Business Groups Split on Keystone XL Pipeline

A proposed pipeline from Alberta, Canada to the Gulf of Mexico has drawn both the ire and admiration of business groups.

The controversial Keystone XL Pipeline has risen to national prominence following the passage of a payroll tax cut extension, which included a stipulation that President Barack Obama must make a decision in favor of, or against the project within 60 days. Proponents, like the U.S. Chamber of Commerce, claim that the $7 billion pipeline would be a jobs machine. The opposition, on the other hand, claims that the project will generate only modest job increases, and could end up costing more than it creates.

“If the president is serious about job creation and energy security, now is the time to act on the Keystone XL pipeline,” said U.S. Chamber President and CEO Tom Donohue. “This is the perfect example of a shovel-ready project that makes sense for our economy. The strong, bipartisan support for a provision requiring a prompt decision indicates that the Congress understood that there is simply no reason to delay a decision on Keystone until after the election.”

According to the Chamber, the pipeline will create 20,000 immediate jobs and an additional 500,000 barrels of oil from Canada, contributing both to job creation and presumably more affordable oil prices. “We strongly urge the president to move swiftly to approve the permit and move forward with this project, which is clearly in our national interest,” said Donohue.

However, environmentally-minded business groups, like the Green Business Network, have argued just the opposite; that the pipeline will divert oil, and jobs, from Midwestern oil refineries to their counterparts in the Gulf of Mexico. Citing a study conducted by Cornell University’s Global Labor Institute, the opposition has noted that consumers in the Midwest could end up paying 10-20 cents more per gallon once the pipeline is completed, ultimately suppressing spending and costing jobs. Furthermore, the environmental risks associated with the pipeline could create significant health and economic costs, thereby eliminating jobs as well.

The Keystone pipeline was originally proposed in September 2008, when TransCanada Keystone Pipeline, LP filed an application for a presidential permit with the State Department to build it. Under Executive Order 13337, the State Department must review the application when it would cross an international border with the U.S. The same executive order also directs Secretary of State Hillary Clinton to consult with federal agencies before issuing a decision as to whether or not the project is in the national interest. So far, no determination has been made.

Jacob Barron, CICP, NACM staff writer

CMI Preview: Index Surges on Holiday Retail Boom



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NACM’s monthly Credit Manager’s Index for December, to be unveiled in full Thursday afternoon at www.nacm.org, will illustrate solid games for the final month of the year. But, like most months, the service and manufacturing sectors aren’t exactly on the same page.


“Throughout the year, the manufacturing and service sectors exchanged positions with one another, and it was a rare month when both sectors were on the same track,” said NACM Economist Chris Kuehl, PhD. “December was no exception. The service sector grew much faster than manufacturing due to the strength of the retail segments of the index.”

The latter observation was to be expected, as sales usually surge on holiday gift shopping and manufacturing typically peters out late in the fourth-quarter. To wit, the service side of the CMI should show the highest readings since May though not quite to levels reached at the end of 2010. And favorable factors levels for the service sector remain high, with hope that anything that even closely resembles stability between 4Q2011 and 1Q2012 will be taken as a sign for much better economic growth in 2012. A key is avoiding some type of unforeseen catastrophe to shake confidence, like last year.

“This was the expectation at the end of 2010, but that was before the appearance of problems that beset the economy as a result of the supply chain disruption from the Japanese earthquake and tsunami as well as the impact on oil pricing from the Arab Spring and the violence that took Libya out of the oil markets for the foreseeable future,” Kuehl said.

However, favorable factors for the manufacturing sector going forward may be increasingly difficult to find.

(Editor’s Note: For the full data and analysis of the December CMI, check on www.nacm.org Thursday afternoon).

Brian Shappell, NACM staff writer

China Hinting at New Challenges to Dollar, Ratings Agencies

During what is a traditionally slow news period within the United States because of preoccupation with the holiday season, China lobbed a few thinly veiled barbs and hinted at challenges they would mount both in use of currency and U.S.-based credit ratings agencies.

Chinese banking official Zhou Xiaochuan announced that China, unsatisfied with the quality and accuracy of ratings coming out of the dominant U.S.-based credit ratings agencies (Moody’s Investment Services, Standard & Poor’s, Fitch Ratings) was seriously considering launching its own ratings agency. Additionally, he encouraged China’s largest financial institutions to consider launching their own competitors to the U.S.-based big-three or at least to add more researchers analysts to rely less on the existing services. The agencies have grown increasingly unpopular with what some characterize as trigger-happy downgrades of sovereign credit ratings of late, perceived conflicts of interest between its actual ratings and product offerings as well as its shaky performance in the lead-up to the global economic freefall.

Granted, there would be a lot of obstacles to overcome in either Chinese scenario as international trust of its government and banking system still lags far behind its status as a manufacturing hub. And that doesn’t even take into account the large cost to get anything competitive up and running to which potential clients, stuck in an ongoing tepid economic recovery, would be unlikely to pay a premium.

In a perceivably unrelated move, the Chinese and Japan announced new currency/trade partnership designed to boost both the renminbi and the yen in the area of trade, among others. Though largely symbolic and shrouded in a lack of finite details to date, the move appears to be a message that both are trying to gradually reduce reliance on the dollar as the dominant currency. While a statement not to be ignored, it’s not likely to push the Chinese currency ahead of the dollar on the world stage at any faster pace. As the Federal Reserve’s Matthew Higgins told NACM in an interview as well as attendees at FCIB’s New York International Roundtable in September, it could still take decades for the dollar to be replaced as the world’s go-to currency.

Brian Shappell, NACM staff writer


Updated Stats Confirm Busiest Year to Date for Exporting Support Outfit



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The Export-Import Bank of the United States’ (Ex-Im’s) annual report unveiled this week backs up its claims based off of preliminary numbers in October that the group financed more projects, in dollar value, in 2011 than any previous year.

Ex-Im financed $32 billion in projects through the calendar year, marking the third consecutive campaign in which it broke a previous record. In addition, Ex-Im noted small business financing surged again in 2011 and is up by more than 70% over the last three years. Ex-Im’s activity in 2011 was highest in Mexico and India, and is gaining ground quickly thanks in part to massive needs in the energy sector, said Ex-Im sources.

 The organization, an independent federal agency pairing U.S. companies and product manufacturers with companies abroad, also considers the following nations as high-opportunity ares going forward for U.S. businesses: Colombia, Turkey, Vietnam, Indonesia, Brazil, Nigeria and South Africa.

During an NACM interview with Ex-Im President and Chairman Fred Hochberg in September, he said, “If you’re not exporting to places like these, you need to get in that game...there’s not a company that exports [properly] that isn’t doing well.”


Brian Shappell, NACM staff writer

Uncertainty In Asia Following Kim Jong Il's Death

While its economy has been easy to ignore for the last several decades, North Korea still holds sway in Asia. And although the region’s markets are currently strong enough to take a few knocks in stride, the death of North Korea’s “dear leader” Kim Jong Il this week could potentially bring a lasting new layer of risk to the area.

Asia has been a bright spot through the global recession and the economy’s underwhelming recovery, but it remains far from immune to danger. Stock markets in the region fell on the news that Kim had died yesterday, none more notably than the Korea Composite Stock Price (KOSPI) Index, which fell 4.2%. “The Korean stock market has reflected the sign of public concern and fear as to national insecurity,” said Kyle Choi, Esq. of Bluestone Law, Ltd. “Furthermore, the value of the Korean currency has, at least temporarily, depreciated right after the news.”

While these indicators are expected to recover quickly, the question mark in the area now becomes Kim’s son and successor, Kim Jong Un.

The younger Kim remains untested and inexperienced, and could face considerable difficulty in his attempts to take the same level of control that his father once wielded over nearly every aspect of the country. These difficulties could exacerbate the tortured relationship North Korea has with the world, and with its own people, creating bigger problems in the form of the nation's chronic food shortages, political challenges and military security.

