Tag Archives: finance

How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill; North Korea is minting superdollars

How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill; North Korea is minting superdollars | Business | TIME.com.

 

 

 

Photo-Illustration by TIME

Photo-Illustration by TIME

U.S. negotiators are heading into a second day of what have been dubbed “serious and substantial” talks with North Korean officials. Yet amidst all the discussion of how the U.S. will attempt to work with Kim Jong Un, there has been little (open) speculation as to whether Dear Leader Junior might crank up production of $100 and $50 bills. No, not North Korean 100- or 50-won banknotes, worth about as much as old tissues. I’m talking about fake greenbacks — or, as the U.S. Secret Service has dubbed them, “superdollars.”

 

These ultra-counterfeits are light years beyond the weak facsimiles produced by most forgers, who use desktop printers. As an anti-counterfeiting investigator with Europol once put it: “Superdollars are just U.S. dollars not made by the U.S. government.” With few exceptions, only Federal Reserve banks equipped with the fanciest detection gear can identify these fakes.

Yet as unpatriotic as this may sound, perhaps America would be better off if Kim Jong Un were to try and enrich himself with D-I-Y Benjamins. Let me explain, by way of a little background about superdollars.

(MORE: Can a Second Bailout Save Greece?)

The “super” moniker does not stem from any particular talent on the part of the North Koreans. It’s a matter of equipment. The regime apparently possesses the same kind of intaglio printing press (or presses) used by the U.S. Bureau of Engraving and Printing. A leading theory is that in 1989, just before the collapse of the Berlin Wall, the machines made their way to North Korea from a clandestine facility in East Germany, where they were used to make fake passports and other secret documents. The high-tech paper is just about the same as what’s used to make authentic dollars, and the North Koreans buy their ink from the same Swiss firm that supplies the US government with ink for greenbacks.

Forging $100 bills obviously gels with the regime’s febrile anti-Americanism and its aim to undercut U.S. global power, in this case by sowing doubts about our currency. State level counterfeiting is a kind of slow-motion violence committed against an enemy, and it has been tried many times before. During the Revolutionary War, the British printed fake “Continentals” to undermine the fragile colonial currency. Napoleon counterfeited Russian notes during the Napoleonic Wars, and during World War II the Germans forced a handful of artists and printing experts in Block 19 of the Sachsenhausen concentration camp to produce fake U.S. dollars and British pounds sterling. (Their story is the basis for the 2007 film “The Counterfeiters,” winner of the 2007 Oscar for Best Foreign Language Film.)

Superdollars can be viewed as an act of economic warfare, but Pyongyang’s motive is probably more mundane: The regime is broke. The 2009 attempt to raise funds by devaluing its already pathetic currency revealed not only the country’s fiscal desperation, but also the abuse Dear Leader was willing to inflict on his people. The won was devalued 100-fold, which meant 1,000 won suddenly had the purchasing power of 10 won. (Imagine waking up to a learn that a slice of pizza costs $250.) Officials set a tight limit on how much old money could be exchanged for new, so whatever value existed within people’s paltry savings evaporated overnight. Compared to devaluation, generating quick cash by counterfeiting some other country’s more stable currency looks downright humanitarian.

(MORE: TIME’s Interview With Warren Buffett)

The superdollar affair has a certain comic-book quality: copying the currency of the evil capitalists so you can buy cognac and missiles. But Washington isn’t laughing. At the end of December, Ireland’s high court rejected a U.S. request to extradite former Workers Party president and IRA veteran, Sean Garland, for his alleged involvement with the superdollar plot. There is also the question of what exactly the North Koreans hope to procure with all of this “money.” According to the House Task Force on Terrorism and Unconventional Warfare, superdollars may be part of the regime’s effort to acquire materials for nuclear weapons.

Since the superdollars were first detected about a decade ago, the regime has been pocketing an estimated $15 to $25 million a year from them. (Other estimates are much higher—up to several hundred million dollars’ worth.) That sounds like a lot of money, but compared to the $1 trillion in cash circulating in the great ocean of commerce, a few hundred million is chump change. Although certainly costly for small business owners who unknowingly accept a bunch of forgeries, counterfeits probably won’t bring about a crisis of faith in our paper money anytime soon.

Yet taking the long view, maybe a rash of new superdollars from the hermetic regime of Kim Jong Un would be beneficial. How so? Because counterfeits have a way of reminding people of what material money is and how it functions, and that could lead to a discussion of its pros and cons. Cash is, and always has been, such an uncontested part of everyday life that we rarely stop to consider its toll on society as the currency of crime, to say nothing of the heaping expense of printing, transporting, securing, inspecting, shredding, redesigning, reprinting, re-inspecting, and redistributing it ad nauseum, plus the broader costs of prosecuting and incarcerating the thousands, if not millions, of people who commit cash-related crimes. That’s not to suggest we could get rid of paper money tomorrow; we still don’t have a substitute that’s equally convenient, universally accepted, and adequately secure. But that day may be closer than you think. (Coins, however, we could—and should—do away with. As in, right now.)

(MORE: Google Takes Another Experimental Step Toward Delivering TV)

Superdollars, and the untold billions of (electronic) dollars spent combating them could be the wake-up call that finally forces us to think more clearly about the costs of physical money. If killing all cash strikes you as a little too radical, consider for a moment what it would mean to get rid of high-denomination banknotes. Who would be most inconvenienced if Washington were to outlaw $100 and $50 bills tomorrow? Cartel bosses in Juarez, Mexico jump to mind. So do human traffickers in China and Africa, aspiring terrorists in Afghanistan, wildlife poachers, arms dealers, tax evaders, and everyday crooks who hold up mom and pop groceries. And, or course, North Korean government officials.

