eNews May 5, 2011

May 5, 2011

News Briefs

  1. South Korean Trade Awaiting Critical Summer with EU, U.S. Pact Developments
  2. Geithner Acts to Extend Debt Ceiling Deadline
  3. Portugal Bailout Figures Set; Awaits Opposition Party Capitulation
  4. Small Business Regulatory Freedom Act Added as Amendment to SBIR/STTR Bill
  5. Manufacturing, Trade Optimism, Construction Spending All Up
  6. Consumer Bankruptcies Fall with Debt Levels
  7. Fed Finally Admits Rising Inflation, Still Hedges on Rates


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South Korean Trade Awaiting Critical Summer with EU, U.S. Pact Developments

As the White House and pro-trade lawmakers get ready to face off with several significant labor groups and their political allies this summer on a long-in-the-works free trade agreement (FTA) with South Korea, the European Union (EU) appears set to actually implement the terms of its pact with the emerging economic powerhouse after some hurdles among lawmakers were cleared last week.

The White House continues to push Congress to pass provisions of a U.S.-South Korean FTA despite loud criticism from certain organized labor organizations. Last December, the U.S. and South Korea forged what became the expected final version of the deal, which was originally crafted at the behest of the Bush Administration in April 2007, mainly to address objections raised by the now on-board U.S. auto industry. President Barack Obama, working toward a stated goal of doubling exports within the next five years, hopes to sign the pact into law by July.

That's also when a further-along free trade agreement between the EU and South Korea is expected to go into effect. The European FTA is not too unlike that of the U.S. version; valued at around $70 billion, it is seen as practical for European-based businesses looking to reduce the gap in tariffs that put them at a trade disadvantage and is symbolic, at least at first, for an East Asian nation looking to demonstratively declare itself as an A-list player on the world economic stage. U.S. officials believe that belaboring debate on the U.S.-South Korea FTA will simply create significant trade advantages for competitors across the Atlantic Ocean.

Kyle Choi, Esq. of Bluestone Law Ltd. told NACM the pact again illuminates South Korea's rising economic and business stock. Choi, who will lead the just-added "Doing Business in South Korea" educational session at NACM's 2011 Credit Congress in Nashville this month, believes the FTA will increase competitive fairness by reducing the gap in tariffs, estimated by some at 10%, as well as force South Korean companies to produce better products, components and services across the board. On the surface, it appears to be a win-win situation for U.S.-based businesses. On the other hand, the deal may in time show actual practicality for the Asian nation.

"It looks, at least on the surface, to have a lot of symbolic meaning in terms of diplomatic relationships with different countries," Choi said. "It's also going to become practical once South Korea starts employing legal services, medical services and a lot of other sectors from other countries. But, when it comes down to trade, some of their sectors may have to sacrifice, like agriculture. There's no way South Koreans can compete against big American farmers, for example."

Choi plans to address three main topics during his upcoming Credit Congress session: why doing business with South Korean companies is a good idea, the possibility of, and how to prevent problems when doing business transactions there (ranging from acceptable conditions, such as when to use letters of credit, guarantees, etc.), as well as how to resolve problems that inevitably arise (use of arbitration, litigation, etc.). For more information on Credit Congress at Nashville's Gaylord Opryland from May 22-25, click here.

Brian Shappell, NACM staff writer

FCIB at Credit Congress

Don't miss the five-part International Track at NACM's 115th Credit Congress. Learn the essentials of Doing Business in Brazil, Canada, Chile, China and South Korea. Designed specially by FCIB for Credit Congress, these sessions will also explore the due diligence efforts required to conduct in-country business successfully.

Plus, don't miss networking with global practitioners from various industries at FCIB's International Luncheon on Monday, May 23.

Geithner Acts to Extend Debt Ceiling Deadline

U.S. Treasury Secretary Timothy Geithner told Congress this week that he will take steps to extend the deadline for negotiations surrounding the nation's debt ceiling. Currently, the United States is set to hit its statutory debt limit on May 16.

If the debt limit is not raised, the U.S. could default on its debt, causing what many believe would be another global recession.

Since that May 16 deadline is now less than two weeks away, and it doesn't look like lawmakers will reach a deal in time, Geithner announced that the Treasury would immediately suspend, until further notice, the issuance of State and Local Government Series (SLGS) Treasury securities. "SLGS are special-purpose Treasury securities issued to states and municipalities to help them conform to tax rules that restrict the investment of proceeds from the issuance of tax-exempt bonds," said Geithner. "These bonds are used to fund a variety of expenditures, including infrastructure improvements across the country."

While ceasing these bonds buys the U.S. some time, it could simultaneously have a negative effect on states and municipalities. "Because the United States is very close to reaching the debt limit, Treasury must take this action now," said Geithner. "However, it is not without costs; it will deprive state and local governments of an important tool to manage their outstanding debt expenses."

