from Hong Kong and Matthew Saltmarsh from Paris.

Article source: http://www.nytimes.com/2011/07/15/business/global/china-urges-us-to-take-responsible-action-on-debt.html?partner=rss&emc=rss

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Economix: Will the United States Default?

July 7, 2011 by Leave a Comment

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Three views emerge on whether the United States will default on its government debts, as I talk to people on and close to Capitol Hill. The first is, hopefully yes, and this August offers a good opportunity. The second is, possibly yes, but this would be bad, so we need some form of fiscal austerity. The third is, under no circumstances, and any talk of a need for austerity is a hoax.

The first view is mistaken. The second view hides a dangerous contradiction. And the third view borders on complacency. So how can we find our way to fiscal responsibility? We need tax reform.

People in the first camp think that the United States government has become too big and the only way to cut it down to size is to limit its ability to borrow. A constitutional amendment to limit the size of government relative to gross domestic product or to require a balanced budget could work, but experience suggests a future Congress could always find a way to escape any such constraint.

A big part of the underlying problem is that the world has a taste for American assets. Foreign citizens and many of their governments like the ability to buy and sell dollars in liquid markets, and they are particularly fond of American government debt as a place to keep their rainy-day money. Private investors and government wealth managers around the world wring their hands about the trajectory of deficits and debt in the United States – and then buy more of that debt.

So, in one interpretation of this view, the only way to remove the ability of the federal government to borrow is to miss some payments, thus convincing the financial markets that the government is not really a good credit risk.

Such thinking is part of the strategy to threaten not to extend the debt ceiling for the federal government. That would lead to defaulting on some debt. But default, as the Greeks are finding out, is an all-or-nothing enterprise. Doing just a little default is not possible,  because, in the view of the market, your country pays its debt in full and on time, or it does not.

The consequences of a United States default would be severe, not just for world markets but also for the ability of every American business and household to borrow, lend or make just about any financial decision. So threatening to blow up the current government debt system is not a credible threat, unless you sincerely believe that this would be a good thing ultimately for all concerned.

From the hearing I attended in June of the Joint Economic Committee of Congress, my distinct impression is that some leading legislators are leaning this way. In coming votes on raising the debt ceiling, we’ll find out how many members of the House support such views.

The second camp represents the mainstream of American politics today. Genuinely worried about future insolvency, people on both sides of the aisle propose ways to cut future budget deficits. On the Republican side, people prefer spending cuts; the Democrats would rather raise taxes.

Everyone in this camp fully intends to allow the government to pay its debts. Yet increasingly it appears that some people on the left and the right might be attracted to the idea of a government shutdown, at least for a while, assuming that they can effectively blame the other side.

The point is not to change the nature of government or its ability to borrow, but rather to position ideas and personalities for the 2012 presidential election. The government will be able to make its debt payments, but only if it does not pay wages or keep some nonessential parts of government functioning.

The good part of this thinking is that mainstream politicians are increasingly talking about budget constraints and the need to live within our means. The bad news is that these same people extended the so-called Bush tax cuts at the end of 2010, at a stroke not just refusing to deal with the deficit but also significantly contributing to what they now say is our most pressing problem.

The net impact on debt in 2018, relative to what it would have been otherwise, is an increase of $3 trillion. The Congressional Budget Office says in that year nearly a quarter of total outstanding federal debt will exist because these tax cuts were extended last December. (In these pages, James Kwak and I have made the case for opposing the extension.)

For both parties, the gap between rhetoric and policy actions within the mainstream is not closing. And the presidential election is unlikely to help very much. The Bush tax cuts are up for renewal in 2012; are any candidates likely to run on the platform of not extending them?

The third position is that the United States cannot default on its debts. People in this camp offer various explanations, mostly having to do with the fact that long-term interest rates are at their lowest in 50 years. Clearly someone is happy buying United States government debt.