So then. At the risk of infuriating cash-hoarding militia members, anonymity-obsessed ACLU’ers, the U.S. Treasury, Russian mob, Laundromat owners, and just about every person who has ever hid a purchase from a spouse or income from the government, I would say this to Kim Jong Un and his posse of counterfeiters: Bring it.

David Wolman is a contributing editor at Wired and the author of The End of Money: Counterfeiters, Preachers, Techies, Dreamers—and the Coming Cashless Society, out this month from Da Capo Press. Follow him on Twitter: @davidwolman

Read more: http://business.time.com/2012/02/24/how-the-u-s-could-pressure-north-korea-tomorrow-quit-the-100-bill/?iid=biz-article-mostpop1#ixzz1nVl122r1

Markets dive on Greek referendum

BBC News – Eurozone debt crisis: Markets dive on Greek referendum.

US and European markets have fallen following Monday’s announcement of a Greek referendum on the latest aid package to solve its debt crisis.

Eurozone leaders agreed a 50% debt write-off for Greece last week as well as strengthening Europe’s bailout fund.

But the Greek move has cast doubt on whether the deal can go ahead.

New York’s Dow Jones ended the day 2.5% lower, after a mid-afternoon rally on hope that Greek MPs may block the referendum proved short-lived.

One of Mr Papandreou’s MPs, Milena Apostolaki, resigned from the ruling Pasok parliamentary group on Tuesday, leaving the government with a two-seat majority in parliament.

Six other party members have called for Mr Papandreou to resign, according to the state news agency.

There are doubts whether the government will last long enough to hold the referendum, pencilled in for January.

A confidence vote is due to take place in the Greek parliament on Friday.

Banks down

Earlier in the day, London’s FTSE 100 had ended trading down 2.2%, while the Frankfurt Dax fell 5% and the Paris Cac 40 some 5.4%.

Analysis

January seems to be the best bet for when a referendum will take place.

If a week is a long time in politics, two months is an eternity in financial markets in their current state of mind.

A “no” would blow away one leg of the euro rescue package agreed in Brussels last week, and it was a precarious, unfinished structure in the first place.

Some even see the vote as a referendum on Greek membership of the eurozone.

Perhaps Mr Papandreou is gambling that voters will see it that way and reluctantly say “yes”.

The markets may have good and bad days, but they won’t quietly bide their time while they wait to see if the bet pays off.

Shares in French banks saw the biggest falls, with Societe Generale down 16.2%, BNP Paribas 13.1% and Credit Agricole 12.5%.

Other European banks also fared badly for the second day, with Germany’s Commerzbank and Deutsche Bank and the UK’s Barclays and Royal Bank of Scotland all 8% to 10% lower.

German Chancellor Angela Merkel and French President Nicolas Sarkozy issued a joint statement following a telephone conversation between the two leaders saying: “France and Germany are determined to ensure with their European partners the full implementation, as quickly as possible, of decisions taken by the summit, which today are more necessary than ever.”

The two also said that eurozone leaders and the IMF would meet on Wednesday to hold talks over Greece.

Confidence vote

Greek opposition parties have accused Prime Minister George Papandreou of acting dangerously, and called for an early election.

“Elections are a national necessity,” conservative leader Antonis Samaras said, adding that Mr Papandreou was putting Greece’s EU membership at risk.

Opinion polls in Greece suggest that most people do not support the deal and there have been demonstrations against the austerity measures across the country, some of them violent.

Start Quote

Last week’s eurozone rescue package could unravel long before political events in Greece take their course”

Mr Papandreou told a meeting of his governing Socialist party on Monday that Greek people would have the final say on the austerity package, which is designed to reduce Greek debt by about 100bn euros through a series of measures including public sector pay cuts, tax rises and falling pensions.

The austerity measures are a condition of the bailout packages from the European Union and International Monetary Fund.

Some analysts are saying that the referendum would in effect be on whether Greece should abandon the euro.

Nobel Prize winning economist Christopher Pissarides said, “If there is a ‘no’ vote, Greece would immediately declare bankruptcy. I do not see how Greece could remain in the euro.”

There is also concern that the referendum would be unlikely to take place before January, which would create months of uncertainty for the markets.

In Athens, some Greeks greeted the referendum plan with scepticism

“We cannot wait until 15 January,” said Konstantinos Michalos, president of the Athens Chamber of Commerce.

“Personally, I do not think we will ever get there.”

A senior member of Chancellor Angela Merkel’s coalition in Germany said he had been irritated by the referendum announcement.

“The prime minister had [agreed] to a rescue package that benefited his country,” Rainer Bruederle told Deutschlandfunk radio.

Latest Planned Austerity Measures

  • New pay and promotion system covering all 700,000 civil servants
  • Further cuts in public sector wages and many bonuses scrapped
  • Some 30,000 public sector workers suspended, wages cut to 60% and face lay off after a year
  • Wage bargaining suspended
  • Monthly pensions above 1,000 euros to be cut 20% above that threshold
  • Other cuts in pensions and lump-sum retirement pay
  • Tax-free threshold lowered to 5,000 euros a year from 8,000

“Other countries are making considerable sacrifices for decades of mismanagement and poor leadership in Greece.”

He added that the only thing to do now would be to prepare for the Greek state to be insolvent and try to limit the damage to Europe’s banking system.

