eNews August 22, 2013

August 22, 2013


News Briefs

  1. Emerging Market Currencies Plummet as World Waits for New Fed Chairman
  2. Multilateral Trade Pact May Pivot on U.S.-Japan Battles
  3. Early NACM Survey Results Suggest Cash Issues Dominant Cause of Late Payments
  4. Detroit Chapter 9 Eligibility Ruling More Than Two Months Away
  5. Visa, MasterCard Undeterred as Opposition to Interchange Settlement Breaks Threshold
  6. Credit Insurance Use on the Rise


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Emerging Market Currencies Plummet as World Waits for New Fed Chairman

One of the side effects of the U.S. Federal Reserve's decision to maintain rock-bottom interest rates has been an exodus of investors to other currencies, specifically those in emerging markets that offer greater returns. This has been lucrative, both for the investors involved and the developing countries that welcomed the inflow of new money despite its upward pressure on inflation.

However, coverage by NACM and FCIB has led other global media outlets on the next trend in an investment community that has collectively decided the Fed is on the brink of shifting its focus toward mitigating inflation by dialing back its $85 billion-a-month quantitative easing plan, or even by raising interest rates. This has created a reverse exodus of investors back to the U.S. and away from markets like Turkey and India, both of which saw their currencies hit record lows again this week.

India's currency, in particular, is crashing at an alarming rate, according to NACM Economist Chris Kuehl, PhD, who discussed the trend earlier this week in a Strategic Global Intelligence Brief, distributed to FCIB members. "The currency crisis in India is deepening faster than the government can cope," he said. "For all intents and purposes, the rupee is in total freefall as it sets new records against the dollar and other major currencies every day."

Still, the reason for the investment community's sudden certainty that the Fed will raise interest rates is something of a mystery. "Investors are changing their minds and have concluded that the U.S. Federal Reserve is on the edge of shifting its policy and hiking interest rates. Enough investors have decided that there will be a shift to cause many to pull out of the emerging markets so that they can buy into the U.S. while prices are still low," Kuehl said. "At some point, the logic holds that these assets will be priced higher and those that invest now can reap a reward."

Part of this newfound belief in an imminent policy change at the Fed stems from the controversy surrounding who will lead the Fed after current chairman Ben Bernanke's term ends on January 31, 2014. The two apparent choices are former Treasury Secretary Larry Summers, and current Fed Vice Chair Janet Yellen. Investors expect Summers to be more hawkish on inflation, and Yellen more in sync with Bernanke's accommodative approach, but getting the Fed to agree on any new course of action could be a difficult task regardless of who becomes the next chairman, as neither candidate possesses Bernanke's reputation as a consensus builder.

"This is especially the case with Larry Summers," said Kuehl. "He has not been in a position where he needs to bring others around to his way of thinking. Yellen has been in a more collegial environment, but her role as vice chair has been more advocate than consensus builder. Her job has been to push hard for the loose monetary policy of the Fed, which will put her at odds with the inflation hawks that will be on the Federal Open Market Committee next year."

Meanwhile, as this drama plays out in the U.S., the financial turmoil in emerging markets will continue, and the situation facing Turkey, India, Brazil, Indonesia, South Africa and other similarly situated countries could become increasingly dire.

- Jacob Barron, CICP, NACM staff writer

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Multilateral Trade Pact May Pivot on U.S.-Japan Battles

Representatives from nations involved in the proposed Trans-Pacific Partnership (TPP) free trade agreement (FTA) are scheduled to begin talks in Brunei by week's end to advance the initiative. But Japanese practices labeled as protectionist by the United States may provide the first significant speed bump for the TPP, something several members feared prior to Japan's involvement in negotiations.

Officials from several nations involved in the TPP publicly set a goal to finalize an agreement by the end of this year. It would be an understatement to call the goal optimistic given concerns of the two biggest economies involved. Two of the key areas where the U.S. and Japan continue to disagree, including during a bilateral pre-TPP meeting between the two parties earlier this week, are access to the automotive and, especially, agriculture industries. The latter's lobby in Japan is among the strongest, and professes that its farmers would be decimated if they had to compete with American farmers granted enhanced market access. Granted, some believe the agriculture issue might be a fight the U.S. doesn't even want. Rather, it could be a bargaining chip and an effort to garner deeper concessions in other areas like automotive,  insurance or retail.