But how long will this continue? Will foreign investors seek to shift out of dollars in the foreseeable future, perhaps because the euro becomes more appealing? And if the Federal Reserve steps in to buy whatever government paper is not wanted by private participants, this surely can become inflationary.

We have put our head into the mouth of the financial markets lion. Ask Greece, Ireland or Italy what happens when the lion’s mood changes.

You will note that none of these three views addresses tax reform, except in passing. Left and right agree that as a country we spend too much relative to our income. It would make sense, therefore, to find ways to tax consumption more and income less.

This could be done in a way that is not regressive, that does not punish people at the lower end of the income scale. Some of the most progressive tax systems in the world are based in large part on consumption taxes.

Such tax reform could support either a smaller government or a larger one. With a stronger tax base, the size of government is a good debate to have, but that issue that can be completely separated from whether our current and future deficits can be sustained.

Article source: http://feeds.nytimes.com/click.phdo?i=6d24579febeaf353d03435c1bc5a61ee

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Auditor Warns of Risks From Local Debt in China

June 27, 2011 by Leave a Comment

SHANGHAI — The head of China’s national audit office warned Monday that the country was facing growing risks because of a sharp rise in local government debt and poor controls over borrowing by investment companies set up by municipalities, provinces and other bodies.

Liu Jiayi, the top auditor in China, said Monday that at the end of last year local government debt had reached $1.7 trillion, or about 27 percent of the nation’s gross domestic product. He said better regulation was needed to manage the debt risks.

“The management of some local government financing platforms is irregular, and their profitability and ability to pay their debts is quite weak,” Mr. Liu said in a speech Monday.

The release of the report by the national auditor, who works under China’s cabinet, or State Council, comes at a time of growing worries that China’s booming economy is overheating. Beijing is now trying to rein in bank lending to moderate growth and tame inflation and property prices.

On Monday, Prime Minister Wen Jiabao, who was visiting Britain, told Hong Kong television that the economy would probably exceed its inflation target of 4 percent this year.

Some analysts say an economic slowdown could expose huge, hidden liabilities in the banking system — many of the problems tied to a $586 billion stimulus package Beijing announced in late 2008 and a huge wave of state-backed lending that took place in 2009 and 2010. Those money infusions were aimed at buffering China from the global financial crisis.

Although many economists argue that the country’s enormous stash of foreign exchange reserves helps make Beijing strong enough to cope with the local government liabilities, they also point to worrisome signs of mounting debt.

The auditor’s report on Monday was similar to a warning earlier this month by the Chinese central bank. The bank said that at the end of last year, local government liabilities were as high as 30 percent of gross domestic product, or about $2.2 trillion — far higher than previous estimates.

That survey said local governments had created 10,000 investment companies to borrow money from banks, mostly to finance ambitious infrastructure projects. (China does not allow local governments to issue bonds to finance projects.)

But the national auditor’s report varied from the central bank’s in saying its survey had counted only about 6,500 local government investment companies. Analysts cited the possibility that that auditor’s survey was not as thorough as the central bank’s.

Many analysts have grown cautious about China’s economy. Some have reduced growth estimates and downgraded their ratings of Chinese banks over concerns about a coming wave of nonperforming loans associated with local government debt.

Last week, Charlene Chu, an analyst at Fitch, the credit ratings agency, said China’s growth had recently become too reliant on loose credit and that “easy money” was helping fuel inflation and a property bubble, according to a presentation she delivered at a global banking conference in Hong Kong.

She also said there were growing risks because of a shadow banking system that had emerged beyond regulatory scrutiny in China and because of an “overextension” of loans to local governments.

“Rapid expansion of off-balance-sheet transactions is distorting bank financial statements,” she said.

Victor Shih, a professor of political science at Northwestern University in Illinois and one of the first to warn about a sharp rise in local government debt in China, said Monday that the recent surveys were useful antidotes to local government efforts to keep much of their borrowing secret from Beijing.

“It’s a significant step for them to release these numbers,” he said in a telephone interview. “But I think the problem is much, much bigger.”