On the currency markets, the euro continued to slide, falling a further 1.3% against the US dollar.

The yield on German bonds fell to near-record lows, while the difference between the yield of German bonds and those of Italian and Belgian bonds rose to the highest since the introduction of the euro.

Earlier, the Nikkei in Tokyo closed down 1.7% and the Hang Seng in Hong Kong closed down 2.5%.

Europe’s main share markets had all fallen before the referendum announcement as well, with the FTSE, Dax and Cac 40 all dropping by about 3% on Monday.

MIT economist: Wall Street created worst recession since WWII

MIT economist: Wall Street created worst recession since WWII | The Raw Story – Digg.

rawstory.com — MIT economics professor Simon Johnson said on MSNBC’s The Rachel Maddow Show on Wednesday night that Wall Street “blew itself up,” which lead to the “most severe recession since World War II.” The former chief economist of the International Monetary Fund added that the enormous economic damage was “a direct consequence of what the biggest banks did and were allowed to get away with.” Watch video, courtesy of MSNBC, below: Visit msnbc.com for breaking news, […] 1 day 8 hr ago

MIT economist: Wall Street created worst recession since WWII | The Raw Story

Slovakia blocks euro rescue fund

Slovakia blocks euro rescue fund | Reuters.

BRATISLAVA/ATHENS | Tue Oct 11, 2011 7:39pm EDT

(Reuters) – The parliament of tiny Slovakia stalled the expansion of a bailout fund to rescue the euro zone from its debt crisis on Tuesday, but international lenders said they were likely to grant a loan to Greece next month, buying time for a broader response.

European Central Bank chief Jean-Claude Trichet said the debt crisis had become systemic and must be tackled decisively.

Slovakia is the only country in the 17-member currency zone that has yet to approve giving new powers to the European Financial Stability Fund. The expansion was agreed by euro zone leaders in July but must be ratified by each country.

The EFSF is Europe’s main weapon to respond to a debt crisis that threatens the European common currency, the region’s banks and potentially the global financial system.

The government of Slovak Prime Minister Iveta Radicova fell on Tuesday after a small party in her ruling coalition refused to back the plans. The outgoing government still expects to be able to enact the measure as a caretaker administration by the end of this week with support from an opposition party.

“There is an assumption that the EFSF, one way or the other, will be approved by the end of the week,” Finance Minister Ivan Miklos told parliament ahead of the vote.

The failure in the Slovak parliament underlines the difficulty of forging a united response to the worsening debt crisis in a currency zone where all 17 member states must act in concert, and voters are increasingly angry at the growing costs.

Leaders are struggling to find a response that would protect euro zone banks if Greece defaults on its debts.

For now, Athens needs an immediate infusion of cash within weeks just to meet state payrolls. A loan programme has been held up while the European Union and IMF assess whether Greece is doing enough to get its finances in order.

After a weeks-long review of Greece’s finances, inspectors from the European Union, IMF and European Central Bank, known as the troika, said an 8 billion euro loan tranche should be paid in early November. It still requires approval by euro zone finance ministers and the IMF.

MORE REFORMS NEEDED

The troika warned that Greece had made only patchy progress in meeting the terms of a bailout agreed in May last year.

“It is essential that the authorities put more emphasis on structural reforms in the public sector and the economy more broadly,” the troika said in a statement.

It said additional measures were likely to be needed to meet debt targets in 2013 and 2014, and a privatization drive and structural reforms were falling short.

Germany, the euro zone’s biggest economy, said a decision on whether to make the aid payment was still open.

A German Finance Ministry spokesman said the troika’s verdict showed “both light and shadows”:

“We’ll wait and look at the report, analyze it and then decide what will happen with the sixth tranche.”

That money would anyway only buy Greece and its euro zone partners a small amount of time.

Germany and France, the leading powers in the 17-nation euro zone, have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit delayed until October 23.

After Athens admitted it would not meet its deficit target this year, there is a growing acceptance that a second Greek bailout agreed in July with private bondholders’ participation may need to be renegotiated. A rush is now on to beef up the currency bloc’s rescue fund and bolster its banks.

Europe’s top financial watchdog warned that the euro zone’s sovereign debt crisis threatened global economic stability.

Trichet issued the dramatic warning as chairman of the European Systemic Risk Board, created to avoid a repeat of the 2008 financial crisis, amid growing fears that Greece will default on its massive debt.

“The crisis is systemic and must be tackled decisively,” Trichet told a European Parliament committee in his final appearance before retiring at the end of the month.

“The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond.”

NEW BANK DATA SOUGHT

European banking regulators meanwhile asked banks across the continent to provide updated data on their capital position and sovereign debt exposures to help reassess their need for recapitalization.

European Commission President Jose Manuel Barroso said the EU executive would present proposals for bank recapitalization and other aspects of the crisis response on Wednesday.

Industry sources said the EU banking regulator had demanded lenders achieve a core capital ratio of at least 7 percent in a new round of internal stress tests, and banks that failed to reach that mark would be asked to bolster their capital.

That would mean some 48 banks would be required to raise a total of 99 billion euros in capital, according to a Reuters Breakingviews calculator using data from previous stress tests. Greek banks would need nearly a third of the total.

For a comprehensive deal to come together, the bloc’s leaders must resolve differences over how to recapitalize banks, whether to force a Greek debt restructuring or stick to the existing voluntary deal with private bondholders, and how to use the euro zone’s rescue fund.

Europe’s inability to draw a line under the crisis has caused growing international alarm, with Japan weighing in on Tuesday after the United States and Britain pressed EU leaders to take decisive action.

