eNews December 27, 2012

December 27, 2012

Top eNews Stories of 2012

News Briefs

  1. "Sequestration" Threat Looms Large over August Recess
  2. EU Crisis Having Noticeable Impact on the Asia, Latin America, U.S. Alike
  3. Settlement Will Allow Merchants to Pass Credit Card Interchange Fees on to Buyers
  4. Supreme Court Upholds Credit-Bidding Rights
  5. Storm Impact Likely to Be Economically Positive in the End


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"Sequestration" Threat Looms Large over August Recess

A paralyzed Congress punted on several issues when it left for its traditional August recess, preferring instead to wait for the elections to provide some certainty that, of course, never arrived. The biggest issue was the so-called "fiscal cliff" or sequestration, a package of across-the-board spending cuts that could kick the U.S. back into recession and reduce credit availability nationwide. While Congress and the President did reach agreement on normalizing trade relations with Russia, allowing exporters to fully take advantage of the new market access granted by the World Trade Organization's (WTO's) newest member, a deal to prevent the "fiscal cliff" from wreaking havoc on the American market, as of today, remains elusive.

When Congress returns from the August recess on September 10, it will have no shortage of urgent items on its agenda. The biggest of these will be finding a way around the upcoming "fiscal cliff" over which the country is scheduled to plummet on January 2, 2013.

Included in the terms of last year's debt ceiling agreement was a requirement for future spending cuts, should a compromise not be reached beforehand. These looming cuts, commonly referred to as "sequestration," were designed to motivate congressional negotiators to compromise on other less severe cuts and possible revenue increases.

The threat, however, wasn't strong enough to overcome the depth of congressional disagreement. The "Super Committee" charged with reaching a compromise was unable to find at least $1.5 trillion in savings, and therefore was unable to pass the provisions in a bill by the December 23, 2011 deadline, that triggers automatic across-the-board cuts when sequestration takes effect on January 2, 2013.

There are notable exceptions to the cuts, including Social Security, Medicaid, Medicare and veterans' pay levels, but members of both parties are now trying to determine how the scheduled cuts can be avoided─with a particular emphasis on trying to avoid military cuts. Currently, the law stipulates that slightly more than $100 billion be cut in January 2013, with an estimated $50 billion targeted for the Department of Defense.

These funding levels are critical points of discussion in protecting the Department of Defense where any reduction in defense spending could impact national security, along with estimated hundreds of thousands of contracting jobs associated with defense efforts.

Just before departing for the August recess, House and Senate leaders announced that they reached an agreement on how to handle funding for Fiscal Year 2013 that begins October 1, 2012. A six-month Continuing Resolution (CR) will keep the government running after September, and will probably be the first order of business upon Congress' return. This will delay discussions about how sequestration can be avoided until after the November elections.

Other pressing matters awaiting Congress on September 10 include a comprehensive Farm Bill, which lawmakers could not agree to before leaving, and the approval of permanent normal trade relations (PNTR) with Russia in the wake of that country's World Trade Organization (WTO) accession.

- Jacob Barron, CICP, NACM staff writer

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EU Crisis Having Noticeable Impact on the Asia, Latin America, U.S. Alike

Few stories were as prevalent this year as ongoing debt problems in the European Union (EU). Spillover from issues in Greece and larger, more important economies like Spain and Italy showed an ability to affect economies around the world because of the reliance on the EU's previous importing behavior. Though some positive news started to flow by the end of the year—largely in the form of Germany finally being willing to back much of the aid needed to bolster a Greece that seemed perennially ready to fall off the euro currency—the problems remain very real. The potential for an enhanced economic recovery on a global scale could be largely in the hands of Italy and Spain as to how each weathers the fiscal story in 2013.

In an FCIB members-only teleconference focusing on the global economic outlook in November, FCIA Vice President/International Economist Byron Shoulton painted a picture in which virtually all corners of the globe are being affected negatively, to varying degrees, by the ongoing euro-zone crisis.

Shoulton noted that recent agreements coming out of the EU designed to bolster debt-hobbled economies represent "the strongest act to date to save the euro," describing them as "long overdue." But, as the situation continues to play out with the potential for Greece leaving the euro, and Italy or Spain possibly needing their own bailouts, export-dependent economies are taking a hit.