Mr. Shih and other analysts say local governments create their own investment companies to borrow from state banks to finance infrastructure projects. And because much of that borrowing is done off official balance sheets, often using government land or assets as collateral, the debt can be hard to track and assess.

And often the projects, which include roads, bridges, tunnels and subway systems, do not generate enough earnings to repay the loans.

In its report Monday, the national audit office said it had found many irregular activities. For instance, many local governments were using “unreal” or illegal collateral to secure the loans, the report said, and some of the money they borrowed was funneled into the stock and property markets. At other times, the auditor said, the local governments were “overestimating the value of the collateral” — which was often tied to land values.

Article source: http://www.nytimes.com/2011/06/28/business/global/28iht-yuan28.html?partner=rss&emc=rss

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Greece’s New Finance Minister Faces Daunting Task

June 22, 2011 by Leave a Comment

But more than any other Greek politician, including perhaps the prime minister himself, Evangelos Venizelos is a Socialist party heavyweight who now stands responsible for convincing Greece, Europe and skittish investors the world over that Athens is capable of reforming the Greek economy and making good on its financial obligations.

With no growth to speak of and a government debt burden equal to 150 percent of its annual economic activity — one of the highest in the world — such a task may well be too much for any one person, regardless of his political skills.

Late Tuesday night, however, in a speech to Parliament, Mr. Venizelos took an important first step by promising structural reforms and a broad crackdown on tax evasion.

As expected, Mr. Papandreou’s reconstituted government helped solidify the Socialist party, known by the acronym Pasok. Tuesday night, it overcame the opposition of the New Democracy Party to win a desperately needed vote of confidence, 155 to 143. All Pasok members voted in favor.

Now Mr. Venizelos, 54, a constitutional lawyer with minimal economic policy-making experience, must persuade Parliament next week to pass the government’s most recent economic plan — centered largely on a 50 billion euro, or $72 billion, privatization effort. That is the requirement imposed by Europe and the International Monetary Fund to make an immediate cash payment and to allow Greece to qualify for a second batch of rescue money needed to stave off default.

More crucially, he must succeed in doing what no other politician in Greece has done before him: persuade Greeks to pay their taxes and get public sector unions to accept the shrinking of the state.

“He is a political animal and he will cut the privatization Gordian knot because he knows the law and the political tricks of how to get the job done,” said Theodore Pelagidis, an Athens-based economist and one of Mr. Venizelos’s top advisers.

Mr. Pelagidis cites Mr. Venizelos’s experience in negotiating a deal with the powerful electricity unions and his role as minister in charge of putting on the 2004 Olympics as examples of Mr. Venizelos’s ability to get things done.

That said, there is a difference between operating in Athens and Brussels, especially now.

Arriving for his first meeting with fellow European finance ministers in Luxembourg on Sunday night, Mr. Venizelos misjudged the mood, according to several European diplomats briefed on the discussions but not authorized to speak publicly.

According to one person, he seriously underestimated the frustration among his European colleagues at Greece’s failure to honor some of its previous pledges.

The new minister began by trying to explain the limitations Greece faced, a stance interpreted by some ministers as an attempt to reopen the austerity package already negotiated.

That prompted several firm responses after which Mr. Venizelos recalibrated his message, according to another diplomat. He was, however, largely sidelined when the ministers’ communiqué was drafted.

Mr. Venizelos, through a spokesman, declined to comment.

In Greece, by contrast, he is thoroughly plugged in. He was most recently defense minister and has had other Cabinet posts including culture, justice and transport — a political résumé that far exceeds that of his predecessor, George Papaconstantinou, whose rapid fall in stature within his party forced the prime minister to call on Mr. Venizelos last week.

It was in many ways a last resort. Having been turned down by Lucas Papademos, the former vice president of the European Central Bank, and several other prominent economic experts, Mr. Papandreou made his offer in a 3 a.m. phone call last Friday.

