March 25, 2023

Euro Watch: Italy’s Borrowing Costs Rise

The Treasury on Wednesday sold €2 billion, or $3.3 billion, of a 15-year bond it first issued in January, paying a yield of 4.90 percent compared with 4.81 percent at the initial sale.

The Treasury also sold €3.3 billion in three-year bonds at a yield, or interest rate, of 2.48 percent — up from 2.30 percent at a similar sale one month ago.

Demand was weaker than analysts had expected, with bids of 1.28 times the offer amount for both bond issues, and Italian debt yields on the secondary market rose following the sale.

The Treasury nevertheless sold almost all the debt it wanted to sell, aided by the European Central Bank’s as yet untested pledge to buy bonds of struggling euro zone countries that ask for help. Yields on Italian bonds and those of other indebted euro states such as Spain have fallen from near historic highs since the E.C.B. chief, Mario Draghi, said in July that the central bank would do “whatever it takes” to save the euro.

“Without the E.C.B.’s pledge to backstop euro zone peripheral debt markets, post-election instability in Italy would have sent yields surging by now,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy. “However, the strains are showing on Italy’s government bond market, with a further uptick in yields at today’s auction and fairly lackluster demand at that.”

Italian 10-year yields were at 4.69 percent at midday Wednesday, slightly up from levels seen before the debt sale.

The rating agency Fitch cut Italy’s credit rating last Friday to BBB-plus, just three notches above junk status, and assigned a negative outlook, citing political uncertainty after the inconclusive election, a deep recession and the country’s rising debt.

Parliament convenes Friday and President Giorgio Napolitano will hold consultations with leaders of all the parties to see if a government can be formed. If it cannot, the country may face fresh elections within a few months.

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Moody’s Gives Colleges a Negative Grade

The credit reporting agency Moody’s said on Wednesday that it had revised its financial outlook for colleges and universities, giving a negative grade to the entire field.

For the last two years, Moody’s Investors Service gave the nation’s most elite public and private colleges a stable forecast while assigning a negative outlook to the rest of higher education. (Moody’s assigned a negative outlook for the sector in 2009, but it upgraded the most elite ones to stable in 2011-2012.)

On Wednesday, Moody’s explained the change by saying that even the best colleges and universities faced diminished prospects for revenue growth, given mounting public pressure to keep tuition down, a weak economy and the prospect that a penny-pinching Congress could cut financing for research grants and student aid.

The report advocates “bolder actions by university leaders to reduce costs and increase operational efficiency.”

“The sector will need to adjust to the prospect of muted revenue growth,” the report says. “Strong governance and management leadership will be needed by most universities as they navigate through this period of intensified change and challenge.”

While Moody’s gave a negative outlook for the overall industry, most of the nation’s top colleges and universities still carry the top credit rankings.

Nonetheless, the Moody’s report reflects a time of rapid and disruptive change in higher education. Before the financial crisis, colleges and universities routinely raised tuition and fees as administrators sought to burnish their reputations — and the school’s rankings — with new buildings and more student services.

That golden era was upended by the financial crisis. As household income dropped and jobs became scarce for college graduates, families became increasingly vulnerable to college costs and the prospect of students taking on onerous debt. At the same time, institutions could no longer count on an annual windfall from endowment returns, alumni gifts and state financing. All shriveled as the economy soured, and they have not fully recovered.

In the 2011-2012 academic year, for instance, American families spent, on average, 5 percent less on higher education than in the previous year, Moody’s said. As a result, 25 percent of the private colleges that Moody’s rated did not raise tuition in fiscal 2011 at or beyond the rate of inflation; 21 percent of rated public universities did not do so.

Students have become more dependent on federal grants and loans since the financial crisis. Any curtailment of federal aid could put further budget pressures on schools. Pell Grants for low-income students provided $36.5 billion to colleges and universities in fiscal 2011. That represented a median 21 percent of net tuition revenue for regional public universities.

The rapid emergence of online learning provides both opportunities and challenges for higher education, Moody’s said. While online classes could threaten to undermine the residential college model, they could also provide new ways to make money and provide schools with broader audiences.

Moody’s said the average debt burden for full-time students grew 55 percent in the 10 years that ended in 2012. But it maintained that the average debt load was manageable for most students, since 72 percent of student loans were held by borrowers with less than $25,000 in debt. Nonetheless, the report noted that the increasing focus on student debt and college affordability by the media and politicians puts additional pressure on college administrators to rein in costs.