“It all depends on the new North Korean leadership’s position,” said Choi. “If the new leadership decides to maintain the hostile attitude towards South Korea that the previous regime did, it can very much affect the economy adversely, either in the short-term or in the long run.” Security threats could very easily become an issue as well, as the new leader seeks to assert himself militarily, possibly in the form of another nuclear test, which would disrupt regional and market stability even further.

Investors and exporters are never excited about uncertainty, and while North Korea has been, economically speaking, a non-entity in the region, how the questions surrounding the country’s young new leader are answered could determine much of the continent’s future as an economic powerhouse.

Jacob Barron, CICP, NACM staff writer

France Gets Thumbs Up, For Now, From Fitch Ratings; Others Not So Lucky



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On the heels of negative press for France and the possibility of a downgrade from its top-notch credit rating, the third of the big three ratings agencies has weighed in with a favorable outlook for the European power…at least for now.

Fitch affirmed France’s long-term foreign and local currency issuer default ratings and its senior debt at “AAA” status. Additionally, its outlook was upgraded from negative to stable. From Fitch:

“The affirmation of France's 'AAA' status is underpinned by its wealthy and diversified economy, effective political, civil and social institutions and its financing flexibility reflecting its status as a large benchmark euro area sovereign issuer. In addition, the French government has adopted several measures to strengthen the creditability of its fiscal consolidation effort.” However, based on problems in other European Union nations, Fitch predicted the chance of a French credit rating downgrade within the next two years at about 50%.

Fitch wasn’t so kind to everyone in Europe on Friday as six – "PIIGS nations" members Italy, Spain and Ireland as well as Belgium, Slovenia and Cyprus – were put on a new downgrade watch on debt and growth concerns.  

In recent weeks, Moody’s Investment Services had placed France on notice that it is in danger of losing its long-held AAA sovereign credit rating on concerns that aren’t so much based on its own situation, but those of rising borrowing costs/bond yield activity tied to collateral damage from problems in other high debt European nations. It is the second time this year Moody’s has released a public warning about France, which along with Germany has been forced to carry the load for a cluster of debtor nations. Standard & Poor’s later put both France and German on warning on a day when 15 European Union members simultaneously were placed on its negative watch. The rational was over “systemic stresses in the euro zone that have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.”

Brian Shappell, NACM staff writer

Economist: Inventory Numbers Show Caution

The expectation of the retail community as the holiday season advanced was that they would go into this year as they have in the past couple of years—inventory light. That is exactly what has transpired, and there is no sign that strong sales from the last few weeks are going to provoke any last-minute additions to their stock.

There has been no change in retail, but that is not the story in wholesale or in manufacturing. The inventory levels in these sectors have gained dramatically. Manufacturers saw a 0.9% jump in inventory -- in wholesale, the hike was 1.6%. The differing strategies of the sectors are interesting.
 
Overall, there has been a consistent hike in the inventory level for manufacturers in reaction to the big supply chain disruptions that took place this year. It has not been just one or two incidents but a series of them, and they still affect major sectors around the world. The crisis in Japan damaged the ability of the auto sector to keep pace with production schedules all summer and, now, the tech world is suffering from the impact of flooding in Thailand. The factories that produce everything from hard drives to peripherals remain under water post-flooding. These disruptions are creating a new need to have inventory on hand.

Beyond that, there is concern that prices will start to rise in the coming year and many companies are seeking to beef up inventory of raw materials to beat that expected price hike. Wholesalers have been doing some of that advance purchasing as well in order to avoid what they anticipate in the coming months. There is increasing activity that suggests that companies are expecting to see better times in 2012. If things don't work out in such a manner, there will be some long faces by the second quarter.

Source: Chris Kuehl, NACM economist

Law & Order: Bankruptcy a Hot Topic from Courts Local to Supreme

The Supreme Court announced that, in light of a ruling that conflicts with two previous ones from other bankruptcy courts, it will consider the following situation: “whether a debtor may pursue a chapter 11 plan that proposes to sell assets free of liens without allowing the secured creditor to credit bid, but instead providing it with the indubitable equivalent of its claim under Section 1129(b)(2),” likely this Spring. In essence, it will decide whether or not creditors can use what is owed to them instead of cash in the bidding process for assets. A final ruling on credit bidding would likely follow by about three months.

The Supreme Court noted that a Seventh Circuit Court of Appeals in Chicago case (RadLAX Gateway Hotel LLC v. Amalgamated Bank, 11-166) allowed a secured creditor to bid its claim in lieu of a cash bid. That directly conflicts with a pair of other cases including a Third Circuit decision in Delaware was in the bankruptcy case of Philadelphia Newspapers LLC.

Meanwhile, on the municipal bankrupcty front, the Harrisburg, PA Chapter 9 saga started increasingly resemble "Keystone Cops" as the city council's attorney missed a deadline to appeal a judge's dismissal of its bankruptcy filing.  U.S. Bankruptcy Judge Mary France rejected an appeal by the city council’s attorney, over her previous decision to disallow a municipal/Chapter 9 bankruptcy filing coming from the state’s capital city.  France rejected the infamous Chapter 9 filing, done largely because of runaway debt tied to a trash incinerator project, last month on grounds that the city council was not legally authorized to file it.

And, in Jefferson County, creditors tied to its Chapter 9 filing from the Fall have asked to have the case dismissed, similarly to Harrisburg, on the argument that its county commissioners were not authorized to do so. U.S. Bankruptcy Judge Thomas Bennett is charged with considering the motion to dismiss on what amounts to technicalities in the filing’s legitimacy. 

(Editor's Note: more on these and more bankruptcy stories in this week's eNews, being released late Thursday afternoon).

Brian Shappell, NACM staff writer


Amid Improving Growth Fed Still Continues Course on Rates, Treasuries



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Some in the mainstream media tripped over themselves early Tuesday to predict the Federal Reserve would emerge from its latest policy meeting with dampened talk of an extended period of low rates and Treasury purchases as the U.S. economy appears to be back on track for somewhat improved growth levels. While the improving economy was noted, the Fed did not take anything that resembled a step back from its rates or Treasury policies.

The Fed’s Federal Open Market Committee unsurprisingly opted to hold the federal funds rate at a range between 0% and 1/4% and reiterated that conditions “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” The announcement indicated the Fed expects moderate growth through 2012 despite problems in global markets, notably high-debt “PIIGS nations” and those in the European Union affected by their struggles. The Fed admitted such global strains remain the largest threat to an improved 2012. Meanwhile, once again, it downplayed the threat of inflation on the U.S. economy:

“The committee anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate [to foster maximum employment and price stability].”

Part of fighting off inflation as well as continuing a “stronger economic recovery,” than found over the last couple of years,  the committee intimated, is part of the reasoning between continuing its policy of reinvesting principal payments from its Treasury holdings (debt and mortgage-backed securities) back into more securities holdings.

Brian Shappell, NACM staff writer

Global 2012 Economic Outlook Hinges On Europe

Economists seem to agree that global growth in 2012 hangs on the fate of one particular continent.

What happens in Europe will determine much of the world economy’s health, according to economists from the Wells Fargo Economics Group, and NACM Economist Chris Kuehl, PhD. Both Wells Fargo and Kuehl presented their predictions in separate teleconferences last week, and while issues with Asia, inflation and elections were also hot topics, the biggest threat to growth was the euro zone.

“It’s not a 2009 unless Europe blows up,” said Wells Fargo Global Economist Jay Bryson, PhD. “Everything is predicated on Europe not blowing up.”

Wells Fargo Chief Economist John Silvia, PhD agreed with his colleague, noting that “the primary risk to forecast will be the question on European sovereign debt, and what it entails for borrowing around the world.” Kuehl, in his FCIB teleconference, noted that the crisis has already caused a second round of tightening among European banks and businesses. “The credit crisis has begun again in Europe,” said Kuehl. “It’s not as nasty as it was in 2008, but you’re seeing a slowdown. It’s gone back to a period where no one really has a good sense of where this conversation is going to go, and probably won’t have until the middle of next year.”