Shoulton noted that the drop in demand in the EU has affected the economic recovery of nations like the United States and led to growth targets being missed in emerging economies of Asia, notably South Korea, Thailand and Singapore. What's worse, in places like South Korea, the drop in Europe for demand of its products came during a domestic cool-off period, providing a double whammy. Granted, the inability of China, also affected negatively by a drop in product demand from the EU, to quickly ramp up its economy again after purposely slowing growth to stave off inflation isn't helping either.

"This region will remain a major driver of the global economy," Shoulton said of Asia. "But, over the medium term, real GDP expectations will continue their downward shift."

The crisis is affecting Latin and South American nations in another way, as well. Shoulton noted that European-based banks were known to fuel trade financing, with estimates of 33% and 40% of all trade financing for the region emanating from EU-based banks, especially in France and Spain. That could provide a drag on growth potential for emerging Latin trade markets.

"The banks are obviously pulling back," he said. "They are having problems with their own liquidity amid the need to slim the balance sheets."

Granted, Shoulton said there is more reason for optimism in Latin American nations than in the United States, EU and corruption-stricken trading nations in Africa and eastern Europe (primarily Russia). With richness in natural resources, increasing demand for consumer products and status as a key agricultural-product provider, it is "decidedly more upbeat:"

"People are taking a fresh look at Latin America, and it's making it more attractive for foreign investment and trade."

- Brian Shappell, CBA, NACM staff writer

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 Settlement Will Allow Merchants to Pass Credit Card Interchange Fees on to Buyers

This initially sounded like great news to merchants weary of having to bear the burden of interchange fees when their customers paid by credit card. Upon further scrutiny, the deal didn't look so sweet. While the agreement allowed merchants to surcharge their card-using customers, it also kept the process by which interchange rates are set in the dark, meaning Visa and MasterCard could continue to hike fees indiscriminately. Despite a fierce effort by opponents, the agreement would eventually receive preliminary approval in November. Full approval isn't slated until fall 2013.

Merchants that accept credit cards for payment may soon be able to pass on interchange fees to their customers in the form of a surcharge.

Visa, MasterCard and a group of large U.S. financial institutions reached a memorandum of understanding (MOU) last Friday [July 13, 2012], resolving claims from a 2005 class action lawsuit brought by a group of U.S. retailers over the fees charged on merchants to accept credit cards. In addition to providing for a $6 billion payment to retailers, the MOU also imposes policy changes that will allow sellers to charge customers more for paying via credit card.

Though it has yet to be approved by the U.S. District Court for the Eastern District of New York where the case was filed, the MOU has been agreed to by all defendants and the court-appointed class counsel for the merchants, meaning court approval is a mere formality at this point.

Although much of the language surrounding the settlement focuses on consumer transactions, the definitions listed in the MOU state that a "credit card" includes, without limitation, "a plastic card...or any other current or future code, device, or service by which a person, business or other entity can pay for goods or services," which specifies the use of cards by businesses, in addition to consumers. The definition also applies to transactions involving cards "commonly known as credit cards, charge cards, commercial credit cards, corporate credit cards, fleet cards or purchasing cards."

Interchange fees have long been a thorn in the side of any merchant accepting payment via credit cards, whether they sell to consumers or other businesses. In essence, the fee is a percentage of the total value of a transaction that, at least until the settlement is expected to enter into force early next year, had to be borne solely by the merchant. The fees were especially hard on smaller companies, who lacked the technical expertise necessary to navigate through the notoriously complicated process by which these rates are established.

Under the terms of the settlement, however, these companies will be able to recover their interchange fees from their customers choosing to pay via credit card, with some notable limitations. For example, merchants using a surcharge to offset their cost of acceptance can only charge a fee equal to what they pay to accept credit cards. They must also disclose the surcharge to the buyer at the point of entry, point of sale and on the receipt.

The settlement does not apply to debit cards, and doesn't supersede a suite of no-surcharge laws in the ten states where surcharging is illegal: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

A full copy of the MOU can be found here. Stay tuned to NACM's blog for further updates and analysis on how this ruling will affect commercial trade creditors.

- Jacob Barron, CICP, NACM staff writer

For the Most Up-to-Date Credit News, Subscribe to NACM's Blog. It's Simple—And Free!

It's easy to subscribe to the NACM blog for updates on new posts. Simply type your email address into the subscribe box on the left-hand side of the blog home page. An email with easy activation instructions will follow soon after.

