September 22, 2011
The U.S. economy's importance on the global stage is beyond question. However, as was evident during presentations and panel discussions at the FCIB New York International Round Table on Wednesday, America's ability to compete with other nations clearly appears to be trending in the wrong direction.
Speaking on short-term growth prospects, Federal Reserve Bank of New York Vice President Matthew Higgins' survey featuring a collective of top economists predicts upcoming gross domestic product growth for the United States at 2.2% as it continues to struggle with high unemployment and debt. The same study predicts 8.6% growth in China, 8% in India and 4% in the cluster of emerging Latin nations. Moreover, the United States has virtually no chance of reaching pre-economic crisis growth levels for a minimum of two years, statistics suggest.
Long term, the United States is not faring as well as many would have expected in the world rankings of key areas: overall infrastructure quality (23rd), air transport quality (32nd), Internet bandwidth (29th), higher education (14th), quality of primary education (34th) and quality of math/science primary education (52nd).
"The U.S. already is falling out of the ranks of leading nations in areas key to growth," he said. "And it's easy to push the hard decisions [on investing in such areas] off into the future; it's easy to backslide."
Another area where the United States is lagging, as illustrated in a subsequent FCIB Round Table session, is within accounting standards. As the United States, more specifically the Security & Exchange Commission, goes back and forth regarding the International Financial Reporting Standards (IFRS), domestic businesses could find themselves in a tough spot no matter on which side federal regulators fall, speaker Charles Blank suggested. Blank, senior manager at Grant Thornton LLP, noted that a number of nations have already moved toward the standard, developed by the International Accounting Standards Board to try to ensure more uniformity and transparency among businesses throughout the globe. Among recent inclusions are key emerging economies such as India and South Korea as well as top trading partner Canada. Japan also is heavily considering moving toward IFRS, Blank noted. It begs the question: Can the U.S. afford to stay away from IFRS and remain with generally accepted accounting principles (GAAP)?
Paraphrasing a comment from now former SEC Commissioner Kathleen Casey, the U.S. could very well lose its global competitiveness if it continues to "kick the can down the road." Market watchers and investors could turn a leery eye on the United States if it continues to rely on a standard that a majority of dominant economies aren't using. Still, IFRS is garnering little attention domestically despite the pros (improved compatibility, reduced costs for multinational companies) and cons (significant conversion costs, the unlikelihood that non-public companies in the U.S. will convert to the new standard).
"From what I've seen, there's really little understanding of what IFRS is right now," Blank noted. "There's a lot of training that needs to go on."
Brian Shappell, NACM staff writer
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One provision in President Barack Obama's proposed American Jobs Act would further delay the 3% withholding tax on government contracts by another year. GOP lawmakers and a coalition of business advocates are pushing him to go a step further, to a full repeal.
The 3% withholding tax is currently set to go into effect on all government contracts worth more than $10,000 in 2013, after a series of delays since its enactment in 2006. A full repeal has remained elusive however, as eliminating the withholding requirement from the books would keep an estimated $11 billion from the nation's ailing Treasury. Nonetheless, Republican officials are using the newly proposed delay to mount a new push for a full repeal.
"The president must know how damaging the 3% withholding rules are, as his Jobs Act calls for an additional year delay in its implementation. But if it is so harmful to small business—which it is—why not repeal it outright?," asked Rep. Mick Mulvaney (R-SC), chairman of the House Small Business Committee's Subcommittee on Contracting and Workforce. "Majority Leader Eric Cantor has signaled that the repeal of this job-crushing withholding requirement will be on the House agenda this fall. I hope that the president and Senate Majority Leader Harry Reid (D-NV) will also support this repeal."
"The 3% withholding tax would hurt small business cash flow and job growth. Delaying its repeal only continues uncertainty for small business contractors. Permanent repeal will provide more certainty and help create jobs now," he added.
Joining Mulvaney at a press conference last week was Rep. Wally Herger (R-CA), sponsor of H.R. 674, a bipartisan bill that would repeal the 3% withholding tax and has garnered 241 cosponsors. "The 3% withholding tax will harm small businesses as well as state and local governments. We need to get it off the books once and for all to avoid placing small businesses, jobs across America and our economic recovery efforts at greater risk," said Herger. "I look forward to working with House leadership to ensure that we get this bill passed to help our economy."
NACM has supported a full repeal of the 3% withholding tax since its enactment and is a proud member of the Government Withholding Relief Coalition (GWRC), which continues to lobby for relief from this burdensome tax. Stay tuned to NACM's blog and NACM's eNews for further updates on the repeal effort.