How much this lingering uncertainty and possible collapse will affect the U.S., however, remains to be seen. “We don’t have a lot of exposure to Greek debt,” said Kuehl, referring to the euro zone country closest to the brink of collapse. “France is probably the most exposed when it comes to the private sector. Germany is the most exposed when it comes to the government. Once you get past Germany and France the exposure begins to deteriorate quickly and as far as the U.S. is concerned, it’s relatively small,” noted, cautioning still that, “we are exposed indirectly because U.S. institutions are tightly connected to those in France and Germany.”

This being the case, growth in the U.S. is expected to be positive, but still on the small side.  “We do expect the U.S. economy to expand by 2%,” said Silvia. “With this subpar economic level, we have modest inflation levels, and I think the Fed funds rate will stay the same until 2013.” Bryson agreed, noting that “It’s an average sort of year. Then, in 2013, we come back.”

For more information on FCIB’s international educational offerings, click here.

Jacob Barron, CICP, NACM staff writer

Commentary: Germany Wins in EU Debt Battle—What Does this Mean?

For months the contest has been between the Germans and most of the rest of the European Union over the debt situation and potential influences on one-another's budgets. The deal is finally in place, and it's notable that Germany’s chancellor held her ground despite the near panic that set in throughout the euro zone.

The Germans were (and are) the only nation that has the resources to pull Europe out of the mire, and they were not going to lift a finger until getting what they wanted. Some concessions were made in the end, but the core structure of the German plan is intact and will be the strategy pursued going forward.

The plan as it stands is based on four key elements and, at the moment, it does not look as if these are all that negotiable.
  • The first is that there will be strict limits on a nation’s budget deficit as well as their spending-to-GDP ratio.
  • The second point is that there will be a system imposed to reduce the existing debts and deficits to no more than 60% of GDP. This is the imposition of some strong austerity plans on those nations that have run up the highest debts.
  • The third part of the plan is the enforcement part—severe and inescapable sanctions if nations fail to adhere to the new rules. Germany wants a club with which to beat the members into financial submission, especially the 'PIIGS Nations.'
  • The fourth element is a common language and strategy as far as budgets are concerned. The consolidation of national budgets will make the task of coordinating policy far easier.
 
Analysis:
There is a very long path between the creation of this plan and its fruition, and there will be many battles ahead. The point is that Germany refused to waver on key points and, now, it becomes a matter of bringing the other nations in the euro zone on board. Germany, which will have to start ponying up the money needed to bail out the southern EU economies, will retain the upper hand on the issue as long as its economy is the only one that has the ability to rescue the others.

Source: Chris Kuehl, NACM economist

Attorney: Lehman Resolution "Bankruptcy at its Finest."

Judge James Peck of the U.S. Bankruptcy Court for the Southern District appeared almost relieved as he approved the latest plan by Lehman Brothers, which filed the largest Chapter 11 bankruptcy filing in U.S. history about three and a half years ago. Marked by its size, drastically different plans and legal wrangling between creditors, Peck characterized the bankruptcy proceeding as the most difficult ever seen in U.S. courts.

Lowenstein Sandler PD attorneys Bruce Nathan, Esq. told NACM the case represented “Chapter 11 at its best -- Bankruptcy is at its best not when there is litigation, but when there is resolution, and this case was very difficult.” However, he also noted that, just because the plan has been approved and stakeholders have stopped fighting, doesn’t mean the Lehman situation is coming to a neat and tidy end in 2011. He warned there are still significant amounts of assets that need to be liquidated over a three-year period, which is being drawn out to maximize value as opposed to most of the rapid-fire liquidations that occurred as well as  partnerships/ventures Lehman needs to get out of and a two-year window for stakeholders to file objections to claims to what may end up as a pool of money estimated at $65 billion.

“This is the end of the beginning, but there’s really a lot more to go here,” Nathan implored. “What they’ve done is extrordinary, but there’s a lot of bull work to do to finish this case out.”
That said, there has been an active trade claims market for Lehman creditors to consider. The question now is how many creditors sold their claims, and who should consider doing so at this point. “Selling might make sense given how much longer there is to go,” said Nathan.

(Note: More on this story in this week’s eNews, which will be available at www.nacm.org late Thursday afternoon).

Brian Shappell, NACM staff writer

S&P Downgrade Warning Has Little Impact...FOR NOW

As reaction continues following Standard and Poor’s (S&P) placement 15 European Union members on its negative watch list this week just as markets were starting to have faith in the German- and French-led measure to clean up the EU’s ongoing debt and monetary problems, it seems the markets haven’t had much of a reaction. That could change following a two-day EU summit that ends Friday.

Still, what is the actual impact of all this? It’s not much, for now, says Hans Belsak, president of S.J. Rundt & Associates. However, the key words are “for now.”

 “For now, the decision of S&P does not have much of an impact, as it merely recognizes what the markets and investors are well aware of,” he told NACM. “But it does highlight the importance of this week’s European summit meeting and of the ongoing efforts by both Germany and France to move Europe toward greater fiscal integration. If they fail, and if the nervousness in the markets gets worse, the consequences could be calamitous.”

Belsak noted that dissolution, should that worst case scenario arrive in the near future of the Euro zone, would result in “an incredible mess” both in Europe and abroad.

The U.S. would suffer extensive collateral damage, given the exposure of many U.S. financial firms,” Belsak said. “There would be a run into U.S. Treasuries as a ‘safe bet’ but, even so, U.S. financial firms would be forced to scramble for liquidity as European markets freeze up.”

Brian Shappell, NACM staff writer

S&P Issues Downgrade Warning For EU, Just About All of It

Despite image problems from shaky predications in the run-up to the recession, perceived conflicts of interest and a U.S. rating downgrade widely regarded as premature if not unnecessary, Standard & Poor’s has continued to not shy away from controversy with its ratings moves and warnings. But perhaps its most incendiary moment came this week when it put 15 European Union members on blast.

Just as markets were starting to have faith in the German- and French-led measure to clean up the EU’s ongoing debt and monetary problems, S&P swooped in to undue all of that positive by putting the long-term sovereign credit ratings on its negative watch list. Among those receiving the dubious distinction were Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. The following nations were noted as negative both in the long and short term: Estonia, Ireland, Italy, Malta, Portugal, Slovak Republic, Slovenia and Spain. S&P’s now maligned release explaining its position included the following:

“Today's CreditWatch placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole. We believe that these systemic stresses stem from five interrelated factors:
  1. Tightening credit conditions across the euro zone;
  2. Markedly higher risk premiums on a growing number of euro zone sovereigns, including some that are currently rated 'AAA';
  3. Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among euro zone members;
  4. High levels of government and household indebtedness across a large area of the euro zone; and
  5. The rising risk of economic recession in the euro zone as a whole in 2012.
Currently, we expect output to decline next year in countries such as Spain,
Portugal and Greece, but we now assign a 40% probability of a fall in output
for the euro zone as a whole.”

S&P noted that it’s waiting to make any decisions on rating moves until after the Dec. 8-9 EU Summit, but intimate some downgrades could occur very soon after. Stay tuned…

Brian Shappell, NACM staff writer

Commentary: Japan is in Worse Shape than Europe ”So Why isn't it Suffering as Much?

It’s not as if Japan has not been hearing warning bells, but there is always a sense that somehow those clever Japanese will pull something out of their hat and stave off the worst of it. The United States is near panic over a debt that is roughly equal to its GDP, a little less actually. The Greeks are looking at debt that is roughly 150% of their GDP, and they have been written off by some until the next millennium. Meanwhile, Japan is looking at a debt that is close to 220% of its GDP, and it has been there for years.

The latest IMF assessment of Japan is a true gloom-fest, with warnings coming from all directions. The conclusion is that almost nothing in Japan’s economy is sustainable—even in the relatively short-term:
  • The GDP numbers are not improving.
  • Much of the Japanese manufacturing community has already decamped for greener pastures in either lower-cost production nations or in the countries.
  • The population is old already and getting much older.
  • The pension system is not capable of handling the situation much longer.
  • The government spends far too much on white elephants and show projects.
  • The population is resistant to future taxation.