Tokyo said it would consult with Washington before it considers buying more euro zone bonds. Finance Minister Jun Azumi urged Europe to restore market confidence in the run-up to a Group of 20 finance leaders’ meeting in Paris this week.

Interbank lending rates in Europe continued to rise amid growing concern over European banks’ ability to operate, despite the prospect of massive ECB liquidity support.

Some European banks voiced concern at the prospect of being forced by governments to raise additional capital that some say they do not need, possibly by taking public money. One senior banker said that could lead to legal challenges in Germany.

Germany’s BDB banking association said Europe should look at recapitalization on a case-by-case basis rather than taking a blanket approach apparently envisaged by Berlin and Paris.

The director of the association, Michael Kemmer, also told ARD television that politicians should stick to a July agreement on private bondholder involvement in a rescue plan for Greece, which called for a 21 percent writedown.

German Finance Minister Wolfgang Schaeuble and the chairman of euro group finance ministers, Jean-Claude Juncker, have said that figure may no longer be sufficient and the talks may have to be reopened.

Speaking on Austrian television late on Monday, Juncker refused to rule out a mandatory debt restructuring for Greece, which many market analysts and economists say is bound to happen in the coming months. Many analysts see the rush to recapitalize European banks as a prelude to an enforced write-down of 50 percent or more on their Greek debt holdings.

(Additional reporting by Michael Winfrey and Martin Santa in Bratislava, Paul Carrel, Jonathan Gould, Philipp Halstrick, Edward Taylor and Sakari Suoninen in Frankfurt, and Huw Jones in London; Writing by Paul Taylor, Mike Peacock and Peter Graff)

New bankruptcy ripples may emerge

Insight: New bankruptcy ripples may emerge | Reuters.

<span class="articleLocation”>Three years after the collapse of Lehman Brothers touched off a tidal wave of bankruptcy filings, corporate failures may be about to pick up again, with some big-name companies among those struggling for survival.

Companies in a range of businesses, including hair salons, restaurants, renewable energy, and the paper industry, have tumbled into Chapter 11 in the past few months.

The weak economy, lackluster consumer spending, a shaky junk-bond market and increasingly tight lending practices are also threatening struggling companies in industries as diverse as shipping, tourism, media, energy and real estate.

AMR Corp’s American Airlines may need to go to court to restructure its labor contracts, though a spokesman for the airline reiterated on Monday that bankruptcy is not the company’s goal or preference.

Kodak confirmed that a law firm known for taking companies through bankruptcy has been advising on strategy as attempts to overcome the loss of its traditional photography business falter. It has denied any intention of filing for bankruptcy.

Some bankruptcy and restructuring experts warn a fresh U.S. recession could trigger a string of failures to rival the one that followed Lehman Brothers, which in 2008 filed the biggest bankruptcy in U.S. history.

“It’s getting busier for everyone I know,” said Jay Goffman, global head of the Corporate Restructuring Group at law firm Skadden Arps, Slate, Meagher & Flom. “I think 2012 will be a busy year and 2013 and 2014 will be extraordinarily busy years in restructuring.”

No one is currently predicting a second Lehman-type collapse. Its $639 billion bankruptcy came after a loss of confidence in the investment bank as asset values plummeted, leading to the drying up of credit lines.

In fact, predicting a bankruptcy wave at all is a tricky task, experts say. It could depend on several unknowns: how much money banks and other institutions are willing to lend troubled companies, whether the economy lands in a double-dip recession and what happens in the European debt crisis.

The sovereign debt crisis in Europe could be the most important X factor. Even the experts who say that a bankruptcy crisis is not coming because current low interest rates make it easy for companies to get cash to finance their way out of trouble, say that the euro zone’s problems could trigger defaults here.

“It is possible that one or two sovereign debt defaults would increase the pressure we’d feel in the U.S. credit market. Then we might see an environment like we had in 2008,” said Peter Fitzsimmons, president for North America for turnaround advisory firm AlixPartners LLP.

MORE FILINGS

Chapter 11 filings are picking up, bankruptcy data show. Ten companies with at least $100 million in assets filed for bankruptcy in September, the most since 17 filed in April, which was the busiest month since 2009, according to Bankruptcydata.com.

For a graphic click here link.reuters.com/nuw34sp:

Recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the federal government.

Other recent bankruptcies include glossy magazine paper manufacturer NewPage Corp, which was the largest bankruptcy of the year and the largest non-financial company filing since 2009; Graceway Pharmaceuticals, which makes skin creams; Hussey Copper Corp., which makes the copper bars used in switchboards, and the Dallas Stars of the National Hockey League.

So far this month, five companies with more than $100 million in assets have filed, including the Friendly’s ice cream chain – and wireless broadband company Open Range Communications Inc.

It is difficult to predict trends in filings. For example, experts who focused on macroeconomic credit indicators and default projections in 2006 or 2007 wouldn’t in many cases have been prepared for the severity of failures that followed.

In 2009, General Motors, Chrysler Group, LyondellBasell Industries and General Growth Properties all filed for bankruptcy, contributing to a record number of filings and topped the list of largest bankruptcies ever.

At the same time, some experts were predicting an even deeper and longer list of corporate collapses. But within a year of bankruptcy filings breaking records, banks and other financial institutions were buying debt and lending, making it easy for companies to finance their way out of trouble.

Two months after Lehman failed, the U.S. Federal Reserve slashed rates to near zero. Once confidence began to return to the debt markets, investors flocked to high-yield bonds sold by ailing companies, allowing them to refinance.

