November 14, 2013
The European Central Bank (ECB) made a surprise cut to its benchmark interest rate last week, reducing the 0.5% main rate, which was already at a record low, by another 25 basis points to 0.25%.
The move arrives on the heels of diminishing inflation in the euro zone. In October, inflation fell to an annual rate of 0.7%, whereas the ECB has aimed to keep inflation at 2%. While lower inflation might not sound like such a bad thing, especially for cash-poor consumers, October's decline could suggest a greater risk of deflation, which some say poses a greater threat.
"In the euro zone as a whole, sovereigns, banks and households are still heavily indebted, which means that deflation poses a higher risk to recovery than inflation," said AIG Chief Country Risk Economist Carolyne Spackman. "When consumers expect falling prices, they tend to hold off discretionary purchases, which erodes corporate profits and puts downward pressure on both wages and government revenues. Deflation is pernicious in that it makes it even harder for debtors to service their debts, and it can also trigger the need to post additional collateral against secured loans."
In announcing the decision, ECB President Mario Draghi noted that the rate cut aligned with the Bank's prior guidance regarding inflation, but warned that low inflation could be a lasting issue. "We may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on," he said. "Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery as reflected in confidence indicators up to October."
Spackman agreed that the response of Draghi and his cohorts suited the severity of the deflation threat. "Easing monetary policy is appropriate to prevent deflation from setting in, and this helps to understand why the ECB cut interest rates after inflation was only 0.7% in October," she said, "but with the re-fi rate at 0.25%, there is little further room to cut, especially as the deposit rate is already 0%."
While some of the latest news from the euro zone has given some analysts reason for optimism, particularly Germany's manufacturing numbers and Spain's outlook upgrade, the ECB's future efforts to stimulate the economy will almost have to focus on extending liquidity to banks rather than cutting rates any further. Still, whatever steps Draghi chooses to take in 2014 and beyond, the results might not trickle down to non-financial companies. "Banks are still focused on balance sheet repair, and the increased liquidity may not be transmitted to firms," Spackman said. "The rate cut will do little to stimulate lending, and as long as this trend continues, it means that credit managers have to be vigilant, because customers in the euro zone may continue to have difficulty accessing credit."
- Jacob Barron, CICP, NACM staff writer
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For a time, supporters of the Trans-Pacific Partnership (TPP) believed the biggest obstacle to smooth passage would be protectionist sentiment on both sides of the negotiating tablel But, it turns out that media analysts, wary citizens and United States' lawmakers could try to derail the agreement as well.
Criticism is mounting about the lack of transparency in the negotiations of the TPP, a trade agreement that represents a greater economic interest in Southeast Asia by notable nations in North and South America, among others. The last series of meetings, which the U.S. skipped because of the government shutdown, broke with blusterous talk of success from the various nation's trade representatives. But scant specifics about what was being proposed in the trade agreement were discussed publicly.
Part of an alleged TPP draft unearthed by WikiLeaks and printed in Australia's Sydney Morning Herald in the last week suggested plans to strengthen the stronghold of U.S.- and Japanese-based pharmaceutical and computer technology multinationals, as well as impose tougher restrictions and stronger enforcement on copyright/intellectual property "infringement" of various kinds. The Herald surmised that it could mean a spike in prices, especially outside of the U.S., for products in such areas. Additionally, some analysts argue that portions of the plan amount to limits on Internet free speech.
Meanwhile, two letters made public in the last week from Congressional groups, one from within each party, called for more power, involvement and "checks and balances" on the part of federal lawmakers in the negotiation process. A November 8 letter drafted by a dozen Democrats, noted the administration "must ensure that Congress plays a more meaningful role" in the reauthorization of the Trade Promotion Authority (TPA), also known as "fast track" authority. President Barack Obama wants this in order to ease and speed up the TPP agreement, as well as another free trade agreement update with the European Union. The last TPA agreement ended in 2007.
The U.S. Congress, known throughout the world for its partisan-fueled inability to agree on nearly any significant long-term policy, in its attempt to garner more power and involvement in talks that already include nearly a dozen other nations, does not bode well for speedy enactment of a trade pact that once appeared to be on the fast track. The TPP also includes Vietnam, Singapore, Malaysia, Peru, Chile, New Zealand and Australia. Mexico and Canada also have been invited to take part in the negotiations.
