August 18, 2011
In a bit of relief for those concerned about more economic volatility both domestically and worldwide in the weeks following a ratings downgrade by Standard & Poor's (S&P), Fitch Ratings upheld the United States' top-level credit rating, as Moody's Investment Services did about a week ago. Fitch broke from its counterpart by giving the United States a "stable" outlook as criticism rang out against S&P for the methodology behind its now well-debated move.
Fitch affirmed the U.S. long-term foreign and local currency issuer default ratings as well as the U.S. Treasury security ratings and the U.S. Country Ceiling all at the top "AAA" level. Though noting debt has caused the U.S. fiscal profile to "deteriorate sharply," Fitch still rates the nation among the most reliable in the world from a credit standpoint.
"The affirmation of the U.S. ‘AAA' sovereign rating reflects the facts that the key pillars of the U.S.' exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks.'"
Nearly two weeks ago, S&P stripped the United States of its prestigious "AAA" rating with a one-step downgrade on what it described as unease with a political "brinksmanship" that shook its confidence in the nation's ability to deal with its large debt in the most proper or efficient manner. Additionally, the outlook on the long-term rating was set at "negative" by S&P, which hit hard at federal lawmakers over the political theatrics associated with the debt-ceiling debate. Some experts, including NACM Economist Chris Kuehl, PhD, intimated the move feeds into the view that S&P, now reportedly under a Justice Department investigation of past mortgage ratings, at times uses its ratings to influence nations' monetary behavior or even punish them for not following their advice.
"Fitch is equally distressed with the politics, but they simply have not seen any reason to assume that the securities are any less valuable than they were before—the low yields this week would seem to support them," said Kuehl.
Speaking on the Fitch rating, Conference Board Economist Ken Goldstein told NACM that it "underlines the point that S&P was making a statement more than an assessment. And the question intensifies about whether they were making a statement about government finances or the agency's ability to assess risk."
Meanwhile, Mauro Guillen, director at the Lauder Institute and a professor at the Wharton School of Business, remarked at the rarity of differing ratings on the part of the big three agencies. Guillen also intimated to NACM the situation involving S&P is akin to the adage "kill the messenger" and that perhaps had an influence on Fitch and Moody's in the days before its decision.
"In the case of the U.S. downgrade, the fallout from S&P's decision has been so emotional that the other two are likely to move carefully, if at all," he speculated. "The U.S. is not insolvent, and that's reflected in its 'A'-class ratings. But that does not mean one cannot raise concerns about the size, structure and future evolution of the deficit when one party does not want to increase taxes and neither party wants to make unpopular decisions about health care or Social Security."
Brian Shappell, NACM staff writer
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The leaders of Europe's two powerhouse economies presented a plan to save the euro and foster more coordinated economic policy across the euro zone this week. Markets reacted with an exasperated yawn.
U.S. stocks fell for the first time in four days and European banking and exchange shares went south after German Chancellor Angela Merkel and French President Nicolas Sarkozy announced, as part of their plan to keep their shared currency afloat, a proposal to tax financial transactions. The tax, which is only one part of the leaders' plan, was originally rejected by the European Union last year and would likely hit banks and exchanges by curbing trading volume. Their proposal would seek to apply the tax to the whole EU too, rather than just the 17 euro zone states.
The goal of the tax would be to shore up lagging revenue due to nearly non-existent economic growth. The Merkel-Sarkozy plan was announced on the heels of data indicating that Germany's economy had slowed to a halt in the second quarter of 2011, with a 0.1% growth rate for the continent's largest economy.
Investors were quick to voice their opposition to the tax, which the Association for Finance Markets in Europe (AFME) argued would do more harm than good. "The financial services industry should not be seen as an additional source of tax revenue but as an essential part of a stable and sustainable economy," said Simon Lewis, AFME chief executive. "The real impact of a possible transaction tax needs to be understood. Many financial transactions are carried out on behalf of businesses that would bear the cost of the additional tax. For example, the foreign exchange market underpins international trade and a tax on these currency trades would increase costs for a large section of European industry, to the detriment of economic growth."
The markets had hoped that the meeting between the two heads of state would lead to the creation of a bond backed by the entire euro zone, which would ideally be a safe investment and reduce borrowing costs for struggling European nations. Merkel and Sarkozy rejected the plan, however, on the grounds that the bond would let countries like Greece continue to behave irresponsibly and spend without regard for the EU as a whole. Sarkozy did note that a euro bond could be possible in the future.