But, evidentally, the big difference is that investors in Japanese bonds are mostly Japanese, and they really lack the ability to invest easily elsewhere. In Europe, the spooky investor can stash their cash in some nearby haven, but the more insular Japanese lack that option. In Europe, bond buyers are institutional and therefore flighty. At the first sign of trouble, they split and take their money elsewhere. Japanese bonds are sold to the general public, and these are investors that typically just sit and wait. Even the corporate bond sellers are facing far less volatility and, as a result, there is far less pressure on bond issuers to do anything dramatic to contend with the vagaries of the market. The nation is insular and that can be a blessing and curse.

Analysis: Thus far, the isolation in Japan continues to offer protection but, at some point, even this will not be enough to cushion the system from the pressure of the outside world. The problem is that financial change in Japan is a lot like earthquakes. Everyone knows the next big one is coming, but nobody has any idea when. They all know that at some point the bottom will fall out of the bond market and Japan will suddenly be facing the same kind of crisis that is bringing Europe to its knees.

Source: Chris Kuehl, NACM economist

Economists React to Central Banks Liquidity Push

Reaction to the efforts of central banks from around the world, notably spearheaded by the U.S. Federal Reserve, have been mixed. Some of NACM's top sources on the global economy weighed in as follows:

Freddy van den Spiegel, of BNP Paribas Fortis
: "It will certainly reduce somewhat the threatening shortage of dollars in the EU banking system. But it is not a solution to the fundamental challenges --deleverage, compliance to Basel III, digesting of the souvereign crisis, strengthening the political framework of the union and preparation. In other words it is welcome but not enough.

Ken Goldstein, The Conference Board: "Markets love it, until tomorrow. This week’s solution solves this week’s crisis. Next week? The real issues are with the euro:
  • Does everybody stay
  • Will there be a split, essentially euro A and euro B
  • Will they go to euro bonds
  • Will they tighten and unify fiscal policy
  • Can they get everyone over there to buy in

And, until there are answers to these questions, this Perils of Pauline will continue to deliver riveting episodes."

Chris Kuehl, PhD, NACM and Armada Corporate Intelligence: "By itself, this action does not really change all that much. The banks are still facing the limitations that come with central banking. All that really can be done to boost the economy with the tools at their disposal is to encourage behavior by making loans cheaper and making money more fluid. It has been referred to as “pushing a string” in the sense that these actions only make doing something easier. It doesn’t mean that business will borrow or that consumers will spend."

Compiled by: Brian Shappell, NACM staff writer

Commentary: Chinese PMI Declines, Other Nations to Feel Pain for It

For the first time in three years the Chinese have seen a decline in their PMI numbers sufficient to slide into contraction territory. It is now sitting at 49, and that has set off some alarm bells all over the world.

The Chinese have been in the process of deliberately slowing their economy, which makes this number a little harder to interpret. If this was the US or Europe, such a decline would have analysts predicting the imminent return of recession. In China, the situation is much harder to interpret. This is a deliberate policy response more than a trend within the manufacturing community itself,  and that suggests that China can reverse course and start to grow again at any point it chooses to. It is obviously not quite that simple.
 
Analysis: China is trying to contend with dual problems that require actions that work in opposition to one another—a situation shared by the US and Europe. On the one hand the country has been grappling with a growing and serious inflation issue. The food inflation rate has been almost 10% and overall inflation has been almost 6% in the past few months. The only way to reduce the inflation threat has been to clamp down on credit and to restrict bank activity. For several months, these efforts had been largely unsuccessful but, since the end of the summer, there have been signs that China is going to pull off that soft landing.

At the same time the country still faces the monthly burden of providing 1.3 million new jobs
a month just to keep pace with normal population growth. This kind of demand for increased employment is contrary to the trends favored for inflation control. The assumption is that China will have to start turning its attention back to job growth sooner than later and, when that happens, the country will see growth in its industrial sector again. Until then, the Chinese are not providing the kind of demand that many other nations have grown dependent upon. For example, the slowdown in the Australian economy over the last six months is attributable almost entirely to the slower Chinese economy.

Source: Chris Kuehl, PhD, NACM economist

Fed Beige Book: Economic Back on Right, But Slow, Path

From the Federal Reserve:

"Overall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve Districts except St. Louis, which reported a decline in economic activity. District reports indicated that consumer spending rose modestly during the reporting period. Motor vehicle sales increased in a number of Districts, and tourism showed signs of strength. Business service activity was flat to higher since the previous report. Manufacturing activity expanded at a steady pace across most of the country. Overall bank lending increased slightly since the previous report, and home refinancing grew at a more rapid pace. Changes in credit standards and credit quality varied across Districts. Residential real estate activity generally remained sluggish, and commercial real estate activity remained lackluster across most of the nation. Single family home construction was weak and commercial construction was slow. Districts mostly reported favorable agricultural conditions. Activity in the energy and mining sectors increased since the previous report.

Hiring was generally subdued, although some firms with open positions reported difficulty finding qualified applicants. Wages and salaries remained stable across Districts. Overall price increases remained subdued, and some cost pressures were reported to have eased."

See Full Federal Reserve Beige Book analysis here.



Central Banks Join Forces to Prop Up Global Financial System

The world’s largest central banks joined forces yesterday, taking coordinated action to inject liquidity into the ailing global financial system. In addition to the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all took action to enhance their capacity to support markets sagging with the weight of the euro crisis.

“The purpose of these actions is to ease strains on the supply of credit to households and businesses and so help foster economic activity,” said the Fed in a statement. “These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011.”

In layman’s terms, this lower pricing scheme makes more money available to banks and at a cheaper rate, offering both a fiscal benefit as well as a psychological one, by easing these institutions’ concerns about the availability of funds.

The Fed went on to note its continuing relevance to the health of the domestic and international financial sectors, assuring observers that it has plenty of remaining tricks up its sleeve should things continue to get worse. “U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets,” they said. “However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.”

Markets reacted positively to the move, as the Dow Jones Industrial Average jumped by 400 points immediately after the announcement.

Jacob Barron, CICP, NACM staff writer

Fitch: Rating Affirmed, but U.S. Lawmakers’ Ineffectiveness Foreshadows a 2013 Credit Downgrade

Though splashy mainstream media headlines read things like “Warning of U.S. Downgrade,” it is critical to point out that Fitch Ratings actually upheld the nation’s “AAA” credit rating Monday. However, the “big three” agency did note that continued ineffectiveness on the part of the U.S. Congress to break through partisanship to get things done, most importantly address a growing debt problem, could cause Fitch to move the needle by 2013. The odds of a formal downgrade were placed at just better than 50% by the firm itself, in fact.

While Fitch affirmed the U.S. sovereign credit rating, it did drop the long-term outlook to negative from stable. Fitch noted the U.S. continues to retain strong economic and credit fundamentals as well as a currency that is “the global benchmark.” It also asserted that the U.S. economic recovery likely would kick into a higher gear by early 2013 if not late next year. However, uncertainty regarding the recovery of employment levels, government spending and even effectiveness or competency of federal lawmakers are front of mind for ratings analysts at the firm:

“Fitch's revised fiscal projections envisage federal debt held by the public exceeding 90% of national income (GDP) and debt interest consuming more than 20% of tax revenues by the end of the decade and, including the debt of state and local governments, gross general government debt will reach 110% of GDP over the same period. In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status…The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure to agree at least $1.2 trillion of measures to cut the federal budget deficit over the next 10 years...The failure underlines the challenge of securing broad-based consensus on how to reduce the out-sized federal budget deficit."

Fitch, essentially accusing U.S. lawmakers of kicking the can down the road, also noted that automatic cuts, to be implemented if an agreement isn’t made by lawmakers charged with finding ways to reduce the debt, essentially are discretionary spending and, thus, would not be considered a “credible” move toward real debt reduction.

Brian Shappell, NACM staff writer

Credit Manager’s Index Preview: New Data Will Fuel Optimists and Pessimists Alike

The Credit Managers' Index, to be unveiled Wednesday afternoon, is set to show the overall index was largely unchanged over the last month. But, given that September had been seen as a major success, that’s not necessarily such a bad thing. What is a bad thing, even if it’s likely to be short-lived, is the noticeable drop in sales levels.