- Brian Shappell, CBA, CICP, NACM staff writer
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Virginia House Bill 2198, which would affect commercial credit reporting in the commonwealth, appears to be entering the final stages of its consideration by legislators.
The work group formed to study HB 2198 within Virginia's Small Business Commission recently canceled its final meeting that would have taken place November 14. Instead, the work group posted on the Small Business Commission website a compendium of the comments it has received on HB 2198, including the reiterated objections to the bill's provisions that NACM believes would reduce the amount of credit information available on Virginia businesses.
The summary of written comments, available here, consists mostly of vocal opposition to the bill, and specifically to its identification measures that would end the right of companies who contribute information to commercial credit reports to do so anonymously. The only comments included in the work group's appendix in support of the legislation are from Delegate Michael Watson, who introduced the bill in the first place. Watson also offered some minor compromises on the bill's language in his final comments on the bill, specifically to alleviate trade concerns about what, if anything, the subject of a commercial credit report is required to provide when objecting to information on its report. However, it's unclear how Watson's suggested amendments would affect the bill's most controversial provisions.
Now the HB 2198 work group will move ahead with its final report on the bill, which will be presented to the full Small Business Commission at its next meeting in Richmond on December 2. After that meeting, the Commission can endorse the bill, recommend that it be scrapped or make no recommendation one way or the other. Even if the Commission accepts or rejects the bill, its recommendations are not binding and the legislation could still wind up on the Virginia House of Delegates' calendar in January.
NACM has opposed HB 2198 since its introduction. Stay tuned to NACM's eNews and blog for updates on the bill's status.
- Jacob Barron, CICP, NACM staff writer
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Brazilian oil and gas company OGX, which earned the dubious distinction of becoming the largest bankruptcy filing in the Latin world in recent weeks when it failed to reach a deal with secured creditors. Despite the complications and obstacles of bankruptcy law in Brazil, some believe that opportunity exists for unsecured creditors to recoup a bit more than pennies on the dollar.
OGX reportedly needed upwards of a half-billion dollars to remain solvent, and the company's once brazen leader Eike Batista apparently tried to negotiate for approximately half of that amount from creditors in late October without success. The record filing was not a surprise even before the former giant missed debt payments about a month ago, or since previously publicly predicting that it would likely run out of money before 2014.
The filing is significant not only because of its size. OGX's fall from grace is similar in some ways to the demise of Brazil's hot economic growth at the beginning of the decade when it was labeled as "the Pearl of Latin America" and a force within a powerful bloc of other emerging economies. Now, both secured and especially unsecured creditors are expected to take massive losses.
Law firm Katten Muchin Rosenman LLP, though not accredited to practice law in Brazil, noted on its website late last week that "there still exists substantial opportunity to uncover value in the company's distressed debt and trade claims." The firm said OGX's investor and creditor lists include some large and influential companies in the United States and United Kingdom. However, it admits such hope is pinned on timely approval of a plan by creditors, which may be necessary to avoid liquidation. Granted, that is a very optimistic outlook considering Brazil's notoriously poor reputation for slow bankruptcy proceedings compared to other nations, or creditor-friendly recoveries.
Brazil's Bankruptcy and Business Restructuring Law (Law 11.101), enacted in 2005, gives debtors a lot more leverage and leeway in paying off debt following insolvency problems. "The law is terrible to creditors," OctÃ¡vio Aronis, an attorney at Brazilian law firm Aronis Advogados, said in an interview with NACM earlier this year. "The Brazilian version of a Chapter 11 can go on for 10, 15 or 20 years." Aronis added that sometimes the best course of action is agreeing to take something like 40% or even less in the near-term rather than holding out for a better payout that could come years later. As such, OGX's bankruptcy could serve as a gigantic reminder of the importance of knowing the health of a customer as well as potentially using more restrictive terms or credit insurance to reduce your company's risk.
- Brian Shappell, CBA, CICP, NACM staff writer
Aronis recently presented the FCIB webinar "Doing Business in Brazil." To view a replay of this November 12 webinar, click here.
