October 17, 2013
Just as it did earlier in the Obama Administration, partisan-based political gridlock on the part of the U.S. Congress has caught the ire of at least one of the three major credit ratings agencies. The continued fighting that led to the government shutdown and a tight window to raise the debt ceiling could result in a downgrade to the United States' pristine credit ratings for the second time since 2011.
As the Senate scrambled Wednesday for ways to temporarily raise the ceiling that were acceptable to its membership and that of the House, Fitch Ratings essentially issued a warning to Congress by moving the U.S.' longer-term foreign and local currency issuer default ratings, as well as all sovereign debt securities, into the "rating watch negative" category. And a deal that pushes the debt ceiling debate off until early-February likely won't do much to reduce the ire. Though noting the economy's resilience, its standing on the world stage and ability to absorb shocks, Fitch predicted that continued delays in raising the debt ceiling could further "dent confidence in the effectiveness of the U.S. government" and send shockwaves throughout domestic and global markets.
"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinksmanship and reduced financial flexibility could increase the risk of a U.S. default," Fitch explained in a statement. "Although the Treasury would still have limited capacity to make payments after 17 October, it would be exposed to volatile revenue and expenditure flows. The Treasury may be unable to prioritize debt service, and it is unclear whether it even has the legal authority to do so. The U.S. risks being forced to incur widespread delays of payments to suppliers and employees as well as social security payments to citizens—all of which would damage the perception of U.S. sovereign creditworthiness and the economy."
Moody's Investors Service and Standard & Poor's, for their parts, assured this week that they do not have plans to downgrade the U.S. sovereign credit rating or even put it into a "negative" outlook status. Moody's noted it already "anticipated there might be acrimonious political brinksmanship prior to the raising of the debt ceiling" when it assigned a stable rating to the U.S. government earlier this year. Moody's also believed that a much more critical deadline date was actually November 15, when a large $31 billion interest payment comes due. S&P, however, left more flexibility in negative movement, saying it did not anticipate changes over the debt ceiling debate "if short-lived."
In 2011, S&P made the controversial decision to lower the U.S. credit rating by one notch from the top AAA status and skewered U.S. lawmakers for not being able to work together. While it eventually raised the outlook back to stable, S&P noted that any sudden unplanned contraction in future spending levels would be disruptive, and hinted that a failure to meet debt service would create even more significant problems. Granted, some believe the dispute has already caused damage to the U.S.' reputation, overall confidence in the U.S., domestically and internationally, as well as an almost unavoidable rise in the cost of borrowing. Plus, delaying the debt ceiling argument by four months will likely only put the U.S. back on display in the most dubious of ways this winter.
- Brian Shappell, CBA, CICP, NACM staff writer
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Another month, another report detailing how many fewer bankruptcy filings there were compared to years prior.
There were 801,783 bankruptcies filed in the first three quarters of 2013, marking a 13% decrease from the 921,927 total filings recorded during the same period a year ago, according to data provided by Epiq Systems, Inc. to the American Bankruptcy Institute (ABI). The 767,445 total noncommercial filings for the first nine months of 2013 also represented a 13% drop from the noncommercial filing total of 877,123 during the first three quarters of 2012.
But the biggest decrease, as it's been for the last several readings, was in total commercial filings: for the first three quarters of 2013, total commercial bankruptcies only hit 34,338, representing a 23% decrease from the 44,804 filings during the same period of 2012. Chapter 11 filings also fell by 14%, from 5,999 Chapter 11s in the first nine months of 2012 to 5,171 filings in the same period this year.
In his monthly comment on the bankruptcy figures, ABI Executive Director Samuel Gerdano pointed the finger for the continued decline in the number of bankruptcies being filed at the usual suspects. "Sustained low interest rates and sluggish consumer spending since the financial crisis have suppressed bankruptcy filings to 2008 levels," he noted. However, Gerdano also found a new culprit in the onerous costs of a bankruptcy filing. "Some individuals are too broke to afford the cost to file bankruptcy," he said.
The often outrageous cost to file a bankruptcy, particularly Chapter 11s by smaller companies, could partially explain why it appears that while actual bankruptcy filings are fewer, instances of businesses simply closing their doors have increased since the financial crisis. Information on this subject is elusive, as no paperwork needs to be filed for a company to simply cease operating and close its doors, but anecdotal evidence among commercial credit professionals has suggested that the ratio of business closures to actual bankruptcy filings is increasingly skewing toward closures.
NACM and several legal experts have noted that the Chapter 11 process is prohibitively expensive and that many debtors would benefit from a less costly bankruptcy process, which would also leave a bigger distribution pool that could benefit unsecured trade suppliers, who are often the biggest losers both when their customer actually does file and when their customer simply disappears.
- Jacob Barron, CICP, NACM staff writer
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Detroit's Chapter 9 bankruptcy case has moved into high gear after months of behind-the-scenes wrangling. Though the official eligibility hearing on the city's municipal bankruptcy does not begin until next week, some legal arguments have been presented before U.S. Bankruptcy Judge Steven Rhodes in recent days. Attorneys for unions and other groups representing retirees and current city employees argued in court that a Chapter 9 on the part of the city violated the Michigan Constitution. However, Rhodes has strongly intimated throughout the process that it was unlikely that the constitutionality argument would derail the proceedings prior to the official eligibility hearing. The U.S. Justice Department is among the parties that defended Detroit's right to file, saying the filing does not amount to a state or federal constitutional violation.
Meanwhile, in Jefferson County, Alabama, a deal struck in June between the county and creditors may be off because of interest rates. In the delay since the pact was initially forged, rates have risen significantly more than expected, forcing groups like JPMorgan Chase to reconsider going through with a debt-reduction settlement without additional concessions. Various secured creditors were reportedly ready to accept 20%-40% of what they were owed, with insurers losing as much as 50%. Primarily caused by problems with a massive sewer renovation project, Jefferson County's filing had been the largest municipal bankruptcy (by dollar value) prior to Detroit's filing.