Perhaps the quickest, most accurate way to describe the to-be-unveiled CMI is to use just two words: mixed bag.

“If one is of a more pessimistic bent, there is the continued high rate of unemployment, the struggles in the housing sector and the sense that nobody in the political realm has a clue what to do about any of this,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). “There is the mess in Europe, the gyrations in stocks and consumer polls that suggest that vast numbers of people are in bed with the covers pulled over their heads. If you tend toward optimistic, there is something for you as well, especially recently.”

Perhaps the reason for those optimistic lies in the stability in recent months for the manufacturing sector, which is said to continue in November and reflect strength found in May, before a disconcerting summer dip. Additionally, market-watchers may be licking their chops on the news that Black Friday and Cyber Monday sales figures were up significantly. However, those numbers won’t actually show up in the CMI statistics until next month Without the holiday sale/marketing-inspired shopping numbers, sales will be off quite a bit in November and are said to track at the lowest level of the year.

Most economic indicators were pretty stable, aside from the dwindling number of bankruptcy filings. Kuehl, who prepares the CMI, notes the feeling is most companies that were going to file or fold have already done so. Granted, U.S. businesses haven’t purged all financial issues, “but, going forward, many companies will see opportunities to gain market share from those competitors that have left the scene and that strengthens their ability to gain momentum in the coming year,” the economist said.

(Editor’s Note: The November CMI will be release through various sources this afternoon. Check back at www.nacm.org in the home page’s news scroll to get all of the November CMI statistics and analysis).

Brian Shappell, NACM staff writer


American Airlines Files for Chapter 11

American Airlines filed for bankruptcy protection this morning, taking the road that many of the company’s competitors have taken in years prior.

AMR Corp., the holding company of American Airlines, and AMR Eagle Holding Corp., the holding company of American Airlines’ regional carrier, American Eagle, filed their Chapter 11 petitions this morning in the U.S. Bankruptcy Court for the Southern District of New York, despite the fact that both are headquartered in Fort Worth, TX. In a release, AMR’s Board of Directors noted that the filing would hopefully allow the company to achieve a cost and debt structure that is industry competitive, thereby assuring its long-term survival.

According to AMR’s most recent quarterly balance sheet, the company has $24.72 billion in assets and $29.55 billion in liabilities. It also has $4.1 billion in unrestricted cash and short-term investments, which the company said should be enough to ensure that vendors, suppliers and other business partners will be paid timely and in full for goods and services provided during the reorganization according to terms. AMR’s cash position also suggests that debtor-in-possession financing is neither considered necessary nor anticipated.

In an FAQ for suppliers and trading partners, AMR was mum on what sort of payment unsecured creditors could expect to see on their pre-petition claims. “It is impossible to predict before approval of the plan of reorganization how much holders of general unsecured claims will receive,” said the company. However, AMR also filed a separate motion with the court asking permission to pay certain foreign suppliers and vendors certain pre-petition obligations, meaning that these non-U.S. based companies may see payment sooner than later. The company said that it expects the court to approve the motion.

"Our very substantial cost disadvantage compared to our larger competitors, all of which restructured their costs and debt through Chapter 11, has become increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges, " said AMR Chairman, CEO and President Thomas Horton. "Our Board decided that it was necessary to take this step now to restore the Company's profitability, operating flexibility, and financial strength."

Jacob Barron, CICP, NACM staff writer

(Credit News Roundup) While You Were Out…

With the lengthy holiday being celebrated in the United States, a few stories may have slipped past usually eagle-eyed credit professionals. Here are some happenings of note:

The “Big Three” credit ratings agencies (Standard 7 Poor’s, Fitch Ratings, Moody’s Investment Services) experienced a significant legal setback last week in the U.S. Supreme Court. It was ruled that the ratings agencies were not protected from lawsuits based on invoking rights under the First Amendment. The three had tried to use such a defense to protect itself from suits brought by investors who were burned after using the companies’ ratings information, which turned out to be far from accurate, about a half-decade ago. Still, two of the three agencies (Moody’s, Fitch) were cleared in said suit because of a lack of evidence.

In the Harrisburg Chapter 9 bankruptcy case, Judge U.S. Bankruptcy Judge Mary France found the Pennsylvania state law (Act 46) to be constitutional, ending the council's hopes of continuing the bankruptcy proceedings and avoiding state conservatorship. Act 46 forbids “third-class” (by population totals) Pennsylvania cities from declaring municipal bankruptcy prior to July 2012.  (Story at http://blog.nacm.org). A judge also intimated that a lack of cooperation/aggrement on the filing between the council and the embattled mayor made the filing inappropriate.

In Jefferson County, AL, where the largest U.S. bankruptcy filing the nation’s history is proceeding, Judge Thomas Bennett said he will not remove an appointed receiver charged with working on the county’s massive debt tied to a sewer renovation project. However, the judge intimate he could limit the receiver’s powers somewhat to give the county a little more influence over the Chapter 9 proceedings.

In the area of free trade agreements, South Korean lawmakers ignored a significant portion of the voter base fighting its pact with the United States over in fear of job losses or economic hits, and its ruling party called a hasty, surprise Wednesday vote. As a result, the FTA, one started during the Bush Administration and signed by President Barack Obama about one month ago, passed overwhelmingly but not before some unrest, including one opposing politician allegedly letting off some form of tear gas or pepper spray in parliament’s chambers. The deal’s value is estimated at nearly $90 billion. (Story at http://blog.nacm.org).

Struggling newspaper publisher Tribune Co., which has become a symbol of struggles in the newspaper/old media industry as well as a bit of a laughing stock based off of what looked like reckless and “old-boys’ club” internal policies, saw yet another reorganization plan filed in its bankruptcy. There’s no telling at this point if its prospects are any better than several other failed efforts of the past in the languishing proceedings.

Brian Shappell, NACM staff writer



Harrisburg Bankruptcy Eligibility Comes Down to Constitutionality of State Takeover



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Update: A district court judge in Pennsylvania opted to disallow a municipal/Chapter 9 bankruptcy filing coming from the state’s capital city on grounds that the city council that filed it was not authorized to do so.

Judge U.S. Bankruptcy Judge Judy France said early in the proceedings Wednesday that her decision on the eligibility of Harrisburg’s Chapter 9 filing would hinge largely on a legality issue based on state law. She noted that if a newly enacted Pennsylvania law that bars bankruptcy filings for third-level category cities from filing a Chapter 9 bankruptcy before July 2012 could be considered unconstitutional then the council and, thus, the city could proceed with its bankruptcy filing. She noted that if the state law was deemed within constitutional bounds, the bankruptcy filing would be denied, which would pave the way for the state to take over Harrisburg’s finances in short order. France eventually found the state law (Act 46) to be constitutional, ending the council's hopes of continuing the bankruptcy proceedings and avoiding state conservatorship. 

Earlier this fall, Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so said it gives the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit out of proportion to that of investors. At present, debt from the bungled incinerator project quintuples the city’s annual budget. State and mayoral plans to sell off city assets such as parking garages and the incinerator operation as well as raise taxes were rejected by the council.

The state, mayor and incinerator creditors are among a long line of opponents who have asked the judge to throw away the bankruptcy filing as improper. Should the council “win” the right to continue the bankruptcy on the basis of constitutionality, several more lawsuits almost certainly will subsequently challenge the filing in the coming weeks and months.

The case could be a watershed moment in Chapter 9 law as many believe it could increase the cost of credit for cities of similar sizes and debt and could set a virtual roadmap or set of precedents for municipalities trying to get out of paying creditors over failed gambles of the past. Stay tuned…

Brian Shappell, NACM staff writer


SoKo Gives Final Go-Ahead on Trade U.S. Trade Pact

Amid a surprisingly chaotic scene that puts the U.S. Congress’ bickering to shame, South Korea’s parliament voted overwhelmingly to approve a U.S.-South Korean free trade agreement (FTA) that has been in the works for some five years.