Other failing companies were able to “amend and extend” – or to critics, “amend and pretend” – by striking new borrowing terms with lenders that delayed debt maturities in the hopes the economy would rebound smartly and business would pick up.

Those measures often avoided operational overhauls, creating what some experts called “zombie companies” that cut staff and prices to survive, but were too sick to invest in new projects.

Bankruptcy court allows troubled companies to shed debt and also become more operationally efficient as they renegotiate labor contracts, as airlines have done, or reject pricey store leases, which retailers often do.

But these changes do not always work, especially when companies find little support among suppliers or creditors for their turnaround plans. Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer.

In addition, confidence in the economy and easy access to debt allowed companies to complete restructurings in 2009 and 2010 with business plans and debt loads that were based on an economic pickup that has now faltered. That could create the potential for trouble at companies that have already restructured once.

SIGNS OF TROUBLE

Restructuring advisers agree that a dimming economic outlook will force lenders to make some tough calls about troubled companies. Those who see a broader wave of bankruptcies expect the economy to dip back into recession as the U.S. government cuts spending and Europe’s debt problems worsen.

They also look beyond the equity market for less visible signs of trouble. They see a junk-bond market that has suffered its worst sell-off since the Fed cut rates to near zero in 2008 and falling loan market prices as lenders reduce their exposure to weak borrowers.

There are even troubling signs coming from otherwise sanguine rating agencies that assess corporate debt. Moody’s noted that the number of downgraded liquidity ratings for troubled companies rose for a third straight month in September, an ominous sign that was similar to the third quarter of 2007 when the economy last slid into recession.

Indeed, one analyst said the Evergreen Solar bankruptcy as well as the recent filing of restaurant operator Real Mex Restaurants Inc show that weak companies are finding it hard to borrow. Both failed to reach the kind of refinancing deal with creditors that until recently was saving many troubled companies from Chapter 11.

“The idea that a couple of companies can’t even go to existing lenders for a real lifeline is quite telling right now,” said Kevin Starke, an analyst with CRT Capital Group, a brokerage that specializes in distressed securities.

LACK OF HOME RUNS

Still, not everyone is convinced more bankruptcies are on the way. Jim Hogan, the head of GE Capital’s restructuring finance unit who works with a lot of medium-sized companies, said he expects only a gradual increase in business, limited to the weakest industries.

“I’m not telling anyone internally I’m expecting some big home runs for us,” Hogan said.

Some said the current rise in bankruptcy filings is routine as fatigued lenders pull the plug on deadbeat companies. While debt and equity markets may have recently been in a swoon, many credit indicators generally show Corporate America to be in decent health.

For example, corporate balance sheets are stuffed with cash, and the rate of corporate loan defaults is expected to end the year at 0.23 percent, well below the historical average of 3.57 percent, according to Standard & Poors.

One of the biggest concerns of recent years, a looming “wall of maturities” of bonds that come due in the next few years, has largely been refinanced, according to Moody’s.

Despite this, the level of debt held by consumers, the federal government and the corporate sector weighs heavily on the economy and will likely spell trouble for some major companies.

“You have this huge overhang of debt. You don’t see a significant amount of improvement in the economy. How long can that continue?,” said Jay Indyke, chair of the bankruptcy and restructuring practice at law firm Cooley LLP.

(This story corrects Jay Goffman’s title in paragraph 7 to head of restructuring, from co-head)

(Reporting by Tom Hals in Wilmington, Delaware, Susan Zeidler in Los Angeles, Caroline Humer in New York; Additional reporting by Nick Brown in New York; Editing by Martha Graybow and Martin Howell)

Trouble in Triple-A World

Trouble in Triple-A World – By Joshua E. Keating | Foreign Policy.

Standard & Poor’s decision last Friday to downgrade U.S. debt from AAA to AA+ status was as much about politics as economics. According to the ratings agency, “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

As others have noticed, not all of the remaining 15 countries with AAA ratings exactly have their fiscal houses in order. But as long as S&P is getting into the political risk assessment game, he’s a look at the political state of play in some of the world’s most creditworthy countries.

FRANCE

Predictable is probably not the first word one would use to describe the politics of a country that has gone through five different governments since its founding. Today, even the smallest economic reforms — such as, raising the retirement age from 60 to 62, is enough to bring the country to a grinding halt as labor unions shut down the country’s businesses and transportation networks and protesters take to the streets. Maybe that’s the definition of predictability?

The country’s president has been investigated for receiving illegal campaign donations, his predecessor is on trial for payoffs to political allies, and its most prominent opposition leader is facing multiple rape charges. Meanwhile, France’s third-largest political party, which has performed disturbingly well in both national and regional elections, is the far-right National Front which wants to ban all immigration and has pledged to pull France out of the eurozone if it ever comes to power.

BRITAIN

Britain’s decision to stay out of the eurozone, which has given it the flexibility to print more pounds if need be, is looking pretty wise these days. On the other hand, with a growth rate under one percent over the last 12 months and riots raging the capital city, Britons can’t exactly feel too secure. The country’s debt-to-GDP ratio is 80 percent, six points higher than that of the United States.

For now, Prime Minister David Cameron has been able to push harsh austerity measures meant to restore fiscal confidence through Parliament, but he’s dependent on an often uneasy partnership with the Liberal Democratic Party, which could drop its tenuous support, collapsing Cameron’s government.  The prospect of a hung Parliament so rattled currency markets last year that the pound briefly fell against that poster child of skyrocketing inflation, the Zimbabwean dollar.