Jacob Barron, CICP, NACM staff writer
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A panel of judges and legal experts at a high-level bankruptcy forum in Washington, DC suggested inter-creditor suits appear to be on the rise in Chapter 11 bankruptcy proceedings. This is creating an elevated potential to drain the already-depleted coffers from which lower-level creditors are trying to draw money, especially in light of the increased use of a recent court decision in a scope more broad than it appears to have been intended by the ruling judges.
At the American Bankruptcy Institute's "Views from the Bench" conference at Georgetown University Law Center, judges and attorneys who comprised the panel that discussed inter-creditor "warfare" noted—for reasons that are appropriate, desperate or simply as a means of stakeholders trying to maintain a level of importance in the process—creditors seem to be raising more and more issues. It even occurs at times when the litigant in question signed away such rights previously.
"If someone steps up and says, 'I want to speak,' I'll usually listen. I want to hear what people have to say even if, as a matter of law, someone isn't supposed to speak," said U.S. Bankruptcy Court James Peck, from the Southern District of New York. U.S. Bankruptcy Court Judge Shelley Chapman, also from the Southern District of New York, agreed that sometimes said party could raise something "so troubling" that it would be a disservice not to hear them out, regardless of previous agreements.
One of the latest ploys among inter-creditor issues is the use of the Stern v. Marshal decision, a narrow Supreme Court holding being used by some as an effort to get proceedings out of certain bankruptcy courts and into other ones more suited for the outcome the plaintiffs prefer.
"Stern v. Marshall has been weaponized," Peck said during the panel. "It will be raised as an issue just to see if it sticks. Stern v. Marshall is becoming the mantra of those who want to litigate somewhere other than bankruptcy court."
Chapman, however, suggested to NACM that there may not often be any real value raised in evoking something like Stern v. Marshall, especially for lower level creditors and their attorneys, even if the effort proves "successful." The very process could, and likely would, deplete what is already a small and quickly evaporating pool of money that will remain at the end of the process.
"Anything raised to proliferate litigation is going to involve cost," Chapman told NACM. "A debtor has to respond and, generally is going to oppose. You have to ask whether it was a worthwhile venture in the first place." Still, Chapman noted during the panel that creditors, perhaps even ones who know their prospects of recovering any money are almost nil, have tried and will likely continue to try.
One of the writers of the Stern v. Marshall brief, Craig Goldblatt, suggested during a later ABI session that the decision was supposed to be considered a very narrow one and is often being raised by creditors/attorneys who have little business doing so. He called some instances where it's been evoked downright "ridiculous." Goldblatt, of WilmerHale, said judges very likely will continue to rule on cases, regardless of the raising of Stern v. Marshall, if the answers to the following questions are "no":
1. Is the claim for release founded on state law?
2. Is the plaintiff due a jury trial based on the 7th Amendment?
Brian Shappell, NACM staff writer
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The Federal Reserve's Federal Open Market Committee (FOMC) announced yesterday that it would take new steps to stimulate America's lagging economy. In addition to maintaining the target range for the federal funds rate at 0 to 0.25%, the FOMC will also extend the average maturity of its securities holdings, with the goal of keeping long-term interest rates low.
"The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of six years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of three years or less," said the FOMC in a statement. "This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative."
The FOMC also reiterated the federal funds rate is likely to remain in the 0-0.25% range at least through the middle of 2013, citing low resource utilization along with a subdued outlook for inflation over the medium term.
Safe in the knowledge that rates will remain low, and that long-term interest rates will hopefully be lower, banks and other lenders will ideally be moved by the Fed's most recent actions to loosen up credit, generating an overall increase in business and especially consumer spending. Although, in its statement, fears of inflation are modest at best, some analysts believe the shift in the Fed's portfolio from shorter-term, to longer-term holdings could cause a spike.
Markets responded to the Fed's announcement fairly negatively. "The response was not good," said NACM Economist Chris Kuehl, PhD. "There wasn't so much a response to what the Fed did. It was what the Fed said," he added, noting that investor confidence was shaken by the FOMC's admission that slow growth could continue for the next two years, regardless of any stimulus action. "No one's really expecting anything dramatic out of this shift from short-term to long-term bonds."
Three members of the FOMC voted against the decision.
The FOMC's decision came following news that Congressional Republicans sent a letter to the Federal Reserve urging Chairman Ben Bernanke not to take any further actions that could be described as "monetary stimulus." "Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people," said the letter, signed by Senate Minority Leader Mitch McConnell (R-KY), Senate Minority Whip Jon Kyl (R-AZ), Speaker of the House John Boehner (R-OH), and House Majority Leader Eric Cantor (R-VA).