Though a significant portion of the voter base is against the measure in fear of job losses or economic hits, South Korea’s ruling party called a hasty, surprise Wednesday vote on the FTA, one started during the Bush Administration and signed by President Barack Obama about one month ago. One opposing politician even let off some form of tear gas or pepper spray in parliament’s chambers, reports indicate. The deal’s value is estimated at nearly $90 billion.

After years of languishing and political one-upmanship on both sides of the political aisle, the pact was among three Free Trade Agreement (FTAs) passed by Congress in October. Approval of the FTAs with South Korea, Panama and Colombia has long been seen as important to boost business for U.S.-based companies feeling the pinch of lower domestic demand. The FTAs, in theory, will significantly expand U.S. exports in those markets, help small businesses and lower tariffs on American goods.

Getting the measure through though saw U.S. supporters and opponents alike coming from both political parties as the idea of job protectionism divided lawmakers more on regional lines than the usual partisan ones. In South Korea, the divisions seemed to come from a two groups: big business versus the middle class and working poor. Some paint the deal as more beneficial to the United States and more of a move for the sake of appearances and posturing on the part of Seoul.

The Korean vote was seen as the last significant hurdle to implementation of the FTA, widely regarded as the most significant of the three new U.S. pacts.

Brian Shappell, NACM staff writer

Airlines Industry Fighting Ex-Im Deal in India

The Export-Import Bank of the United States has been increasing its activity in providing export credit financing agreements between U.S. producers and companies based in India significantly in recent years. In fact, it’s become one of Ex-Im’s top two national markets for its serves. However, at least one trade organization wants to put the kibosh on a multi-million dollar project it says threatens the American airlines industry.

The Air Transport Association of America (ATA) filed suit against Ex-Im alleging that a partnership it is funding involving Air India did not properly take into account negative effects such a deal would have on the U.S. airline industry and job availability as per federal law. Ex-Im has already backed $1.3 billion in loan guarantees for the Air India project, which will support the purchase of upwards of 30 planes, and ATA alleges Ex-Im is considering backing an additional $2.1 billion.

ATA alleges “the practices of Ex-Im Bank puts U.S. carriers at a commercial disadvantage to foreign carries. Specifically, the U.S. loan guarantees enable foreign carriers to obtain financing at considerably lower rates, in some cases up to 50% lower…”

Noting that the Department of Justice is representing them in the matter, Ex-Im Spokesman Phil Cogan declined comment beyond the following statement:

“Since 1934, Ex-Im Bank has provided export credit financing for American companies in support of U.S. jobs in industries ranging from power and construction to aviation. Export credit financing ensures American companies and American workers have a level playing field in the increasingly competitive and challenging global markets. Ex-Im Bank is proud of its work on behalf of U.S companies and believes this litigation is without merit.”

Brian Shappell, NACM staff writer

NACM Thanks Its Members Following 3% Repeal

On Monday, President Barack Obama signed H.R. 674 into law, striking a blow for businesses and government contractors everywhere by officially repealing the 3% withholding tax.

Had this important legislation not been approved, 3% of the value of most local, state and federal contracts would’ve been withheld from contractors starting in 2013, potentially posing a severe threat to cash flow for all parties involved on public projects.
 
NACM has opposed this tax since it was enacted in 2006, and would like to take this opportunity, now that the 3% withholding requirement is little more than a memory, to officially thank all of its members for their support over the last five years, and for their support of this most recent repeal legislation. Without your efforts, none of this would have been possible, so thank you for all you've done to ensure the repeal bill's success.
 
For more information, read NACM’s statement in the NACM Press Room.

Jacob Barron, CICP, NACM staff writer

Forced French Benevolence Leading to Painful Credit Downgrade?

It appears only a matter of time now before members of the “big three” credit ratings agencies pounce on yet another economic power in the form of a credit rating cut, as problems stemming from the “PIIGS Nations” continue to grow and spread throughout Europe.

On Monday, Moody’s Investment Services put France on notice that it is endanger of losing its long-held AAA sovereign credit rating on concerns that aren’t so much based on its own situation, but those of rising borrowing costs/bond yield activity tied to collateral damage from problems in other high debt European nations. It is the second time this year Moody’s has released a public warning about France, which along with Germany has been forced to carry the load for a cluster of debtor nations, most recently the third-largest economy on the continent (Italy). All of this could affect the new bailout fund for struggling European nations and continue to have a domino effect through the economy and credit markets.

France got a previous downgrade scare earlier in November in what was later chalked up as an “error” by Standard & Poor’s.  S&P had released notice to a group of subscribers that France’s top credit rating was to be cut but, soon after, offered a mea culpa chalking it up to a “technical error” and a reaffirmation of the nation’s top status. Still, how a full statement on a downgrade to one of the best-rated nations on the planet was readied and released could have been a mere tech glitch became fodder for intense speculation in the weeks that followed.

Still, the warnings and the premature downgrade classification, all are leading to an increasingly likely conclusion that the French will have to deal with a ratings cut in the coming days, weeks or months. And, given its importance in helping steer the stabilization of the stumbling euro situation, it could have a much more dramatic impact in real terms than did S&P’s bold downgrade of the United States this summer.

Brian Shappell, NACM staff writer

Banks' Credit-Granting Remains Exceedingly Cautious

The Federal Reserve has limited tools when it comes to bolstering the economy—after all, the central banks were created to control inflation and its role as the stimulator is supposed to be secondary to fiscal policy. The Fed has tried to move into the void left by a sluggish economy and gridlocked Capitol Hill, but with very limited success. Part of the problem is that the needs banks' participation to make their policies effective. The setting of low interest rates at the Fed level only work if the nation’s banks get more active in the loan market. Thus far, there has been relunctance on that end.

This is chronic problem with low rates of interest. The lower the rate charged, the more vulnerable the lender is to default or payment problems. They are not making all that much from the loan and therefore have little reserve with which to play. They need the borrowers to be solid and to pay their loans back as expected. The higher the rate, the more wiggle room, and banks can take risks on the assumption that profits will be higher on the loans that are being serviced.

There have been changes in the way that banks are reacting to the government and to the regulators that have taken a renewed interest in bank policy, such as Dodd-Frank bank reform law.
It also has been noted many times before that full economic recovery is not going to take place until the housing market -- because of its domino impact on several other sectors -- recovers. The reason for the reticence is partly reaction to the excesses of the past and the fact that many banks replaced the risk takers with far more cautious executives who now favor a very careful approach to lending.

Unfortunately, this determination to avoid repeating mistakes from the past is leading to a new set of restrictive loan policies, and the economy is having a very hard time catching fire as long as there is no credit flowing to those who want to stimulate various sectors, including real estate. Steep restrictions apply to the business community as companies struggle to refinance the buildings and equipment they purchased in the past. Many companies that would expand and hire additional people are unable to get the loans they need to do so. The new restrictions demand solid economic performance throughout the recessionary years, and it is a rare company that can point back to the last three years and claim constant profit and revenue growth. The vast majority of the population and the business community now have a blemish or two on their credit ratings due to the recession and banks have been avoiding those that now carry that scar. Not much expansion will take place without bank lending, and very little will change until and unless the banks start to open up the proverbial spigot again.

Source: Chris Kuehl, NACM economist

President Signs 3% Repeal Into Law

President Barack Obama signed H.R.674 into law this morning, finally repealing the 3% withholding tax that was set to go into effect on most local, state and federal contracts starting in 2013.

The bill also enacted provisions that provide tax breaks to companies that hire recently discharged servicemen and women.

NACM has opposed the 3% withholding tax since it was passed in Section 511 of the Tax Increase Prevention and Reconciliation Act in 2006. Although the withholding requirement was included in the bill to ensure tax compliance for government contractors, the devastating effects that it would’ve had on contractor cash flow would’ve negated any potential gains from the provision.

NACM applauds Congress and the Administration for siding with the nation’s job creators, for respecting the vital importance of cash flow and for finally repealing this harmful withholding requirement. For more information on NACM’s five-year fight to repeal the 3% tax, click here.

Jacob Barron, CICP, NACM staff writer

House Approves 3% Withholding Bill, Ending Repeal Saga

The House of Representatives unanimously approved an amended version of H.R. 674 today, officially repealing the 3% withholding tax. All that's left now is for the President to sign the bill into law, which he's expected to do soon.