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The Obama Administration has framed the National Export Initiative, and the efforts to increase exporting through the efforts of the Export-Import Bank of the U.S., as a critical element of its job growth and economic recovery agenda. It certainly is that, but exporting and efforts to increase the presence of American products in the far-flung corners of the world also contribute indirectly to a broader purpose, one measured in influence rather than revenue.
In his address to the 24th Annual FCIB Global Conference in Philadelphia in September, Sean Mulvaney, an independent member of Ex-Im's board of directors, noted that efforts to expand trade figured into the ongoing, and often silent, battles waged over geopolitical influence. The present time, Mulvaney said, is particularly rife with competition between sovereign entities over who has what influence where. "We are living in a world of tremendous multi-polar competition, one we have not seen since the Victorian Age over a century ago," he said. "One aspect of this competition relates to the rapid rise and use of wealth in sovereign state hands."
To that point, Mulvaney noted that a decade ago, the governments of emerging nations added a combined $100 billion a year to their reserves. In 2009, however, they took in $1.6 trillion. Governments around the world are venturing out into the global economy directly, leveraging their currency reserves, natural resources and state-owned enterprises or sovereign wealth funds to not only generate economic returns, but also "to build and exercise influence on behalf of the nation state."
"This is a phenomenon that may not be new, but I would argue it is reaching a scale that is perhaps unprecedented. And because of the nature of globalization and the growing interdependence of nations, the deployment of this new wealth could have far reaching geopolitical implications," Mulvaney said, pivoting to his own agency and suggestions by some Ex-Im opponents that the bank itself should be abolished. "I highlight this fact not to suggest that Ex-Im's mission should be expanded. Nor am I suggesting that Ex-Im is a tool of U.S. foreign policy. I am stating my belief that as nation state competition continues to play out, it would be unwise for the U.S. government to remove or reduce the role of Ex-Im."
- Jacob Barron, CICP, NACM staff writer
To find out more about why Mulvaney believes Ex-Im should be allowed to continue its important work of supporting American exporters through its financing programs, read his article "The Case for Continued Bipartisan Support of Ex-Im" in the November/December issue of Business Credit, available now.
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Louisiana: A ruling out of Louisiana's Court of Appeals for the First Circuit has affirmed a lower court ruling that says materialmen must provide notice of nonpayment to the general contractor and owner within 75 days of each month in which product was delivered or lose the right to file a privilege or lien on the material from that time period. The ruling is at odds with what had been typically seen as acceptable, filing notices within 75 days of the final month of furnishing, and is tied to poorly written statutory language, which will almost surely be reviewed in the upcoming state legislative session.
Mississippi: A ruling out of the Fifth Circuit Court of Appeals that rendered Mississippi's Stop Notice statute unconstitutional could very well foster challenges in other states with similar Stop Notice statutes such as Arizona, California, Nevada, New Mexico and Washington. The court affirmed a 2012 lower court ruling in the case Noatex Corp. v. King Construction of Houston, LLC that the Stop Notice statute, as written, violated the due process of companies. However, challenges in the aforementioned states with statute similarities likely won't gain traction of any kind due to more clearly-written language, yet, "I'm sure some GC will take a shot at it," said James Reed, Esq., partner at Baird Williams & Greer LLP.
Oklahoma: An amendment to the state's mechanic's and materialmen's lien statute providing for a lien filing to include profit and overhead costs went into effect on November 1.
Virginia: The Virginia General Assembly has adopted an amendment to the Mechanic's Lien Code providing that an unlicensed contractor may not claim a mechanic's lien if a valid contractor's license or certificate was required by law for the work performed. According to James Fullerton, Esq., founding partner of Fullerton & Knowles, PC, the bill also requires that the lien claimant place licensing information on the face of the lien memorandum, including the license number, the date that the license was issued and the date it will expire, or certify in the affidavit that a license was not required by law for the type of work performed.
- Brian Shappell, CBA, CICP, NACM staff writer
More analysis on these stories and much more is available to customers of NACM's Secured Transactions Services' Lien Navigator. For more information, click here.
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