“Until universities demonstrate better ability to lower their cost of operations, perhaps through more intensive use of online classes and elimination or reduction of tenure, we expect government officials to produce bolder solutions in response to the public outcry against the cost of higher education,” the report said.

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DealBook: Questions of Fair Play Arise in Facebook’s I.P.O. Process

As Washington intensifies its scrutiny of the initial public offering of Facebook, the company’s bankers are facing questions about whether the process — even if perfectly legal — was fair.

The concerns center on Morgan Stanley, Goldman Sachs and other banks involved in the I.P.O. that shared a negative outlook about Facebook with a select group of clients, rather than broadly with all investors.

In the days leading up to Facebook’s debut, analysts at several banks ratcheted down their growth estimates for the social network. The move came after the company told them that quarterly and annual revenue would be on the softer side, said people briefed on the matter who spoke on the condition of anonymity because they were not authorized to discuss the issue publicly.

As is typical in the I.P.O. process, research analysts at Morgan Stanley, Goldman Sachs and other firms contacted certain clients to discuss their revised expectations, while other big investors called on the banks to get their new take. But ordinary mom-and-pop investors did not have the same access to the valuable information.

Now, regulators and lawmakers are taking a closer look.

This week, the Securities and Exchange Commission’s enforcement division opened a preliminary inquiry into the Facebook offering, a person briefed on the matter said. The Senate Banking Committee and the House Financial Services Committee have also started informal examinations into the I.P.O. process.

Congressional aides plan to talk with Facebook executives, regulators and others involved in the I.P.O. in the coming days, after which the Senate committee will weigh whether to hold a public hearing about the matter.

“While the S.E.C. investigates some of the problems surrounding the Facebook I.P.O., I think it is important to broadly and publicly examine the procedures for taking a company public,” said Senator Jack Reed, Democrat of Rhode Island and chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment. “We need to ensure the system is fair, balanced, and works for everyone.”

The scope of the S.E.C. inquiry is unclear, though the agency’s market abuse unit could examine how nonpublic information was disseminated to certain investors — and whether it conflicted with the company’s public disclosures and regulatory filings. One person close to the matter added that the agency has also heard complaints from investors who did not know how many shares they held, amid technical missteps at the Nasdaq exchange on Friday.

No one at Facebook or any of its underwriters have been accused of any wrongdoing, and people close to the matter cautioned that the company and its banks might not have run afoul of any regulations. The S.E.C., Facebook and Morgan Stanley all declined to comment.

The most highly anticipated technology offering in years, Facebook’s debut has instead disappointed many once-enthusiastic investors. While underwriters, investors and analysts had hoped for even a small “pop” on the first day, Facebook barely broke its offering price of $38 a share and required support from Morgan Stanley to remain above that.

Facebook tumbled in its next two days of trading before finally closing up 3.2 percent on Wednesday. Still, at $32, the company’s shares remain well below their offer price.

Many market participants continue to cope with the fallout of Facebook’s messy debut. Morgan Stanley’s brokerage arm wrote in an internal memorandum on Wednesday that it was reviewing clients’ orders and might reimburse customers for pricing discrepancies.

As the largest Internet I.P.O. on record, Facebook’s offering has drawn intense scrutiny from the start. But with the stock shedding $16 billion in market value, some small-time investors are crying foul and regulators are wondering what went wrong.

“What brighter light exists than the highest profile I.P.O. in memory,” Jacob S. Frenkel, a former S.E.C. lawyer and now a partner at Shulman, Rogers, Gandal, Pordy Ecker. “With Memorial Day weekend, the summer pools are open, and this is an invitation for all the regulators to jump right in.”

One avenue for regulators could be Facebook’s conversations with analysts, particularly whether the social network made statements that contradicted its public filings. Under securities rules, a soon-to-be public company is permitted to provide “material” information to research analysts. But if that data is inconsistent with the company’s public prospectus, the issuer must revise the regulatory filing.

Such scrutiny is likely to focus on at least two recent conference calls Facebook held with its analysts. During a discussion in April, Facebook briefed about 20 bank analysts on its revenue guidance for the second quarter and the full year, according to a person briefed on the matter. On May 9, the day the company submitted a revised public prospectus disclosing its challenges in mobile advertising, Facebook spoke to the analysts again, telling them that revenue would come in at the lower end of its forecast.

One bank then cut its revenue expectations by 5 percent for the second quarter. Goldman analysts sent an internal memo, with the revised figures, to the firm’s private wealth managers and institutional sales force.