When news pertinent to the credit world is breaking, there's no need to wait or to get your information from any other mainstream media source. Use the NACM blog, a free service to you, focused specifically on what YOU, the credit professional, want to know and why it's important.

Supreme Court Upholds Credit-Bidding Rights

Heard in April, with a decision unveiled in late May, the Supreme Court of the United States reviewed and ruled on the first significant bankruptcy case to make the high court's docket in a number of years. Several attorneys polled by NACM in the aftermath said they believed the federal justices made the right call in preserving credit-bidding rights during certain bankruptcy auction situations, a decision perceived to be in line with the essence of the U.S. Bankruptcy Code. There was concern going into the Supreme Court hearing that had a ruling gone against credit-bidding, it would have added more unpredictability, and thus cost, to the credit-granting function in general.

In a quicker-than-expected turnaround, the Supreme Court ruled unanimously to uphold the rights of secured creditors in Chapter 11 bankruptcy-related assets sales.

The high court noted that a Chapter 11 "cramdown" plan could not be confirmed if a secured lender, often a bank, is denied the right to use debt owed to them at an assets auction in lieu of cash. The timing comes as a surprise, as a decision was not expected for several weeks, as did the unanimous vote (with Justice Kennedy not taking part in the decision) since Chief Justice Roberts expressed the importance of "the specific over the general" when analyzing the debtors' point of view in a late April hearing of arguments regarding differing credit-bidding decisions in the lower courts.

The court opinion, delivered by Justice Scalia and made public Tuesday, May 29, threw out verbiage technicalities on which the petitioner was basing its argument and on which the Third Circuit based a previous decision that cut at credit bidding rights.

"The general/specific canon is not an absolute rule, but is merely a strong indication of statutory meaning that can be overcome by textural indications that point in the other direction," Scalia wrote. "The debtors point to no such indication here." Scalia's take on the petitioner's argument included characterizations such as "surpassingly strange" and "irrelevant" as well as one that hung its argument on procedural technicalities more so than "substantive" requirements of federal bankruptcy law.

The case in question was RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake was whether creditors would be able to use the value of their secured debt as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and limited credit bidding, in some instances.

The petitioner argued that, in a case like RadLAX, the concern lies in the ability of getting other non-secured bidders to even show up for an auction if they have knowledge that a secured creditor can best the bid without offering up any new cash, instead of just what is already owed to them. In addition, the petitioner said federal law notes that the use of the word "or" in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the "indubitable equivalent" of their claim is realized.

Such arguments drew critical reactions from a majority of the justices, who intimated that the argument against credit bidding runs contrary to the essence of the Bankruptcy Code and the intentions of the U.S. Congress. More on what the judges said can be found here.

- Brian Shappell, CBA, NACM staff writer

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Storm Impact Likely to Be Economically Positive in the End

There is something almost perverse about the economic assessment of a natural disaster or major storm, like Sandy, that hit the U.S. Mid-Atlantic and Northeast areas in October. In the midst of all the painful and tragic destruction, there is the inescapable fact that people and communities rebuild after a disaster—and the richer the community, the swifter that reconstruction becomes.

The storm that ravaged the eastern seaboard will cause billions of dollars in damage. The vast majority of the businesses and people affected by this storm insured their property against just such a development and, in the weeks and months to come, they will be receiving billions in payouts so that they can start to recover. There will also be millions more coming from the federal and state authorities. None of this aid will replace the lost memories and treasures, and it will certainly not help those who lost loved ones in the catastrophe. However, from a strictly economic point of view, the aid will boost the regional economy.

The most immediate impact will be on industries that were forced to shut down and lose customers that can't be replaced. This is the transportation sector mostly—notably, airlines that cancelled flights lost that revenue forever. Retailers will likely benefit in the short term, as people stocked up—at least those businesses that did not suffer damage and power loss. In the longer term, the reconstruction process will add billions to the economy and will mean that jobs will be on offer for many months to come. The estimate is that local GDP growth will increase by as much as 1% when all is said and done.

It is the fickle nature of disaster: The damage can't possibly be underestimated and the silver lining is not on people's minds as they watch their lives ripped to pieces. Many of those who were battered may not recover fully for years, but the region itself will come out ahead once the recovery process gets underway. At various points in history, it has been a massive tragedy that stimulates growth. For example, the utter destruction of World War II propelled the U.S. economy out of a deep recession and stimulated a decade of growth.

- Armada Corporate Intelligence

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