Merkel and Sarkozy also rejected the markets' other big hope for the meeting, which was an expansion of the 440 billion euro rescue fund. In addition to the financial transaction tax, they also proposed that debt limits be written into national law and that a euro council be established, headed by EU President Herman Van Rompuy, to create a continent-wide "economic government."
Jacob Barron, NACM staff writer
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Those looking for a silver lining in the week that followed the blow Standard & Poor's dealt to the previously untouchable "AAA" U.S. credit rating and the subsequent rollercoaster ride on Wall Street weren't going to find it in a couple of monthly studies unveiled late last week.
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced June export totals of $170.9 billion and imports of $223.9 billion. The $53.1 billion deficit is the largest in two years. Additionally, June exports were $4.1 billion off of May's pace on lower demand in Europe and, to a lesser extent, Latin America as well as stagnant demand in Asia. Meanwhile, China unveiled its monthly trade statistics claiming a $31.5 billion trade surplus in July, the highest level since 2009. While its dominance and a 20.4% surge in exporting up to $175.1 billion could possibly act as an annoyance to other nations falling far behind in trade amid concerns of currency manipulation, exporters from other countries could at least take solace in China's importing activity. After a disappointing June, Chinese importing jumped 22.9% to $144.6 billion. Any drop in Chinese importing could be a hit for U.S. and European Union confidence levels, as businesses are increasingly reliant upon the Asian powerhouse's continued growth, especially in middle-class consumer culture, to offset losses and stagnation caused by the lack of a strong economic rebound in their areas of the globe.
Speaking of confidence, last Friday's headline-grabber in the mainstream media was the University of Michigan/Thompson Reuters Consumer Sentiment Index's fall from 63.7 to 54.9, the lowest rate in the study's 31 years. Factors such as a housing market that has failed to show significant recovery, ongoing high unemployment and the newfound fears stoked up in the highly politicized and partisan debate over debt ceiling/budget matters appear to be the lead reasons for the shattered domestic optimism.
Along with the rest of the week's poor economic news, an increasing number of analysts are again starting to bandy about the dreaded "r word" (recession) and talk of a double-dip. It's far from a consensus, but it's firmly back on the radar. Still, the stock market surged in the hours following the release of the U.S. trade and confidence data. However, given that volatility now appears to be the norm on Wall Street, it apparently comforted few.
Brian Shappell, NACM staff writer
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A free trade agreement (FTA) between Canada and Colombia became effective on Monday, while a similar FTA pending between the United States and Colombia since 2006 has yet to be sent to Congress for approval.
The completion of the Canada-Colombia FTA sparked a flurry of statements from Republican lawmakers, who argued that the agreement, and the still-pending status of its American counterpart, will put U.S. companies at a severe competitive disadvantage.
"While Canada's trade agreement with Colombia goes into force today, American exporters are put at a competitive disadvantage because the Obama Administration has yet to submit our own trade pact to Congress for a vote," said Sen. Orrin Hatch (R-UT), ranking member of the Senate Finance Committee, whose jurisdiction includes international trade. "Our bilateral accord with Colombia, which was signed years ago, would spur new job growth and shore up a vital regional alliance. There is no reason for continued delay and it is past time the President submit our pending trade agreements with Colombia, Panama and South Korea to Congress."
As Hatch noted, U.S. FTAs are pending with Panama and South Korea, in addition to Colombia. Lawmakers have criticized the lack of approved FTAs since their signature, arguing that there's no real reason to keep them from going into force and ultimately making exporting to these countries much more affordable. "The longer this Administration delays the further our economy falls behind," Hatch added.
Congressional leaders in the House also took the opportunity to hit the president on his perceived foot-dragging on the FTAs. "Our trade agreement with Colombia was signed in 2006, years before Canada and Colombia even began their negotiations," said Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee. "In the meantime, our share of Colombia's imports of key grains fell, and the trend will only accelerate as Canada and other countries deepen their trade ties with Colombia. Once again, I urgently call on the president to send the job-creating trade agreements with Colombia, Panama and South Korea to Congress without further delay."