While the forecasts did not appear in the company’s filings, they do not seem to contradict any information the company previously disclosed, according to securities lawyers and professors following the details of the Facebook I.P.O. In its prospectus, Facebook highlighted broad risks facing its future growth.

Another potential line of inquiry for regulators, securities experts say, is whether bank analysts disseminated information unfairly to only choice investors. Before a company goes public, analysts at banks that underwrite the offering are not allowed to publish forecasts or other research about the company. They can provide those estimates only orally, for example in a telephone conversation, and they generally do so only with their biggest clients.

Securities lawyers note that research analysts are not obligated to share their work with the wider public. The rules governing the I.P.O. process allow analysts to confer with particular clients, as long as it is done in line with a bank’s longstanding policies.

Still, Facebook’s I.P.O. has left a sour taste with some investors, who believe the system is structured to favor the biggest investors. The process — which prominently features a series of closed-door meetings with management teams known as a roadshow — gives big investors like hedge funds a privileged window into the company.

“You have this legacy problem,” said Christopher J. Keller, a partner at Labaton Sucharow. “Twenty to thirty years ago, there was no such thing as a retail investors as we know it, so we still have rules that allow the large player in the market to have a leg up.”

It’s a lesson Elias Fiani recently learned.

During Facebook’s first hour of trading on May 18, Mr. Fiani, a 53-year-old employee of the New York City Transit Authority, bought 1,000 shares through Bank of America Merrill Lynch for $38 a share. On Monday morning, he panicked as the stock dove, and unloaded his stake at $33, taking a $5,000 loss.

Two days later, his brokerage firm called, asking him for an additional $4,000. Because of an error, the correct purchase price should have been $42.

Adding insult, he found out that some investors had received information about Facebook’s financials that he never got. He called the S.E.C. on Wednesday afternoon to air his complaints.

“It’s about distrust,” Mr. Fiani said. “This is another stock market rigging.”

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Fitch Joins Others in Cutting Hungary Debt to Junk Status

BUDAPEST — Hungary lost the investment grade on its foreign-currency debt at Fitch Ratings on Friday, the third such downgrade in six weeks, increasing pressure on Prime Minister Viktor Orban to obtain an International Monetary Fund backstop.

The foreign-currency bond ratings were cut one step to BB+ from BBB-, Fitch said in a statement. Fitch, which awarded Hungary its investment grade in 1996, assigned a negative outlook. The country is rated Ba1, at Moody’s Investors Service and BB+ at Standard Poor’s, the highest non-investment rating at both companies.

The International Monetary Fund and the European Union broke off talks last month on Hungary’s bid for a bailout after the government refused to withdraw a new central bank regulation that the institutions said may undermine monetary-policy independence. The forint fell to a record against the euro Thursday as investors speculated a loan deal may be delayed.

“The downgrade of Hungary’s ratings reflects further deterioration in the country’s fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new” agreement with the I.M.F. and the E.U., Matteo Napolitano, a director in Fitch’s sovereign group, said in a statement.

Earlier Friday, Mr. Orban retreated in his confrontation with the central bank chief Andras Simor, seeking to revive talks on an international bailout after a market rout this week, boosting stocks, bonds and the currency.

The forint held on to its gains after the downgrade. Hungary’s 10-year government bond yielded 10.115 percent, down 0.29 percentage points. The benchmark BUX stock index rose 0.4 percent, snapping a three-day decline.

The country will have the highest debt level and lowest economic-growth rate among the E.U.’s eastern members next year, according to a European Commission forecast. An I.M.F. agreement would probably reduce pressure on Hungary’s debt rating, Fitch said in November.

“The main risk is if the government fails to agree with the” I.M.F. and the E.U. “on the legal changes, but Fitch’s comments look like something that has been in the pipeline and should have been released earlier this week,” Simon Quijano-Evans, a London based economist at ING Bank, said Friday. “We see the move as neutral.”

Investors are shunning riskier assets and demanding higher yields as European leaders grapple with a debt crisis that started in Greece more than two years ago and is threatening to infect weaker economies.

The central bank raised the benchmark interest rate to 7 percent on Dec. 20 from 6.5 percent, which was already the E.U.’s highest. Policy makers said they may boost borrowing costs further if risk perception and the inflation outlook deteriorate “substantially.”

Mr. Orban has relied on one-time measures, including the effective nationalization of $13 billion of mandatory private pension-fund assets and extraordinary industry taxes to control the budget. The deficit had already reached 182 percent of the Cabinet’s full-year target at the end of November.