Either way, few experts expect the talks to be smooth due to these issues, which is why some original TPP members objected to including Japan at all, despite the value and perceived opportunity of its economy.

The TPP represents a greater interest from developed economies in the "Pivot to Asia" in the southeast part of the continent. The pact would also include emerging economies like Vietnam, Singapore and Malaysia, as well as Peru, Chili, New Zealand and Australia. Mexico and Canada also have been invited to take part in the negotiations.

- Brian Shappell, CBA, CICP, NACM staff writer

Call for Proposals for NACM's 2014 Credit Congress

Be one of the impressive session speakers on cutting-edge issues at the 118th NACM Credit Congress and Exposition from June 8-11 at the Rosen Shingle Creek Resort in Orlando, Florida.

Submit your session proposal by October 11, 2013, and share this invitation with others who have knowledge and insight that will benefit our delegates.

Join our impressive keynote speakers and take the opportunity to build relationships with others in the field of business credit and finance.

Complete your session proposal here.

Early NACM Survey Results Suggest Cash Issues Dominant Cause of Late Payments

The preliminary results of an NACM survey about what's to blame for customer late payments suggest that cash issues, rather than technical errors, are the dominant cause for delays. With a little more than a week left before the survey closes, 36% of respondents have said that only 0-10% of their customers' late payments are caused by billing, invoicing or other technical errors, while 90-100% of them were caused by cash issues.

The second most popular response so far still leans heavily toward cash being the culprit for most delays, with 17.5% of participants saying that only 10-20% of their customer late payments are caused by errors, and 80-90% of them caused by cash issues.

Of the smaller group of respondents with a greater percentage of late payments due to errors, specific problems with shipping, pricing and invoicing were the primary causes. Many also noted that their bigger customers were more likely than their smaller buyers to cite errors when making past-due payments. "I wouldn't necessarily call them 'errors' but processing issues," said one participant. "These are mostly large companies that are trying to leverage every bit out of suppliers, not real cash flow issues."

Still, respondents that cited "cash issues" as the predominant cause of late payments weren't necessarily referring to their customers' financial distress. Many of them commented that their customers are fully capable of making payment according to terms, but simply don't for various reasons. "The majority of our late payments occur as a result of a customer cash management decision," said one participant. "These decisions have more to do with financial metrics than cash availability."

The two-part survey, which also asks which company department is responsible for resolving errors, will remain open until the end of August. Click here to participate! Respondents will receive .1 Roadmap points toward an NACM designation and be entered into a drawing for a free teleconference registration.

- Jacob Barron, CICP, NACM staff writer

Different Perspectives Can Help Solve Your Issues

Attend FCIB for the 24th Annual Global Conference on September 15-17 in Philadelphia for what John LaRocca, CICP said are "unique and global points of view that I may not otherwise be exposed to."

LaRocca, director of global credit at Hitachi Data Systems, was speaking to the exceptional diversity of experience that FCIB events offer. Join him in this year's Executive Exchange Session where he will direct questions about topics affecting global credit professionals. "This panel enables a sharing of experiences from people who have successfully navigated the business credit and collection issues of today," he said.

For more information about the other prestigious moderators and panelists, and the topics they will present, view the Global Conference's agenda here.

Detroit Chapter 9 Eligibility Ruling More Than Two Months Away

No one said Chapter 9 bankruptcy was a fast track for municipalities trying to repair deep debt problems, and Detroit is no exception. Notwithstanding it being the first municipal bankruptcy spotlighted in national media, the filing will have to survive an onslaught of objections from creditors of various classes.

Creditors faced a Monday deadline to file objections to the bankruptcy plan honed by city Emergency Manger Kevyn Orr. More than 100 parties filed objections by day's end. They argued everything from violations of the state constitution to mathematical errors within the city filing. Among those at the front of the line was a pair of pension boards, Detroit's largest creditors. This underscores the point that the biggest issue facing most municipalities struggling with debt is unfunded and quickly escalating pension obligations. The issue was also in play during at least two California filings and one out of Rhode Island in the last two years, none of which rivaled the size and scope of Detroit.