The International Trade Commission (ITC) estimates that the tariff reductions in the U.S.-Colombia FTA would expand exports of U.S. goods by more than $1.1 billion, and support thousands of additional jobs. Once the FTA enters into force, more than 80% of U.S. exports of consumer and industrial products to Colombia will become duty-free, eliminating the over $3.5 billion in tariffs that have been imposed on U.S. exports to Colombia since the agreement was signed.
Jacob Barron, NACM staff writer
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Despite criticism of the program during the debt ceiling debate, the U.S. Treasury's Small Business Lending Fund (SBLF) continues to disburse funding to community banks nationwide. Most recently, another 37 banks received a total of $418 million in the next wave of SBLF funding.
Including the most recent announcement, a total of 80 community banks will have received more than $1 billion in SBLF distributions. More money will wend its way to other community banks in the weeks to come.
The Treasury had previously received criticism for making disbursements under the SBLF while simultaneously claiming that it was approaching a point at which it would not be able to pay U.S. debts during the debt ceiling crisis. "Given the suggestion by the president and others that a failure to increase the debt ceiling would result in a default on the debt and the inability to send out Social Security checks, it seems imprudent at best to provide hundreds of millions of dollars to small community banks, with suggestions that more SBLF spending is on the way," said Sen. Orrin Hatch (R-UT) during the throes of the debt crisis.
Hatch also questioned how the Treasury would spend the remaining authorizations under the SBLF, given that the Treasury loses its authority to disburse money near the end of September. "The authority of the department to make capital investments through the SBLF expires on Sept. 27, 2011, one year after the date of the enactment of the Small Business Jobs Act," he said. "This means that the department now has only 62 days to spend the more than $29.6 billion in remaining authorizations."
The Treasury seems to have brushed off this criticism, however, and made no note of how it would spend the remaining money, only indicating that more disbursements were on their way. "These funds will provide critical support to Main Street community banks so they can expand their lending to small businesses," said Deputy Secretary of the Treasury Neal Wolin. "This program helps entrepreneurs in communities across the country access the capital they need to grow their operations, invest in new equipment and hire additional workers."
Receiving the largest portion of funds this time around were First NBC Bank Holding Company in Louisiana ($37.9 million), Independent Holdings, Inc. in Tennessee ($34.9 million) and AmeriServ Financial, Inc. in Pennsylvania ($21 million).
Jacob Barron, NACM staff writer
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As previously noted in eNews stories about company bankruptcies, so-called "green," sustainability-driven product and service providers have been hit particularly hard by the recession and slow recovery because the perception of higher upfront investment costs. However, a group of commercial real estate panelists argues that the cost logic is flawed, and green still has a big place in commercial real estate with room to grow, not just in the future, but now if implemented properly. Still, the tough plight of the "green" industry suffered another casualty earlier this week.
The Baltimore chapter of the Urban Land Institute's "Cost Saving Strategies in Commercial Real Estate" conference last week sounded much like a rallying call, albeit a subtle one, for advancing energy-saving efforts and technology in existing and new commercial real estate properties. Though commercial real estate and green industries have struggled as much as any industry other than housing, panelists argued the savings generated by a move toward sustainability aren't as hard to come by as foot-draggers and budget-watchers purport.
"It's already in your budgets," said Eileen Nacev, director of sustainability at JBG. "You're paying it in your utility bills." She added that utility costs are just the tip of the iceburg as costs, including punitive ones, of not going more efficient could be right around the corner—a growing number of cities are starting to require higher efficiency from commercial real estate, including adhearance to standards such as LEED and Energy Star.
Randy Gains, VP of engineering at Hilton Worldwide, noted that more than 5% of the company's total expenditures go toward energy. Gains said the transformation to more energy-efficient systems at upwards of 1,300 Hilton properties in 2009 led to $29 million in energy cost savings. Key to success, however, isn't spending the most on equipment. Rather, he suggests it's about basics such as doing the cost-benefit analysis and doggedly tracking the data, which has become more readily available and accurate as 'green' has evolved.
However, the realities of a tough market continue to dampen the rose-colored view on green products/service business, like most industries. The latest example came Monday when Massachusetts-based Evergreen Solar filed for Chapter 11 bankruptcy protection. Despite receiving millions in federal and state grant dollars and tax incentives, the solar business has struggled mightily in the last two to three years. Earlier this year, it shut down a U.S. plant that employed more than 800 people and, like a Maryland-based BP solar operation, relocated abroad to save costs.
Brian Shappell, NACM staff writer
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