Fiscal Commission Expectations Are Too High.

Fiscal Commission Expectations Are Too High. – There’s just too much distance between Commission Republicans and Democrats on raising revenue and cutting spending. That doesn’t mean the effort will be wasted. Far from it. Starting the public debate on these issues is what’s important. When that debate gets widespread and when it gets taken seriously by enough Americans, it will open up the possibility of adopting some of the many good ideas already broached by Commission Co-Chairs Erskine Bowles and Alan Simpson. Even if a deficit reduction package was endorsed miraculously by the Commission, the deal would have to be recut by Congress next year, and it would have a difficult time passing. My concern is that we could easily waste next year and the year after in political gridlock with no deficit reduction. That would be bad for the economy as the markets start raising interest rates in anticipation of burgeoning future deficits with no restraint in sight. It’s important to demonstrate that economic reality has set in on Capitol Hill.
Sorry Pete: Deficit Commission Will Have Failed If There’s No Agreed-Upon Plan – I have to strongly disagree with Pete on this one: the only appropriate measure of whether the Bowles-Simpson commission has succeeded is whether it comes up with a deficit reduction plan supported by 14 of its 18 members.  That was it’s only charge; anything less– including having up to 13 members support something–will be a failure. Pete says that the commission should be considered a success if it does nothing more than raise the awareness of the deficit, increase the understanding of the magnitude of what needs to be done, and starts a vigorous debate.  Sorry, but a big debate on the budget not only was underway when the commission was created (that, after all, is why it was created), but that vigorous debate had been going on for decades.  Awareness of what needed to be done to deal with the deficit wasn’t the problem: the refusal to do those things is what this was all about.  Without 14 votes, the refusal will continue.
The European rescue plan that dare not speak its name – Should Germany leave the euro? Looking at the eurozone debt crisis unfold, many economists are warming to the idea, though I am told that the German chancellor emerged from this weekend’s bail-out talks more determined than ever that the single currency remain intact. Her plan, I’m told, is to honour the promise to proect senior creditors "in the breach". The current rules and protections will stand until 2013, but if there are individual bank failures before that time, she is going to try very hard to force private senior creditors to take a hit. As one person put it: "the more this is about banks, the cheaper it is for Germany." It will be interesting to see whether this German offensive on debt is any more successful than the last one. In the meantime, what about the rest of the eurozone? Could it benefit from getting rid of Germany, and maybe some of its neighbours?

Contagion Strikes Italy as Ireland Bail-out Fails to Calm Markets – The EU-IMF rescue for Ireland has failed to restore to confidence in the eurozone debt markets, leading instead to a dramatic surge in bond yields across half the currency bloc.  Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.  The euro fell sharply to a two-month low of €1.3064 against the dollar, while bourses slid across the world. "The crisis is intensifying and worsening," . "Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively."

Report on the Troubled Asset Relief Program—November 2010 – CBO Director’s Blog Today CBO released the fourth of its statutory reports on transactions undertaken as part of the Troubled Asset Relief Program (TARP)—the program established in October 2008 to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of “troubled assets.” The report discusses CBO’s estimate of the costs of transactions completed, outstanding, and anticipated under the TARP as of November 18, 2010. The report also provides a comparison of CBO’s estimate with that published by the Office and Management and Budget (OMB) in October. CBO estimates that the cost to the federal government of the TARP’s transactions (also referred to as the subsidy cost), including grants that have not been made yet for mortgage programs, will amount to $25 billion. That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding mortgage foreclosures: CBO estimates a cost of $45 billion for providing those three types of assistance. Other transactions will, taken together, yield a net gain of $20 billion to the federal government, CBO estimates.

Property-Tax Collection Plunge May Make Michigan Towns Borrow or Default – Cities and towns across Michigan have seen property-tax collections plunge as much as 20 percent in the past year, the steepest drop since a 1994 state tax rewrite, forcing scores of communities to choose by March whether to borrow to pay bills or risk default on bonds. The municipalities rely on property taxes for as much as 60 percent of their revenue, according to the Michigan Municipal League. State support that typically composes another 20 percent to 35 percent of city budgets has been slashed by almost a third in the past year, during the longest recession since the 1930s. The end of a three-year federal stimulus worth $3.1 billion to Michigan — a sum roughly equal to two annual budgets for Detroit — will force “fundamental decisions,” according to a memorandum by the Michigan Senate Fiscal Agency. “This gets real bad in about 90 to 150 days,”

Bond Sales Tumbling in Worst Month Since Lehman Aftermath: Credit Markets – Corporate bond sales worldwide are tumbling on concern Ireland’s debt crisis will spread across Europe as returns on the notes approach their worst month since credit markets froze two years ago. Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, after surging 34 percent in the first half of the month, according to data compiled by Bloomberg. Plunging returns on debt of borrowers from France’s Credit Agricole SA to Bentonville, Arkansas-based Wal-Mart Stores Inc. are dragging bonds to a 1.08 percent loss in November, Bank of America Merrill Lynch index data show.