The government is also cutting spending and raising taxes to save as much as $4 billion a year by 2013.

Mr. Orban wants to cut debt from 81 percent of economic output last year and aims to keep the budget deficit within 2.5 percent of gross domestic product in 2012.

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Asian Stocks Lose Early Gains to Fall Broadly

Neither the Japanese stock market nor the yen seemed terribly impressed by either the downgrade or Japan’s new measures on Wednesday: The Nikkei 225 stock index rose in early trading, but quickly gave up those gains to end the day down 1.1 percent at 8,629.61 points.

Similarly, the yen remained persistently strong in the international currency markets, hovering at about 76.60 yen per U.S. dollar.

In fact, Moody’s decision to lower its rating of Japan by one notch came as little surprise, as Standard Poor’s had announced a similar downgrade in January and the economic and political challenges facing the country are well known.

Analysts at Nomura noted in a research commentary that some market participants had expected Moody’s to lower its rating by a larger magnitude, or accompanied its downgrade with a negative outlook.

In that context, “the financial markets may be reassured to some extent now that neither scenario has occurred. At the very least, Moody’s decision is unlikely to trigger a marked rise in long-term interest rates,” they wrote.

Moody’s move took the rating to Aa3, from Aa2, with a stable outlook. The ratings agency cited “large budget deficits and the build-up in Japanese government debt since the 2009 global recession” for its downgrade.

“Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies,” Moody’s wrote in a statement.

The March 11 earthquake and tsunami and the subsequent nuclear disaster have delayed a recovery from the 2009 global recession and have aggravated deflationary conditions, Moody’s wrote, adding that “prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets.”

Later on Wednesday, Japan’s government said it would create a $100 billion credit facility to encourage companies to invest overseas, in an effort to weaken the yen, whose recent strength has been worrying Japanese exporters.

Elsewhere in the Asia-Pacific region, too, the markets slipped, ignoring the firm rally in the U.S. markets during the previous day. Analysts cautioned that the lingering uncertainties about the U.S. economy and European debt woes remain in place and are likely to produce more volatility in coming months.

The key index in South Korea closed down 1.2 percent, the Taiex in Taiwan fell 0.6 percent, and the S. P./ASX 200 in Australia finished 0.1 percent lower.

In Hong Kong, the Hang Seng index was 1 percent lower by mid-afternoon, the Straits Times index in Singapore fell 0.4 percent, and in India, the Sensex was down 0.8 percent by the afternoon.

On Wall Street on Tuesday, the Dow Jones industrial average finished nearly 3 percent higher and the Standard Poor’s 500 rallied 3.4 percent, with investors apparently seeking out buying opportunities before Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Friday.

Investors also harbored hopes that the Fed chairman, Ben S. Bernanke, would announce fresh Federal Reserve support for the U.S. economy at the event.

Futures on the S. P. 500 were down 0.8 percent during the Asian afternoon, signaling that Wall Street may give up some of Tuesday’s gains when trading resumes Wednesday.

Gold, which had sagged sharply on Tuesday, climbed again on Wednesday — a reflection that the precious metal’s appeal as a relative haven amid times of uncertainty remained undiminished. Gold was trading at $1,842 an ounce by midafternoon in Asia, up from about $1,830 earlier in the day.

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Economix: A ‘AAA’ Q. and A.

7:12 p.m. | Updated to elaborate on bank bailout.

Why did Standard Poor’s lower the credit rating of the United States to AA+?


Notions on high and low finance.

The rating agency thinks the United States has too much debt, or at least will: “Under our revised base case fiscal scenario — which we consider to be consistent with a AA+ long-term rating and a negative outlook — we now project that net general government debt would rise from an estimated 74 percent of G.D.P. by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.”

Why is the debt so high?

One reason is that the government had to spend huge sums to bail out the banks and try to offset the impact of the deep recession caused by the financial crisis. It looks as if the government will more or less break even on the bank bailouts, but it cannot recoup the money it had to spend to keep the economy afloat.

Did S.P. issue warnings when the mistakes leading to the financial crisis were being made?

No. One cause of the crisis was that S.P. and its competitors handed out AAA ratings to almost anyone who wanted one for a mortgage-backed security. They did that even for securities whose only source of repayment was subprime mortgages issued to buyers with poor credit who had taken out what were known as “liars’ loans” because no one checked to see if they had any income at all.

Why did they do that?