Although it turned out to be largely ignored by the FOMC, as many expected it to be, the letter ruffled feathers for its apparent attempts to influence the behavior of the Fed, which is considered an independent agency that operates beyond the bounds of political influence.
Stay tuned to NACM's blog and eNews for further updates and analysis.
Jacob Barron, CICP, NACM staff writer
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Like its counterparts in the PIIGS nations, Italy saw its credit rating hacked by one of the big three credit ratings agencies earlier this week. Meanwhile, another in the ratings trio wagged a finger of warning at the reeling Irish. But are people increasingly starting to question how much these moves even matter at this point?
Standard & Poor's issued a credit downgrade this week to Italy. Like Portugal, Ireland and Greece, there are concerns over Italy's debt levels and weakening growth prospects. Unlike the aforementioned trio, the Italian economy is considerably larger and more important to the euro zone, and the nation's balance has other problems to overcome that could be massive. Perhaps at the top of that list is the continued lack of faith in the scandal-ravaged Berlusconi government by just about all parties.
"Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges," S&P's downgrade report noted. NACM Economist Chris Kuehl, PhD suggested, however, that the downgrade itself was much ado about nothing.
"Once again the market barely noticed, and many have started to assert that the ratings agencies have become next to irrelevant when it comes to these big country bonds," said Kuehl, referring to the big three raters' declining reputation on the world economic stage. "In the first place, it comes as no shock to investors that Italy has issues, and the downgrade didn't add any relevant information to the mix. The Italians are right there with the other struggling states in Europe as they watch the yields on their bonds rise. Italy is now looking at yields close to 6%, but at least they are still a far cry from the nearly 30% yield the Greek bonds are carrying. Spain, Portugal and Ireland are all in the same boat, and nothing from the ratings agencies is coming as a shock."
Meanwhile, Ireland was hit Tuesday with news from Fitch Ratings of the increasing potential that its credit rating will be downgraded later this year as well if lackluster second-half growth is reported. While Ireland has hit most of its austerity goals to date since agreeing to a euro zone bailout, there is a perceived need for growth there to offset massive debts so, among other reasons, it can reenter the bond market in some type of significant way within the next two years. Otherwise, Ireland may require a second euro zone bailout, the report speculates.
Fitch did, however, affirm Germany's long-term and local currency issuer default ratings at "AAA." The agency lauded the Germans, but did sprinkle in a hint of warning because of the nation's exposure that stems from carrying much of the euro zone economically.
"The affirmation of Germany's rating reflects long-standing credit strengths and the robust growth performance," said Fitch's Maria Malas-Mroueh. "[But] with a 40% share of total German exports, 2% of GDP earmarked commitments to existing rescue packages and exposure of the banking sector to the euro area peripheral economies, the risk of spill-over from the sovereign debt crisis to Germany remains high."
Brian Shappell, NACM staff writer
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The United States filed a case against China in the World Trade Organization (WTO) for the country's unfair imposition of duties on American chicken products earlier this week. The case is the latest effort by U.S. Trade Representative Ron Kirk to hold China accountable for its commitments to the WTO, including those to maintain open markets on a non-discriminatory basis and to follow procedures transparently.
Similar cases have been filed against China's treatment of steel products, industrial raw materials, electronic payment services and wind power equipment.
"To be clear, the United States does not arbitrarily seek disagreements with China," said Ambassador Kirk. "However, we will not stand still if we believe that China has violated its commitments as a WTO member and is therefore threatening American jobs—in this case hundreds of thousands of American poultry industry jobs."
America's poultry processing sector, which employs 300,000 workers, has faced severe difficulties since restrictive duties were imposed by China almost a year ago. Before the duties entered into force, the U.S. was China's largest supplier of chicken broiler products, with over 600,000 metric tons exported in 2009. Since then, however, U.S. exports to China are down by a startling 90%. Industry sources indicate that, if the duties are not lifted, they will cost the U.S. poultry industry approximately $1 billion in sales to China by the end of this year alone.
"Our actions against China simply demonstrate that the United States is prepared to take every measure necessary to stand up for American workers by ensuring that China—or any of our other trading partners—does not misuse laws to prevent exports of U.S. products," Kirk added.
Specifically, the U.S. is requesting dispute settlement consultations, the first step in a WTO dispute. Under WTO rules, parties that do not resolve a matter through consultations within 60 days may request the establishment of a WTO dispute settlement panel.
Jacob Barron, CICP, NACM staff writer
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