U.S. Bankruptcy Court Judge Steven Rhodes set the eligibility hearing on the case for October 28. Bruce Nathan, Esq., partner at Lowenstein Sandler LLP, predicted long before the official filing that Detroit would eventually end up in Chapter 9 and, because of the size and attention it would command in the media, could be the most complicated municipal filing in U.S. history.

"This is the most interesting case in a generation," said Nathan, whose firm was hired by one of the objecting parties. "It is a virtual constitutional laboratory. A central part of this is constitutionality for both state and, for the first time, federal law. All cities with issues like Detroit are watching this case."

- Brian Shappell, CBA, CICP, NACM staff writer

Risky Business

Businesses risk billions of dollars each year on sales on credit. How do you find your way between fact and fiction, hope and charity, and faith and foolishness?

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Visa, MasterCard Undeterred as Opposition to Interchange Settlement Breaks Threshold

Under the terms of the still in-flux antitrust settlement involving Visa, MasterCard and U.S. merchants, the two card networks had the right to back out of the $7.25 billion deal if businesses accounting for 25% of the total volume of credit card purchases opted out. When it was first announced, hitting that 25% threshold seemed like a long shot. It was expected that 25% of U.S. merchants involved in the suit would oppose the settlement, but the volume of transactions processed by Visa and MasterCard is so great that exceeding 25% of that total appeared too large for the opposition to overcome.

That's exactly what seems to have happened, however. In a July conference call with investors, MasterCard President and Chief Executive Officer Ajay Banga acknowledged that opposition to the settlement had surpassed the 25% of total credit card purchase volume. Despite this, Visa and MasterCard have decided to stay the course, and continue their pursuit of a multibillion dollar antitrust settlement.

"The defendants as a group had the right to terminate the settlement agreement because the volume threshold of 25% was exceeded, but elected not to do so," Banga said.

Opponents of the settlement, including several of the world's largest retailers, have criticized the preliminarily-approved settlement for being inherently unfair to merchants because it prevents them from filing future lawsuits against Visa and MasterCard for the way in which their interchange, or "swipe," fees are set. The agreement offers no recourse for merchants to challenge these fees and allows the world's two largest card networks to continue setting these fees in secret, they argue.

Instead of addressing merchant concerns about transparency, the centerpiece of the settlement that Visa and MasterCard continue to pursue is a combination of $6 billion in direct payments to merchants and $1.25 billion in temporary interchange rate reductions. The settlement also allowed merchants to pass on their processing costs to customers via surcharge, a provision that has already taken effect.

The settlement is subject to a judge's final approval in federal court in a hearing on September 12.

- Jacob Barron, CICP, NACM staff writer

NACM's Secured Transaction Services Workshops

Liens & Bonds: Managing the Process from a National Perspective

And / Or

UCC Filings and the Best Possible Position to Get Paid

Thursday, September 26, 2013 - Denver, CO

Click here for more information and to register.

Credit Insurance Use on the Rise

The use of insurance in trade credit transactions, especially cross-border ones, continues to rise, according to statistics from a United Kingdom-based credit and investment insurance industry trade association.

Statistics updated this summer by Berne Union, which is comprised of both private insurers and publicly backed export associations, noted an increase in new business to $1.538 trillion (USD) in new short-term credit insurance (more traditional trade credit) for 2012. That is an increase from $1.495 trillion in 2011. While significant, it pales in comparison to the increase from the $1.257 trillion reported in 2010. This continues a trend reported by Berne Union, whose members are purportedly involved in as much as 10% of all world export activity, for much of the last five years.

Between 2008 and 2012, new short-term credit insurance increased by $241 billion. Medium- and long-term export credit insurance (typically capital projects, infrastructure, etc.), which decreased from 2011 to 2012, still rose by $27 billion to $180 billion overall during the same five-year period, with much more expected out of developing nations in the coming years.

The most active nations for short-term credit insurance policy purchases in 2012 were the United States, Germany, the UK, Italy and France. Brazil and China moved up in the listing for short-term policies, and improved in medium- and long-term policies as well.

- Brian Shappell, CBA, CICP, NACM staff writer

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