Exchequer Chancellor George Osborne says he views the global debt crisis as an “opportunity” to push through economic reforms, but unless his government can deliver growth fast, the window of opportunity may be a short one.

CANADA

Want a definition of government dysfunction? How about a prime minister who, when faced with a myriad of tricky issues — an unpopular war, economic turmoil, Olympic fever — chooses to shut down the government for two months. That’s exactly what Canadian Prime Minister Stephen Harper did in early 2010, employing a time-honored Canadian political tactic known as a “prorogue” to shut down parliamentary debate. It was the third time the prime minister had employed the prorogue in as many years. One can hardly blame Harper for wanting to avoid parliamentary debate. Because of repeated votes of no-confidence, Canada has had four national elections in the last seven years.

Canada has weathered the financial crisis better than most developing world economies, though the effect of U.S. and European economic woes may force the country to revise down its growth forecasts.

GERMANY

Once touted as “Frau Germania” and the recipient of glowing comparisons to Margaret Thatcher and even Otto Von Bismarck, German Chancellor Angela Merkel, has definitely lost her mojo lately. And there’s never been a worse time for it: With Germany’s key role in the European economy, she’s arguable the continent’s most important person. But Merkel isn’t quite the strong and unbending leader as these times call for anymore: she’s changed her position from radical free trader to defender of the welfare state, from defender of the environment to champion of industry, and from nuclear cheerleader to anti-nuke activist.

Voters aren’t buying it. Her popularity is at its lowest point since 2006 and her party was trounced in recent local elections.  Most worryingly, the leader of Europe’s lender of last resort hasn’t been able to sell voters on the need to bail out Europe’s struggling economies.

LUXEMBOURG

Pop quiz: What country has the world’s largest national debt per capita? Greece? Ireland? Pakistan? Nope. It’s tiny AAA-rated Luxembourg, which boasts a debt of nearly $1.9 trillion, or about $3.44 million per capita. Granted, the country also has the second highest GDP per capita, so they can probably cover their debts right now. But given the country’s reliance on the European banking sector and investment funds — not the most stable field at the moment — who’s to say how long the duchy’s good times will last?

UBS: Our risk systems did detect £1.3bn rogue trader – We just didn't do anything about it

UBS: Our risk systems did detect £1.3bn rogue trader – ComputerworldUK.com.

But the warnings were ignored, bank claims

UBS has insisted its IT systems did detect unusual and unauthorised trading activity, before rogue trader Kweku Adoboli ran up a $2 billion (£1.3 billion) loss on the bank’s derivatives desk.

Interim chief executive Sergio Ermotti, who is running the company following Oswald Grubel’s resignation last month, sent a memo to employees saying the bank is aware that its systems did detect the rogue activity.


In the memo, seen by the Wall Street Journal, Ermotti wrote: “Our internal investigation indicates that risk and operational systems did detect unauthorised or unexplained activity but this was not sufficiently investigated nor was appropriate action taken to ensure existing controls were enforced.”

He added: “We have to be straight with ourselves. In no circumstances should something like this ever occur. The fact that it did is evidence of a failure to exercise appropriate controls.”

The news comes as the heads of UBS’ global equities business, Francois Gouws and Yassine Bouhara, also resigned.

Meanwhile, regulatory and internal investigations continue into the problem.

“Criminal law prevents us from disclosing detailed information at the moment,” Ermotti wrote. He added that the company was taking “immediate and decisive action based on the findings of our own review of what happened”.

The bank insisted it was working to improve its risk and control framework, adding that it was clarifying rules and processes.

Rogue trader: How UBS systems and controls failed to stop a £1.3bn loss

'Massive jobs shortfall' predicted for global economy

‘Massive jobs shortfall’ predicted for global economy | Business | guardian.co.uk.

‘Massive jobs shortfall’ predicted for global economy

International Labour Organisation said the group of developing and developed nations had seen 20m jobs disappear since the financial crisis in 2008

International Labour Organisation (ILO) director general, Juan Somavia

‘We must act now to reverse the slow-down in employment growth,’ International Labour Organisation (ILO) director general, Juan Somavia, Photograph: Martial Trezzini/EPA

The world’s major economies are heading for a “massive jobs shortfall” by the end of next year if governments do not change their tack on policy, the International Labour Organisation (ILO) said in a study published on Monday.

In the report, prepared with the OECD for G20 labour ministers meeting in Paris on Monday, the ILO said the group of developing and developed nations had seen 20m jobs disappear since the financial crisis in 2008.

At current rates it would be impossible to recover them in the near term and there was a risk of the number doubling by the end of next year, it said.

“We must act now to reverse the slowdown in employment growth and make up for the jobs lost,” ILO director general Juan Somavia said in a statement.

“Employment creation has to become a top macroeconomic priority.”

The number of people in work in the G20 has risen by 1% since 2010, but 1.3% annual growth is needed to return to pre-crisis employment levels by 2015, the ILO said.

“However, employment growth of less than 1% cannot be excluded given the slowdown of the world economy and the anaemic growth foreseen in several G20 countries,” the report said. “Should employment grow at a rate of 0.8% until end 2012, now a distinct possibility, then the shortfall in employment would increase by some 20m to a total of 40m in G20 countries.”

India and China, the world’s most populous countries, were both laggards with less than 1% annual growth in total employment, the report said, so an extra push for jobs could have a major impact on the G20.

However, the report was based on figures for both countries that were not up to date. China’s jobs growth of 0.7% was for 2009, while India’s 0.4% was the average annual change between 2004-2005 and 2009-2010.