Unemployment Rises in Europe, Weighing on Euro – Unemployment in the euro zone rose in October to its highest level in more than 12 years, an official report showed Tuesday, underlining the pressure on governments as they try to reduce spending and bring deficits under control.  The seasonally adjusted unemployment rate was 10.1 percent in October, up from 10 percent in September, Eurostat, the statistics agency of the European Union, reported. For the full Union, unemployment was unchanged in October at 9.6 percent, it said, equivalent to about 23.1 million men and women.  Julia Urhausen, a Eurostat spokeswoman, said joblessness in the 16 nations that make up the euro zone was at its highest since July 1998, when the rate also stood at 10.1 percent.

Currency Manipulation: Two Sides to Every Coin – Recently, currency manipulation has garnered headline attention. We have been constantly bombarded with rhetoric out of Washington: “China isn’t allowing its currency to appreciate fast enough”; “China’s exchange rate policies are stealing jobs from America”; “We’re playing fair, why can’t China?” More often than not, the more vociferous proponents come from politicians who, in our opinion, are simply posturing for votes; attempting to provide catchy sound bites they believe will resonate with their constituents, without fully grasping the underlying fundamentals at play. The situation itself is truly paradoxical – akin to a major corporation thanking its largest creditor by insulting them. The currency debate, just as every coin, has two sides. Let’s address each of the above concerns in turn…

Spain, Portugal and Italy bond yields rise on fears more bailouts needed to quell debt crisis  – Investors sold off government bonds from Spain, Portugal and Italy on Tuesday amid worries that Europe’s debt crisis has not been contained by Ireland’s bailout but is putting pressure on other fiscally weak countries. The yields on Spain’s 10-year bonds jumped as high as 5.7 percent by midmorning, making for a euro-era record difference of 305 basis points against the benchmark Germany 10-year bond, which had a yield of 2.7 percent. The spread on Italy’s 10-year bond reached 210 points, also the highest since the launch of the euro, before easing back somewhat. Portugal, whose yields soared last week, saw its spread edge higher as well.

Contagion crisis intensifies; Spain yield soars — The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults. The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%. The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points. “Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” . “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.” The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

Hungarian Bonds Extend Record Selloff on Interest-Rate Dispute — Hungary’s bonds fell for a seventh day, extending their biggest monthly rout since February 2009, on speculation the central bank’s row with the government will prompt further interest-rate increases and drive away investors. The yield, which moves inversely to the bond’s price, on notes in forint due February 2015 jumped 17 basis points to 8.35 percent, its highest since September 2009, as of 1:30 p.m. in Budapest. The cost of insuring Hungary’s debt against non- payment climbed to the highest since June. The forint, the world’s worst-performing currency in November, gained 0.1 percent to 284.17 per euro after tumbling 3.2 percent in the previous three days

ECB Support `Critical’ for Spain as Crisis Worsens, Buiter Says – The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup Inc. Chief Economist Willem Buiter said. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter said in a note to investors yesterday. A Spanish crisis would “stretch the resources” of the bailout fund set up in May by European governments “perhaps beyond its current limits.”

Hungary, Belgium T-Bill Sales Costly, Demand Subdued – Fears that Ireland’s financial problems will spread further afield led to more expensive short term debt auctions for Hungary and Belgium Tuesday. For Hungary, which sold less than it had planned in Treasury bills, domestic factors also played a part. The unexpected Hungarian interest rate hike on Monday and mounting concerns over Hungarian government policy weighed on sentiment, adding to wider concerns over the possibility of more sovereign bailouts in the euro zone. In a separate auction, Belgium also paid higher yields amid subdued demand for its three- and six-month Treasury certificates, again reflecting fears of contagion within the euro zone. Belgium’s sale of Treasury certificates, or short-term debt, mirrored its government bond sale Monday when demand was subdued and the yield surged 14% on the 10-year bond on offer, compared to a month ago.

 ‘Insolvent’ Portugal Needs Loans Soon, Buiter Says – Portugal is “insolvent” and will probably need soon to join the emergency-loan program from the European Union and the International Monetary Fund that’s available to Greece and Ireland, according to Willem Buiter, Citigroup Inc.’s chief economist. “The market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates is less dramatically but quietly insolvent,” Buiter wrote in a report dated yesterday. “We consider it likely that it will need to access the European Financial Stability Facility soon.”

Spanish Banks Face Funding Hurdle Amid Bailout Threat – Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout.  “There’s a universal dumping of Spain going on,”  “The fear is that Portugal, Spain and Italy are now in line after what happened in Ireland.”  Anxiety over Spain’s ability to bring down the euro- region’s third-highest budget deficit after Europe handed Ireland an 85 billion-euro aid package has driven up financing costs for the country’s lenders already battered by rising bad loans and falling revenue. The average yield investors demand to hold euro-denominated Spanish bank bonds, relative to government debt, rose 141 basis points to 385 basis points in November — the biggest monthly jump on record, according to data compiled by Bank of America Corp.

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