Geithner characterized this step as "extraordinary," noting that other similarly unprecedented actions will have to be undertaken should the debt ceiling not be raised soon. "If Congress does not increase the debt limit by May 16, the Treasury Department will be forced to employ further extraordinary measures on that date to provide headroom under the limit," he said. "Therefore, on May 16, I will (1) declare a 'single debt issuance suspension period' under the statute governing the Civil Service Retirement and Disability Fund, permitting us to redeem existing Treasury securities held by that fund as investments, and to suspend issuance of new Treasury securities to that fund as investments, and (2) suspend the daily reinvestment of Treasury securities held as investments by the Government Securities Investment fund of the Federal Employees Retirement System Thrift Savings Plan."

These actions, collectively, would extend the debt ceiling deadline to about August 2, according to Geithner. "While this updated estimate in theory gives Congress additional time to complete work on increasing the debt limit, I caution strongly against delaying action," he added. "The economy is still in the early stages of recovery and financial markets here and around the world are watching the United States closely. Delaying action risks a loss of confidence and accompanying negative economic side effects."

Jacob Barron, NACM staff writer

Distressed Business Services

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Click here to learn more about NACM's Distressed Business Services.

Portugal Bailout Figures Set; Awaits Opposition Party Capitulation

A bailout agreement between debt-riddled Portugal and the European Union/International Monetary Fund appears nearly complete with just one more hurdle to clear. And it appears to have come just in time to prevent a default.

Reports out of Europe Wednesday indicated the Portugal bailout will be valued at 78 billion euro/$116 billion (USD). The aforementioned parties were actively pressing opposition leaders, primarily from the Social Democrats party, for an agreement ahead of the official announcement. The bailout would require a host of Portuguese austerity measures highlighted by the following: tax increases in areas including those in the property category, a freeze on the levels of many existing benefits and public sector wages/pensions, barring of spending on new construction projects like the Lisbon airport and Liston-Porto high-speed rail link and tighter cuts, perhaps even potentially significant ones to, education, health and housing.

The bailout marks the third of the PIIGS nations—after Greece and Ireland—to accept financial assistance in less than one year amid crushing debt loads. Additionally, Portugal saw its sovereign credit rating plummet just five weeks ago as Standard & Poor's noted that the bailout pre-conditions almost surely would require a restructuring of debts and that all senior unsecured government debt would be subordinated to the EU's European Stability Mechanism. That is likely again if bond sales continue to fare poorly.

Freddy van den Spiegel, chief economist and director of public affairs for BNP Paribas Fortis, told NACM that Portugal's bailout is a short-run positive in the sense that it restores some confidence in the EU and the euro currency. However, the economist noted that deep, existing problems are far from resolved and will remain a steep challenge for the Iberian nation in the coming years.

Brian Shappell, NACM staff writer

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For more information on NACM's MLBS, click here.

Meet Greg Powelson, director of MLBS, in Nashville during NACM's 115th Credit Congress & Expo. Greg will be presenting "Mechanic's Liens & Bonds: Critical Elements for Every Construction Credit Manager."

Small Business Regulatory Freedom Act Added as Amendment to SBIR/STTR Bill

Consideration continues in the Senate on the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) Reauthorization Act, a bill that's grown ever larger with the addition of several important amendments.

In addition to a proposed provision that would repeal a 3% withholding requirement set to go into effect on all government contracts next year, a separate amendment proposed by Senators Olympia Snowe (R-ME) and Tom Coburn (R-OK) would impose new regulatory review requirements on federal agencies, mandating that they conduct periodic reviews of their rules and measure the impact of certain regulations on small businesses.

Originally, the amendment existed as a standalone bill dubbed the Small Business Regulatory Freedom Act, but Snowe and Coburn have sought to increase its chances for passage by attaching it to the reauthorization.

A recent editorial from Snowe laid out the case for the amendment. "When I talk with business owners in Maine and elsewhere, the single most cited barrier to job growth is the uncertainty about federal regulations," she said. "The cost of ensuring compliance with the evermore complex web of mandates and regulations is choking employers' ability to innovate and create jobs. Regulators owe it to all Americans to ensure the rules and regulations they enforce are efficient, effective and meeting their goals in the best way possible. That is why all federal regulations need thoughtful and regular review. Unfortunately, too few regulations receive such attention."

Snowe noted that regulations are often piled on top of existing regulations without any consideration to whom they might impact. She also cited a study that pegged the annual cost of complying with federal regulations in the United States at $1.75 trillion.

"The Snowe-Coburn regulatory amendment...would strengthen the Regulatory Flexibility Act (RFA), the seminal legislation enacted in 1980 requiring federal agencies to conduct small business analyses for any regulation that would impose a significant impact on a substantial number of small firms," said Snowe. "This amendment should be provided its due consideration during Senate debate of the SBIR/STTR reauthorization bill...If the majority is serious about turning the tide on anemic job creation, they will permit a vote on our critical regulatory reform amendment, which is vital to the prosperity of our nation's almost 28 million small businesses job generators."

Jacob Barron, NACM staff writer

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Meet fellow CFDD members during NACM's 115th Credit Congress & Expo in Nashville and join us for a special CFDD Luncheon on Tuesday, May 24—the perfect place to learn all about CFDD!