Finally, the Stockton, California Chapter 9 has cleared another important hurdle. Last week, Stockton's City Council voted unanimously on a plan to exit bankruptcy that both pays out secured creditors and insurers at a higher rate than initially anticipated, with some getting a stake in future city profits that exceed predictions, and allows continued payments to the state's pension system (CalPERS). Current employees and unsecured creditors would not fare nearly so well in the deal. Experts are surprised at the speed with which key stakeholders have reached this stage of the process. Granted, a U.S. Bankruptcy Court judge still must approve the plan and has yet to set a date for doing so.
- Brian Shappell, CBA, CICP, NACM staff writer
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Janet Yellen's noteworthy nomination to be the nation's first female Federal Reserve chair has, in some ways, overshadowed her prowess as an economic thinker. Economists referring to the first Yellen term as the equivalent of a third Ben Bernanke term aren't giving her enough credit, according to NACM Economist Chris Kuehl, PhD.
"Remember that she was the first of the regional Fed presidents to call attention to the weakness in the overall financial community in 2007 and 2008," he said. "She has also been involved in high-level economic policymaking for years—going back to her role on the Council of Economic Advisors under [President] Bill Clinton."
Though Yellen will inherit a number of major issues if she's confirmed as Fed chairman after Bernanke, the most daunting of these are how she'll handle the tapering process of the Fed's ongoing quantitative easing program and how she'll handle interest rates. Regarding the Fed's $85-billion-a-month bond purchasing program, the question of Yellen's future actions on the subject is two-fold. "The first is when will the Fed stop or reduce the level of bond buying—referred to now as tapering. The second question is when will the Fed reverse course and start to sell off the bonds it now holds?" said Kuehl.
Once the Fed starts to unwind its bond position, it could crowd out corporate bonds and bonds from states and cities, but investors and other market observers can expect a deliberate, even reluctant response from Yellen when it comes to dialing back any stimulus. "The Yellen position has been that of Bernanke and in some respects she has sounded even more committed to a loose monetary policy until there is some substantial growth," particularly as this applies to jobs, Kuehl noted. "If the taper doesn't start in the last few months of the Bernanke Fed, the prospects for a rapid Yellen response are limited. Look for tepid tapering—maybe no more than a reduction of $10 billion to $15 billion." This is especially true as long as Congress continues on its "suicide mission," as Kuehl described it.
Interest rates are another issue where Yellen can be expected to keep her foot on the stimulus gas pedal until there is a clear and present threat from inflation. "It would seem logical to assume that the interest rate will stay very near zero for the next two years and perhaps longer," Kuehl said. "It would be safe to assume that the rate will be the last thing the Fed will change as the economy improves."
- Jacob Barron, CICP, NACM staff writer
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Just a month ago it appeared that China was righting its economic ship. At the same time, there appeared to be some creeping concerns regarding Singapore. What a difference a matter of weeks can make.
Chinese exports for September came in well below projections, with a 0.3% decline for the month, according to the Chinese General Administration of Customs. With problems still somewhat apparent in markets like the European Union and Brazil, the confidence-jarring government shutdown in the United States could fuel another disappointing month for trade out of export-dependent China in October, if not beyond.
On the flip side, news out of Singapore was much more positive and a bit surprising. Third quarter gross domestic product (GDP) growth was more than 5% better than the same period in 2012. The improvement came largely on the back of exporting activity. Wells Fargo Securities Global Economist Jay Bryson said the news was significant because Singapore, often one of the first nations to report its quarterly data, is somewhat of a "bellwether for trends in global trade." The Wells Fargo report predicted that any sustained growth in improving export activity out of the nation would likely foster noticeable improvements in lackluster consumer spending there.
- Brian Shappell, CBA, CICP, NACM staff writer
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Bilateral trade in goods and services between the United States and India grew from $59.9 billion to $92.5 billion between 2009 and 2012. India foreign direct investment (FDI) in the U.S. increased from a mere $227 million in 2002 to almost $5.2 billion a decade later, making the south Asian giant one of the fastest growing sources of investment into the U.S. Total FDI inflows from the U.S. into India, from April 2000 to July 2013 topped out at about $11.5 billion.
Policymakers in both countries are eager to maintain this expansionary trend in U.S-India trade relations, and so at the fourth annual meeting of the U.S.-India Economic and Financial Partnership in Washington earlier this week, U.S. Treasury Secretary Jacob Lew and Indian Finance Minister P. Chidambaram pledged their continuing efforts to address a number of still lingering issues between the two nations, to each one's benefit.
President Barack Obama and Indian Prime Minister Manmohan Singh have already reaffirmed their commitment to the conclusion of a high-standard Bilateral Investment Treaty between the U.S. and India, which will serve as a lynchpin for increasing investment, transparency and predictability. As ever, the goal for officials in both nations is job creation. In a joint statement, Lew and Chidambaram noted that greater investment would be key to further stoking employment opportunities.
"We discussed the importance of investment for driving economic growth and job creation in our economies and ways to improve our enabling environments to mobilize investment, especially for the financing of infrastructure," they said after the meeting. Lew and Chidambaram's reference to the importance of infrastructure investment falls in line with recent reports from experts who have noted that this type of trade will be the chief driver of global export growth for the foreseeable future.
Other issues that the U.S. and India discussed at the meeting were the need to strengthen financial regulation and the implementation of international anti-money laundering/combating the financing of terrorism (AML/CFT) standards.
- Jacob Barron, CICP, NACM staff writer
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