After stripping out India, China and Saudi Arabia, which also used 2009 data, employment growth in the other 17 countries was 1.5%, according to a Reuters calculation based on data in the ILO report.

The latest figures for other G20 countries show four with growth rates below 1%, namely Italy, France, South Africa and the United States, while two others – Japan and Spain – have seen a fall in total employment in the past year.

Since the beginning of 2008, Spain, South Africa and the United States had experienced the biggest falls in employment among the G20 countries. Spain and the United States also saw the biggest rises in unemployment rates, followed by Britain.

Italy Hits the Iceberg

Italy Hits the Iceberg – By Maurizio Molinari | Foreign Policy.

Perhaps it was already too late for Italy to avoid the financial downgrade that credit-rating agency Moody’s threatened at the beginning of this summer. It’s not as if people didn’t see it coming. Italy’s economy has been battered by rising debt and worsening credit spreads. A default or bailout is every European central banker’s nightmare scenario — it’s the economy “too big to save.” Indeed, as Finance Minister Giulio Tremonti ominously warned in July, “If we don’t act now, then we will be like the Titanic, and even the first-class passengers suffered.” Not to push the analogy, but Italy may have just hit the iceberg. It’s not necessarily sinking, though. The government in Rome can still try to exploit the pressure generated by the current financial crisis to jolt the economy out of its semi-stagnation, launching a bold and comprehensive program of structural reforms to increase productivity and growth, while driving down debt. But does anyone believe that embattled Prime Minister Silvio Berlusconi still has the will — or enough political juice — to do it?

Moody’s Oct. 4 decision to downgrade Italy’s sovereign debt to A2 follows a similar decision by Standard & Poor’s on Sept. 19 that knocked the country down to a single A rating; but Moody’s slash of three notches was in some ways more shocking. Both agencies also give Italy a negative outlook, which means that future downgrades are likely. Italy’s high and mighty have reason to worry.

The downgrades are based on three concerns. First is the sharp deterioration of the international economic outlook, particularly in Europe. This is obviously something over which Italy has no control, but which it’s more impacted by than other advanced countries because of its endemic low growth rates. Italy does not have the fiscal space or the flexibility to change monetary or foreign exchange policies to boost growth. Second, and compounding the problem, sluggish growth risks undermining the otherwise good fiscal results achieved by Italy in the past few years, particularly the primary budget surplus. Third is the political component: Growing frictions within the ruling coalition and its slim parliamentary majority have undermined the government’s ability to enact necessary but unpopular measures to front-load fiscal consolidation and break the numerous logjams that hamper growth. And political uncertainty is not going to disappear anytime soon; even if Berlusconi steps down, it is unclear who will be his successor or whether new elections will lead to a more effective government coalition.

Even if Berlusconi and Tremonti did see the Moody’s iceberg coming, it is unlikely that they could have turned the ship of the Italian economy in time to avoid it. This, however, doesn’t mean that they’re above fault. Italy should have taken immediate action to strengthen its economy and to try to distance itself from the contagion of the debt crisis in Greece and the other European peripheral countries. Specifically, Rome should have embraced the stern recommendations issued in early August by European Central Bank (ECB) President Jean-Claude Trichet and his incoming Italian successor, Mario Draghi, who requested that Italy act with urgency on several fronts, including liberalizing public services and professions, making the labor market more flexible, increasing the retirement age in line with international standards, and streamlining the public administration. These measures, as the ECB urged, should be part of a “comprehensive, bold, and credible strategy of reforms.” Rome gravely nodded and promised to get to work, but the result was more of the same: lots of talking and only marginal improvement.

After some procrastination, the Italian government did push through Parliament a set of measures aimed at having a balanced budget by 2013, a plan that would allow the debt-to-GDP ratio to start to decline from its very high level. But the plan’s effectiveness and credibility have been questioned: Most measures don’t actually cut government spending but rather increase tax revenue, including a much-vaunted program to strengthen tax collection. (We’ll see what comes of that.) In any case, many of the structural reforms and growth-enhancing measures suggested by the ECB are missing.

The predicament that the Italian government now faces is like trying to fix the flaws in the Titanic’s construction as it’s hitting the iceberg: Sound the alarm, save the women and children, plug the holes — and while you’re at it, build more lifeboats, double-plate the hull, and make sure that those rivets aren’t subpar.

Markets are asking Italy to resolve long-standing problems that will take years to redress, even assuming its full commitment to the task. This commitment, however, is severely lacking now and in the foreseeable future. Berlusconi is under fire for nonstop sordid revelations about his private life; the current coalition government lacks any clear candidate to replace him; and the opposition is too fragmented and weak to offer a credible alternative. Even civil society seems unable to offer credible leaders. The only exception to this lack of leadership is the president, Giorgio Napolitano, whose moral authority has grown considerably in recent months but whose powers are strictly limited by the Italian Constitution. Napolitano, however, has never said that he’s eager to assume the premiership.

Under these circumstances, it is unclear who will be able to take those bold, comprehensive actions recommended by the ECB; Tremonti is preparing plans, but the political will to push them forward is lacking. This is due largely to Berlusconi — whose weakened stature makes it nearly impossible for him to take command of a fractious government. Meanwhile, Italy remains exposed to the spillover effects of the debt crisis, though its budgetary situation appears much stronger than those of most European countries. But the Moody’s downgrade doesn’t help. It’s now going to be more difficult — and it cost Italy a lot more — to enter credit markets and reassure bondholders.