They had models that showed a lot of such mortgages would never default.

Are those securities still AAA?

No. Many of them are rated in the lower regions of junk. It turned out there were a lot of defaults.

Does this mean that S.P. thinks the U.S. ability to meet its obligations is in question?

No. It knows the United States borrows in dollars, and also has a dollar printing press. The recent Congressional circus raised some fears the country would refuse to pay, but that seems to have passed.

There have been complaints that the rating agencies are always behind the market. Is that true this time?

No. In recent months, Treasury borrowings costs have declined, because investors around the world engaged in a flight to safety. The market thinks there is nothing safer than a Treasury bill.

How have other AAA countries done?

Generally O.K. But rates have gone up in France because of worries about the euro and a recognition that France, unlike the United States, does not have the ability to print the currency it must repay.

So the market seems more concerned about France, but S.P. does not. Is that because France has less debt outstanding?

No. S.P. believes that in 2015 France’s debt will be 83 percent of its GDP, compared to 79 percent in the U.S. But it thinks France will do a better job of bringing down budget deficits.

So the market seems to have a different view than does S.P. of the relative merits of U.S. and French debt? Whom should I believe?

That is up to you. But the market figured out subprime mortgage securities were junk long before S.P.

So the U.S. debt is up partly because S.P. was incompetent before the financial crisis. Is there any particular reason to assume they know what they are doing now?

Next question.

What impact will this have on trading in Treasuries in coming days?

There is no way to be sure. Anything that causes a lot of people to sell a security is likely to cause prices to fall. But it is hard to see there is any new information in S.P.’s report.

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Moody’s Downgrades Cyprus Over Economic Woes

LONDON — In the latest downgrade to hit a euro-zone country, Cyprus had its credit rating cut by Moody’s Investor Service on Wednesday because of its banking exposure to Greece, political jostling and recent disruptions to the country’s power supply.

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

An explosion at a naval base earlier this month badly damaged the Vasilikos power plant, which supplies about half of the country’s power generation capacity. That has caused regular power outages, and Moody’s said in a statement that the power shortage is likely to hurt the economy, which it now expects to stagnate this year, and expand only 1 percent next year.

The rating agency 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” as a reason for the downgrade.

Cyprus bonds fell on Wednesday and Italian and Spanish bonds also dropped as investors became increasingly concerned whether an aid package assembled this month 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 would be affected in the case of a sovereign debt default, Moody’s said.

The ratings agency 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, Moody’s said.

The July 11 explosion that destroyed the plant and killed 13 people also rattled the government. Costas Papacostas, the defense minister, and Petros Tsalikidis, chief of the national guard, resigned amid criticism about failing to take steps that could have prevented the accident. Some 98 gunpowder containers 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 various 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 because they feared an angry backlash from Cyprus’s powerful labor unions, 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.

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Bucks: Feeling Anxious? You’re Not Alone

4:48 p.m. | Updated

The economic recovery may be stalling, housing prices still haven’t bottomed out, and the world is beset by revolutions and natural disasters, from tsunamis to tornadoes.

Feeling a bit anxious?

You’re not alone.

The Index of Consumer Sentiment, produced monthly by the University of Michigan, actually rose a bit in May, to 74.3, from 69.8 in April, but dipped again in the preliminary report for June, to 71.8. Writing in a note accompanying the April index, Richard Curtin, chief economist for the university’s surveys of consumers, said consumers seemed to have a negative outlook on their earning potential. “Consumers now give just one chance in three that their income will outpace the inflation rate,” he wrote. It’s not that people expect inflation to increase, he said. Rather, they don’t expect higher incomes in the years ahead.

Depressed yet? Then consider this. Dan Geller, who operates and markets its research to retail and banking businesses, said his “money anxiety index” was the highest it had been in 30 years. Mr. Geller said he used “structural equation modeling” to crunch various monthly economic data, like inflation and unemployment rates and levels of spending and saving, to create a number that approximates worry about money. He has created index numbers that go as far back as 1959, and he said that people were pretty concerned right now.

“Basically the core reason for the financial anxiety is that consumers don’t have any confidence, or they have low confidence, in any prospect of economic recovery,” Mr. Geller said.

The Money Anxiety Index for March was 88.9; April, 91.3; and May, 91.9. That’s still well below the index’s high of 136 during the recession of the early 1980s, but the trend is worrisome. Historically, he said, when the index rises for five or more months in a row, a recession is likely.

How are you feeling about your financial future? Let us know.

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