The vote tally was 422-0, with 13 members not voting.

Previously, the House had already approved H.R. 674, but it was amended in the Senate, meaning it had to re-vote on a new version of the bill that included provisions taken from another piece of legislation that gives tax breaks to businesses that hire veterans.

NACM has fought for a full repeal of the 3% withholding tax since it was enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005. NACM congratulates both chambers of Congress for setting aside their differences and finally agreeing to eliminate what would've been a potentially devastating tax requirement.

Stay tuned to NACM's eNews tomorrow for more information.

Jacob Barron, CICP, NACM staff writer

Emerging Markets a Mixed Bag Filled with Different Levels of Potential, Concern

Despite ongoing, trite talk of the global slowdown and/or growth malaise, a handful of nations continue to stake their claim as true emerging markets as was evident during the closing session of FCIB’s 22nd Annual Global Conference.

“Doing Business in the Emerging Markets” featured a panel of experts, but also leaned heavily on the experiences of those in the crowd. Of course, the BRICs (Brazil, Russia, India, China) were top of mind, as is usually the case whenever emerging economies are in play for discussion:
  • Brazil – There are some inflation-based short-term concerns and write offs can be a problem. However, due diligence yields some powerful results in a nation with a growing middle class and a position as a host nation for some major events this decade (Olympics, World Cup). John LaRocca, of Hitachi Data Systems Corp., noted his company increased sales by $30 million without a huge spike in write-offs as a result of requiring three years of financial statements from customers to “give us consistency” in what was being analyzed.
  • Russia – As noted in previous eNews blog reports from Global, most of the audience is quite suspicious of doing business with Russian-based companies without significant or complete payment up front. Said attendee Alex Adashev, of Fifth Third Bank, “It’s like the Wild Wild West.”
  • India – It’s increasingly being seen as the number two world market on potential, but concerns linger about differing currencies and a poor financial infrastructure.
  • China – Anecdotes from credit professionals found that, as more companies based at least some of their production operations there for cost-cutting purposes, there have been increasing complaints with product quality, adherence to specifications and even wait time. As such, many credit professionals are increasingly hearing, “I’m not paying for that” after a shipment of goods arrives.

Panelists and attendees also mentioned a couple of surprises among emerging markets, such as one-time drug hotbed Columbia as well as Angola. In Columbia, attendees doing business there noted the amount of Americans doing business there continues to increase noticeably, and the major cities/business hubs have been largely cleaned of drug activity.

Meanwhile, Angola may just be a bit of a hidden gem. Said panelist Mike Dwiggins, of Wells Fargo Bank, “the potential there is fantastic.” While admitting the infrastructure in Angola must come a long way, he said the use of financial institution guarantees and assistance from the Export-Import Bank of the United States is something credit-granting businesses should be looking into.

Brian Shappell, NACM staff writer

US, Like Europe, Must Face Austerity in the Near Future

The U.S. economy and the value of the dollar, while nowhere near either’s most desirable peak are, in reality, just fine in the short-term, says JP Morgan’s Kevin Hebner, who opened up the Tuesday sessions of FCIB’s annual Global Conference in greater West Palm Beach, FL. However, change is going to be needed to address underlying problems in the not too distant future.

Hebner noted that the U.S. and dollar is doing well and will continue to do so because they considered a safe haven. Proof is in the fact that international investors are abandoning the third largest “safe haven,” Italy for obvious reasons and because the bond markets markets simply are too small in other “safe haven” locations such as Norway and New Zealand.

Additionally, forecasts of a Chinese slowdown and the impact that can have on the United States did not seem to concern Hebner greatly either. He noted China is “not the next Dubai times 1,000…they are going to come through just fine.” However, he did note the United States has to take a hard look at starting austerity measures to gets its out of line debt-to-GDP ratio. He predicted this could, and perhaps should, start as early as 2013, post-presidential election cycle, and continue for the remainder of the decade.

“It’s a marathon, not a sprint,” he said of getting through austerity to a better ratio. Still, the United States remains in better shape than Europe, especially a Greece that needs sustained cuts of about 70% to the public sector to get into a normal debt ratio. It’s something that obviously will continue to weigh down Europe, as will problems in the larger, more important Italian economy.

“Europe’s [version of] TARP, the EFSF, is having a nightmare raising money,” he noted. “Their bond auction was a failure. There’s no clarity on how this is going to play out in the European banking sector.”

Note: Check back throughout the week here and at our Twitter account (NACM_National) for live coverage from FCIB’s Annual Global Conference from greater West Palm Beach, FL.

Brian Shappell, NACM staff writer


Areas Drawing Interest at FCIB Global Include Russia, Greece, Egypt

On the heels of a successful series of “Doing Business In…” educational session at NACM Credit Congress and through more recent webinars, FCIB launched a series of four new, sprawling regional ones at its annual Global Conference in greater West Palm Beach. The following were among nations and areas that drew hot interest and/or debate:

Russia – The phrase that pays, so to speak, when talking about Russia and credit is: careful. Panelists and attendees alike told stories of problems with getting paid by Russian-based companies. Most require cash-on-demand or, in the face of growing demands for better terms in a risk-reward climate, deposits. But the following all appeared to be par for the course: very late payments, payments in “big chunks,” little regard for proper invoicing and explaining to what debt the payment is supposed to be going.

Greece – While it seems obvious to say, “Be careful in Greece,” it goes beyond that. Take the time to figure out which industries are dominated by public sectors/government funding, such as the hospitals industry. After all, that is where the money appears to be running dry the quickest. “You have to be mindful of where their capital comes from,” said Bob Wanuga, of Atradius Credit Insurance.

Egypt – The business climate in Egypt, “right now is in pretty bad shape,” Economist Hans Belcsak told attendees via a recorded message. He noted that, since the regime change, business that had been successful previously were considered by many, often unfairly, as successful only because of loyalty to the recently toppled regime. What has resulted is the jailing of many business leaders, widespread suspicions of those who remain free and workers violently demanding 100% wage increases that obviously are cost prohibitive.

Asia-Pacific Region – While there are difficulties in dealing with some of the nations there in – India because of the expansive landscape and currency differentiation, Bangladesh because of weak banking infrastructure and Australia because of sometimes downright erratic business behavior – most polled at FCIB Global characterized it as the easiest international region with which to do business. This is especially true in China, South Korea and Turkey, though the latter seems to be a bit of a crossroads with divergent interests pulling them toward more western economic value and observation of Islamic law. 

Note: Check back throughout the week here and at our Twitter account (NACM_National) for live coverage from FCIB’s Annual Global Conference from greater West Palm Beach, FL.

Brian Shappell, NACM staff writer

Change the Buzz Word a Day One of FCIB Global

Despite divergent topics discussed during the opening trio of sessions at the FCIB Global Conference in the greater West Palm Beach area, one theme seemed to beam out of the morning sessions: Change (and being able to adapt the large amount of it going on in business and credit at present).

Sanjiv Sanghvi, of Wells Fargo Bank, noted that a few changes in leadership in Europe (Italy, Greece) doesn’t necessarily equate to a bump in stability automatically.

“It’s tough to believe that putting technocrats in power will mean they will things will be run in a fundamentally different way,” he said, before noting the U.S. economy continues to look strong – much stronger than portrayed by the mainstream media – especially in comparison.

Sanghvi did note that the coming Basel III changes will require businesses, notably those in credit, to stand up and take note. All told, the Basel III changes and what seem to be some almost hidden requirements could force financial institutions to literally double their capital holdings. As such, he believes banks forced to change their ratios will simple handle the equation on one side or another: raise the costs to borrow or reduce assets in the game.

“That’s a huge different in capital requirements,” he said. “There’s going to be less credit available, not just in trade finance, but finance in general.”

Meanwhile, Marsh USA’s Angela Duca’s speech about global political risk suggested companies either need to be quick on their feel and flexible when granting terms into emerging, somewhat stable economies or they need some type of insurance backing.