Manufacturing, Trade Optimism, Construction Spending All Up

While concerns about the effect of commodity price volatility on the nascent economic rebound are steadily growing, some statistics tracking conditions earlier this spring and unveiled in late April/early May paint a somewhat rosier picture.

Multiple sets of statistics continue to show the lengthy positive trend for manufacturing growth continuing. However, the pace of expansion appears to be slower than in previous months and at the same time last year.

U.S. Commerce Department statistics found new orders for domestically manufactured goods increased by 3%, which was actually slightly more than forecast. International shipments grew in March by a near-exact amount, according to those statistics, on strong demand from BRIC powerhouses China and Brazil.

"Now that the dollar has been weak for more than three years and some established trade partners have developed, the manufacturer is looking at the export sector as a more permanent part of their operations," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor, in his Strategic Global Intelligence Brief commentary. Kuehl, a prominently featured speaker at NACM's 2011 Credit Congress this month in Nashville, added that "the combination of buying materials to service opening markets and the acquisition of new capital equipment has been driving the overall rate of factory orders and will likely continue to do so in the months and years to come."

It appears the ongoing manufacturing expansion also is helping to fuel some construction activity, at least in the commercial and industrial segments. Commerce noted a larger than expected 1.4% gain in construction spending from February to March, the best since the previous April. Construction spending has lagged just about as much as any economic growth metric in recent years. Residential construction still appears to be in worse shape than its commercial counterparts even though its downturn started earlier and often was predicted to end earlier, which has not been the case. The ongoing residential real estate woes continue to have a ripple effect on overall economic growth and, thus, the health of U.S. businesses, large and small.

Meanwhile, a private study on U.S. trade confidence finds it at the highest level in nearly two years. A just-unveiled study by HSBC Holdings, the HSBC Trade Confidence Index, tracked at its highest level since the second half of 2009 on prospects for exporting growth to China and Latin America with 62% of polled small and mid-sized businesses predicting noticeably higher trade volumes during the next six months.

"U.S. businesses increasingly recognize the prospects global trade offers their businesses," said HSBC Executive VP William Nowicki. Among nations garnering the highest level of optimism among polled businesses are India, Saudi Arabia, Mexico, Indonesia and Turkey. Four of these nations were prominently discussed in the March Business Credit feature article, "Breaking Through the BRIC Wall," which can be read here.

Kuehl will be presenting at this year's Credit Congress at the Gaylord Opryland (May 22-25). For more information, visit the Credit Congress web pages.

Brian Shappell, NACM staff writer

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Consumer Bankruptcies Fall with Debt Levels

Last year was something of a banner year for bankruptcy filings. But as economic growth returns and consumer debt levels start to decrease, experts aren't expecting the same in 2011.

The most recent bankruptcy figures bear this out: consumer bankruptcy filings in April decreased 7% nationwide to 134,720 proceedings, down from 144,490 filings in April 2010. Last month's numbers also marked a 7% decrease from the March 2011 consumer bankruptcy total, which was 144,657. According to the National Bankruptcy Research Center (NBKRC), March is traditionally the highest filing month of the year and, while the March numbers were the highest in 11 months, even they were down 3% when compared with the numbers from March 2010.

April's decline makes it the fourth consecutive month in which filings were down from the previous year. "The worst is behind us," said the NBKRC in their March report.

All in all, everyone is expecting an easier year when it comes to bankruptcies. "As consumer debt levels fall and families continue to shore up their finances, bankruptcy filings will continue to drop as well," said Samuel Gerdano, executive director of the American Bankruptcy Institute (ABI). "Consumer bankruptcies for 2011 will likely dip below the 1.5 million filings recorded last year."

Jacob Barron, NACM staff writer

Fed Finally Admits Rising Inflation, Still Hedges on Rates

Talk of escalating inflationary pressures has been circulating for months now and, in a last-one-in-the-pool type of manner, the Federal Reserve finally admitted as such. But it still hasn't shaken the Fed and Chairman Ben Bernanke's resolve to keep rates historically low to help foster growth or continue stimulus efforts full speed ahead.

Following the Fed's latest two-day meeting of the Federal Open Market Committee last week, it was announced that the target for the federal funds rate would remain at the rock bottom range between 0% and 0.25%. The Fed also announced it would continue its ongoing plan to purchase $600 billion in longer-term Treasury securities. Both, however, were expected.

Perhaps unexpected was the Fed's warming to the idea that many had embraced weeks and even months before: that inflation is creeping into the picture. Granted, the Fed's announcement typically downplayed inflation even if it was no longer ignoring its presence.

"Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," the Fed said in a statement. In addition, while hailing continued gradual economic recovery, the Fed also acknowledged that commodities prices, especially those based on crude oil, "have risen significantly." There is obvious concern, both inside and outside the Fed, of their impact on stymieing the already lackluster economic recovery.

For more timely and breaking news such as this story as well as coverage you won't find in eNews or Business Credit, regularly check out our Credit Real-Time blog.

Brian Shappell, NACM staff writer

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