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Gold Tops $1,500 an Ounce in ‘Flight to Quality’

April 20, 2011 by Leave a Comment

PARIS — The price of gold rose above $1,500 an ounce on Wednesday for the first time ever, pushed higher by investor concerns about global inflation, government debt and turmoil in the Middle East.

Other precious metals, like silver and platinum, have also experienced a recent surge in prices on what analysts call a flight to quality, when uncertainty about the economic and political outlook pulls investors into assets that are perceived to be safest.

“We’re seeing a perfect storm for gold and silver prices,” said Robin Bhar, a senior metals analyst in London for the French bank Crédit Agricole.

The contract for May delivery of gold in New York rose as high as $1,506 a troy ounce during trading Wednesday before settling at $1,498.50, a gain of $3.90 on the day. It was the first time that gold had breached the $1,500 level.

While that represented the highest level ever in nominal terms, the real price was higher during the early 1980s, when it was well over $2,000 when adjusted for inflation. In March 2008, the nominal price of gold first broke the $1,000 level.

Silver prices also climbed Wednesday. Silver for May delivery climbed 1.2 percent to settle at $44.461 a troy ounce in New York, after rising as high as $45.40, the highest price since 1980. A troy ounce is 31.1 grams, or 1.1 ounces.

The list of factors that have supported the price of precious metals in recent weeks is long. It includes worries about the sustainability of European debt levels and whether countries like Greece will soon default; the weaker dollar; rising inflation in many parts of the world; continued unrest in North Africa and the Middle East, which has also pushed up oil prices; and concern over the U.S. budget, which also sent fear into world stock markets earlier in the week. Stocks recovered somewhat Wednesday after strong earnings reports restored investor confidence, analysts said.

Other factors that are helping precious metals include the buildup to the early autumn wedding season in India, during which families lavish gifts of gold on brides; the longstanding shortage of skilled labor and equipment at certain mines; and the increase in the number of mutual funds investing in gold.

The recent popularity of gold-based exchange traded funds, or E.T.F.’s, has also propelled prices of the underlying metal by making it easier for more investors to trade in gold.

Each share in an E.T.F. represents part of an ounce of bullion, but it comes without the inconvenience of holding the metal or the risk of buying futures and options. Before such funds became popular in the middle of the last decade, individuals who wanted to invest in gold had to buy gold jewelry, coins or bullion — and pay the high security and transaction costs. They could also invest in the shares of gold mining companies, a more arms-length exercise — although they, too, have risen recently.

In addition to benefiting from increased demand for the underlying metal, gold and silver futures contracts are seen as attractive substitutes for paper investments, given that they can be redeemed for a physical commodity.

“Gold is sometimes a currency, sometimes a commodity and sometimes a store of value,” analysts at Merrill Lynch wrote recently.

Although gold prices are likely to remain volatile and are vulnerable to retreat as investors take profits on their gains, few analysts are willing to bet on a major reversal in the near term. “As the purchasing power of workers in emerging markets increases, we see demand for gold as a commodity increasing over the next few years,” the Merrill Lynch report said.

In a research note published Friday, Goldman Sachs forecast a gold futures price of $1,690 an ounce in 12 months’ time, driven primarily by the assumption that the U.S. Federal Reserve’s continued stimulus policy, known as quantitative easing, would keep U.S. real interest rates low, bolstering demand for the metal as an investment.

The market for silver, which Mr. Bhar described as a “poor man’s gold,” is far more illiquid than gold. Mr. Bhar said several hedge funds appeared to have been “bullying” the price higher in recent sessions. Prices of palladium and platinum have also climbed.

Investment and consumer spending in the country have remained robust despite Beijing’s efforts to temper growth through interest rates increases and curbs on bank lending.

Less valuable base metals like copper, tin, aluminum and zinc, which are used in large quantities in construction and heavy industries, have also climbed since last year, having previously plummeted during the financial crisis.