To make matters worse, like with the Titanic’s sinking, the Carpathia is too far away to come to Italy’s aid. European leaders have been unable to decide on an effective strategy to cope with the debt crisis and contain its effects. The European Financial Stability Facility (ESFS) that is designed to assist countries dealing with the economic crisis is not yet operational, pending the ratification of the last of the 17 eurozone countries, Slovakia. Even assuming the ESFS does come online in the near future, most serious analysts doubt whether it has adequate resources; only $300 billion would be available to it, and most estimates hold that it will take more than $1 trillion to calm the restive markets.

Still, there’s a glimmer of hope on the horizon. There is no doubt that Italy — as well as a number of other eurozone countries — is navigating through very dangerous seas. But it’s not yet a foregone conclusion that it will go down like the Titanic. That said, if Italy’s politicians think that anyone but themselves will come and save them, then they might want to start taking swimming lessons now.

IMF says US and Europe risk double-dip recession

US and Europe risk double-dip recession, warns IMF | Business | guardian.co.uk.

International Monetary Fund’s World Economic Outlook says slow, bumpy recovery could be jeopardised by Europe’s debt crisis or over-hasty attempts to cut America’s budget deficit

IMF cuts growth forecast for UK

Wall Street protest

A protest on Wall Street. Confidence has fallen and the risks are on the downside, the IMF said in its half-yearly report. Photograph: Keystone/Rex Features

The International Monetary Fund warned on Tuesday that the United States and the eurozone risk being plunged back into recession unless policymakers tackle the problems facing the world’s two biggest economic forces.

In its half-yearly health check, the Washington-based fund said the global economy was “in a dangerous place” and that its forecast of a slow, bumpy recovery would be jeopardised by a deepening of Europe’s sovereign debt crisis or over-hasty attempts to rein in America’s budget deficit.

“Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said as it cut its global growth forecast for both 2011 and 2012.

The IMF also cut its growth forecasts for the UK economy and advised George Osborne to ease the pace of deficit reduction in the event of any further downturn in activity.

The IMF’s World Economic Outlook cited the Japanese tsunami and the rise in oil prices prompted by the unrest in north Africa and the Middle East as two of a “barrage” of shocks to hit the international economy in 2011. It said it now expected the global economy to expand by 4% in both 2011 and 2012, cuts of 0.3 points and 0.5 points since it last published forecasts three months ago.

“The structural problems facing the crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion,” the IMF said.

Speaking at a press conference in Washington, Olivier Blanchard, the IMF’s economic counsellor, said there was “a widespread perception” that policymakers in the euro area had lost control of the crisis.

“Europe must get its act together,” Blanchard said, adding that it was “absolutely essential” that measures agreed by policymakers in July, including a bigger role for the European Financial Stability Fund (EFSF), should be made operational soon.

“The eurozone is a major source of worry. This is a call to arms,” he said.

Blanchard said the fund was cutting its growth forecasts because the two balancing acts needed to ensure recovery from the recession of 2008-09 have stalled. Governments were cutting budget deficits but the private sector was failing to make up for the lost demand. Meanwhile, the global imbalances between deficit countries such as the US and surplus countries such as China looked like getting worse rather than better.

“Markets have become more sceptical about the ability of governments to stabilise their public debt. Worries have spread from countries on the periphery of Europe to countries in the core, and to others, including Japan and the US, Blanchard said.

He added that there was a risk of low growth, fiscal, and financial weaknesses could easily feed on each other.

“Lower growth makes fiscal consolidation harder. And fiscal consolidation may lead to even lower growth. Lower growth weakens banks. And weaker banks lead to tighter bank lending and lower growth.” As a result, there were “clear downside risks” to the fund’s new forecasts.

Developing nations lead the way

In its report, the IMF said it expected the strong performance of the leading emerging nations to be the main driving force behind growth in the world economy. China’s growth rate is forecast to ease back slightly, from 9.5% in 2011 to 9% in 2012, while India is predicted to expand by 7.5% in 2012 after 7.8% growth in 2011.

Sub-Saharan Africa is expected to continue to post robust growth, up from 5.2% in 2011 to 5.8% in 2012.

The rich developed countries, by contrast, are forecast to grow by just under 2%, slightly faster than the 1.6% pencilled in by the IMF for 2011.

“However, this assumes that European policymakers contain the crisis in the euro periphery area, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate.”

“The risks are clearly to the downside,” the IMF added, pointing to two particular concerns – that policymakers in the eurozone lose control of the sovereign debt crisis, and that the US economy could weaken as a result of political impasse in Washington, a deteriorating housing market or a slide in shares on Wall Street. It said the European Central Bank should consider cutting interest rates and that the Federal Reserve should stand ready to provide more “unconventional support”.

It said: “Either of these two eventualities would have severe implications for global growth. The renewed stress could undermine financial markets and institutions in advanced economies, which remain unusually vulnerable. Commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in developing countries.”

The IMF said that in its downside scenario, the eurozone and the US could fall back into recession, with activity some three percentage points lower in 2012 than envisaged. Currently, the fund is expecting the US to grow by 1.8% in 2012 and the eurozone by 1.1%.

“In the euro area, the adverse feedback loop between weak sovereign and financial institutions needs to be broken. Fragile financial institutions must be asked to raise more capital, preferably through private solutions. If these are not available, they will have to accept injections of public capital or support from the EFSF, or be restructured or closed.”

The IMF urged Republicans and Democrats in Washington to settle their differences: “Deep political differences leave the course of US policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels.”