But among these commodities, there have been more divergences, according to Jim Lennon, head of commodity research in London for Macquarie Securities.

Markets for commodities like coking coal, used to make steel, iron ore and copper have been “tight,” he said, driven by inventory accumulation from producers and concerns about output bottlenecks at mines from Chile and Brazil through Africa to China and Australia.

For other base metals like aluminum, zinc and nickel, supply and demand appear better matched, he added.

Overhanging many of these markets remains the question of China, and whether its roaring economy might soon cool down. Many metals’ traders and analysts have had to become China watchers, poring over the economic data issued by that country and studying accumulations of stocks in Chinese warehouses. During the first quarter, China’s economy expanded 9.7 percent from a year earlier.

 

 

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Portugal Stages Surprise Bond Auction; Ireland Is Hit With New Downgrade

April 1, 2011 by Leave a Comment

The government sold 1.65 billion euros ($2.3 billion) of short-term government debt, more than it had planned, after abruptly announcing the sale Thursday night. Lisbon said it was meeting “specific demand” for the debt without giving more details. The yield was 5.79 percent, 2.5 percentage points more than it paid at auctions of similar bonds last year.

Yet shortly after the auction was completed, Fitch, the ratings agency, cut Portugal’s credit rating by three notches, saying it was concerned that the country would not receive timely external support before the elections on June 5.

Some investors said that demand for the bonds could have come from China, which previously said it would support European economies troubled by large debt burdens, and Brazil, whose president was recently cited in a newspaper report as saying the country might buy Portuguese debt.

Portugal needs 9 billion euros in the short term to pay for two bond redemptions in April and June if it wants to avoid a bailout by the European Union and the International Monetary Fund.

Prime Minister José Sócrates resigned on March 23 after failing to push his latest austerity plan through Parliament. President Aníbal Cavaco Silva on Thursday set June 5 as the date for new elections.

The bond sale on Friday, which raised more than the 1.5 billion euros planned, bought Portugal some breathing room to sort out its finances and avoid becoming the third country in the euro zone to seek a bailout, after Greece and Ireland.

“It might be that what they’re trying to do is issue just enough short-term debt to get through to the elections and then the next government can ask for help,” said Laurent Fransolet, head of European fixed-income strategy at Barclays Capital in London.

Mr. Fransolet also said it was not surprising that Portugal preferred to raise the needed funds on the market rather than through a bailout. “There are other costs associated with going to the E.U. and the I.M.F., including political costs,” he said.

Carlos Costa Pina, the Portuguese secretary of state for Treasury and finance, said recently that Portugal would be able to meet its debt commitments for this year, including the redemptions of long-term debt in April and June.

Fears that Europe’s debt crisis was worsening again grew Thursday when Portugal disclosed a budget deficit that was higher than expected and it was revealed that four of Ireland’s most prominent financial institutions required a further capital injection of 24 billion euros to cover bad loans.

Ireland yielded to the European Central Bank on Friday when it agreed to protect bondholders even as the costs for bailing out its banks rose. The country had disagreed with the central bank on the issue, arguing that senior bond holders in the banks would have to share the losses to reduce the costs of the bailout.

Standard Poor’s, the debt rating agency, cut Ireland’s sovereign debt rating one notch to BBB+ from A but revised its outlook to stable. The cut left Ireland with a low investment grade.

Fitch on Friday cut Portugal’s long-term foreign and local currency ratings to BBB–, one notch above junk level, from A–.

Portugal had its sovereign credit rating lowered to BBB– by Standard Poor’s on Tuesday on concerns that the country might have to default on some of its debt. Officials in Lisbon said Thursday that the country’s budget deficit last year was 8.6 percent of its gross domestic product, well above the goal of 7.3 percent.

The government of Mr. Sócrates had already started to increase taxes and cut spending to try to reduce the budget deficit to 4.6 percent of G.D.P. this year. Portugal had a record deficit of 9.3 percent in 2009.

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