“How do you forecast political risk [terrorism, regime changes, etc.]? You can’t,” Duca said. “It’s hard to predict the spark that will cause a major change in a country. And, in the real world, political risk exists all the time.”

Michael Sauter, of Guardean GmbH, used his presentation to promote the idea of willingness to be flexible as well, noting that holding firm to principles and strategies that worked four to five years ago simply may be the most “dangerous” strategy a credit department can employ.

“Adapting to change is the most important thing to our profession,” Sauter said.
Note: Check back throughout the week here and at our Twitter account (NACM_National) for live coverage from FCIB’s Annual Global Conference from greater West Palm Beach, FL.

Brian Shappell, NACM staff writer


Russia Clears Final Hurdle to WTO Membership

Following 18 years of negotiations, Russia will finally become a card-carrying member of the World Trade Organization (WTO) starting in December. The news came after Russian President Dmitri Medvedev, Minister of Economic Development Elvira Nabiullina, and the rest of Russia’s WTO negotiating team agreed to the terms and conditions for the country’s accession.

The WTO is expected to approve the terms and formally invite Russia to join the economic collective at a ministerial conference in Geneva next month.

Membership in the WTO is expected to lower tariffs on exports to its newest member, while also improving foreign access to Russia’s services markets, and holding the country accountable to a system of trade rules.  “Russia’s membership in the WTO will generate more exports for American manufacturers and farmers, which in turn will support well-paying jobs in the United States,” said President Barack Obama, following the accession agreement.  “Russia is also opening its services market in sectors that are priorities to American companies, including audio-visual, telecommunications, financial services, computer and retail services.”

From day one of its membership, Russia will have to comply with WTO rules on the protection and enforcement of intellectual property rights, along with rules governing legal transparency and general trade behavior.  “Upon Russia’s accession, the United States will be able to use WTO mechanisms, including dispute settlement, to challenge Russia’s actions that are inconsistent with WTO rules,” said Obama.

“This step marks a win for both the Russian people and the American people,” said U.S. Trade Representative Ron Kirk. “It will spur trade and support significant job growth in both countries as a result of lower tariffs and increased market access. It also brings Russia into a rules-based system, increasing transparency and predictability to the benefit of all businesses in Russia and ensuring that the Russian government is held accountable to a system of international trading rules governed by the WTO.”

Jacob Barron, CICP, NACM staff writer


Retailers Continue to Feel the Sting

Although corporate bankruptcies fell for the year, it appears many retailers are still having significant problems staying away from the bankruptcy bug.

While bankruptcy filings exceeded 1.5 million in 2010, a 14% increase and the highest number since 2005 reform, business bankruptcies actually declined by 1%, according the Supreme Court's 2010 Year-End Report on the Federal Judiciary. Still, retailers have struggled amid an economic recovery that can be characterized as underwhelming at best to date.

The next victim, if widespread speculation proves corrected, could be book retailer Borders. Experts and publications such as the Wall Street Journal and The Street have grown increasingly loud in their predictions that the company will need to enter Chapter 11 bankruptcy. In fact, a poll conducted by the latter found that more than 2/3 of respondents believed a Borders Chapter 11 filing was not only likely, but imminent. At least one publisher reportedly has stopped all shipment of books to the retailer following its quiet admission last month of potential delays in vendor payments on the horizon.

Meanwhile, clothing retailer Loehmann's appears to be heading in a different direction. The company, which filed for bankruptcy in November, is on the brink of emerging from its Chapter 11 much healthier as a judge has given preliminary approval on its restructuring plans. Creditors must vote on the plan by February 2, and a follow-up court hearing is slated for February 7 for final confirmation, as long as there are no snags along the way. Loehmann's has noted it plans to keep most of its remaining near-50 stores operating in a business-as-usual capacity and plans to be financially solvent during the present year.

(Editor's Note: See full version of this story in the upcoming edition of NACM eNews, available Thursday afternoon).

Brian Shappell, NACM staff writer

Senate Approves 3% Withholding Repeal

The Senate approved H.R. 674 today, clearing the 3% withholding repeal bill's path to passage.

The bipartisan vote included measures to repeal the 3% tax, which would otherwise go into effect on most government contracts starting in 2013, and to enact a jobs plan that offers tax breaks to businesses that hire recently discharged veterans.

While the House must still approve the final bill before it can be signed into law, support remains strong, and full passage is likely.

NACM congratulates the Senate on approving this important legislation, and welcomes the imminent end of the 3% withholding tax, which NACM has opposed since its enactment.

Stay tuned to NACM's blog for more updates.

Jacob Barron, CICP, NACM staff writer

Economist: Chinese Consumption Levels Just Fine

Greg Fager, an expert on Asian-Pacific economics at the Institute of International Finance, told members of the National Economists Club that Chinese production and consumption is still continually ready to grow, despite some reports and predictions to the contrary. Fager mocked recent U.S. mainstream media’s negative assertions such as “China’s consumption is not as strong as data shows” (Reuters) and “Rising wages will bust China’s bubble” (Financial Times).

“It’s phenomenal the production going on there. That’s why I laugh at quotes like ‘workshop [of the world] on the wane,’” said Fager. “China always pushing up, always read to grow. It’s policy that is keeping a lid on that growth.”

He noted that China’s version of a recession means GDP dipped to +7%. Additionally, projections show the Chinese middle class population, about 56 million or 4% of total population in 2000, will surge to 361 million or 25% of the population by 2030. And, said Fager, these upward-moving consumers care about better quality food, cosmetics, electronics and on down the line.

“The Chinese middle class is going to be influencing products made all around the world,” he argued. “You can already see it now with car sales around the top 20 cities in China, and they haven’t even dented potential Chinese auto demand. If you think they’re consuming too little, just wait for it.”

That said, there still are areas where improvement is necessary. One glaring example is in the banking system and emerging use of “shadow” banking. But he believes other problems, such as concern about inflation and competitiveness amid rising wages, won’t hold China back. More importantly, the rising wages will help fuel domestic consumerism.

Brian Shappell, NACM staff writer

Largest Municipal Bankruptcy in US History Filed After Creditor Deal Crumbles

Many weeks ago, it seemed Jefferson County, AL officials and its main creditors on a sewer renovation project that has sucked its coffers dry had the framework for deal that would keep the community out of filing for Chapter 9 bankruptcy. But then, the prospects for such a deal were gone and the largest municipal bankruptcy in the history on the union now has gone on the books.

Jefferson County Commissioners voted 4-1 Tuesday evening to declare bankruptcy. Alabama Gov. Robert Bentley confirmed publicly that a deal with creditors that could have renegotiated upwards of $1 billion of the $3 billion in debt tied to a sewer renovation had fallen through before the decision. The Chapter 9 filing, which lists the county’s debts in excess of $4 billion, is nearly double that of the well-documented filing in Orange County, CA nearly two decades ago.

Creditors seemed to throw at least a temporary lifeline to Jefferson County in the form of a renegotiation plan this summer. However, county officials and the creditors were reportedly hundreds-of-millions of dollars apart on terms, and officials made it known they would not agree to waiving Chapter 9 filing rights under any agreement. Even Bentley noted earlier this summer on multiple occasions that Chapter 9 was "a very strong possibility," though his statement on the matter on Tuesday could best be described as sheepish or humbled.

The filing, perhaps a harbinger of things to come amid cities struggling with bad investments, shrinking tax revenues and, notably, pension/health care entitlements; the Jefferson County filing follows those of Harrisburg, PA and Central Falls, RI from recent months. At least a half-dozen municipalities have filed for Chapter 9 bankruptcy protection in 2011.

Brian Shappell, NACM staff writer

Italian PM to Resign After Debt Planned Passes

Just one week ago, economist Ken Goldstein, of The Conference Board, intimated in an NACM interview that the media attention on problems with Greek debt and its political leadership were merely a red herring foreshadowing a much bigger story of problems in Italy. Well, market-watchers and mainstream media hacks effectively can cue the trite “Rome is burning” sound byte as Italy’s prime minister has lost his power amid evaporating support from some previous close allies over the handling of the nation’s debt problem.

Days after costs for borrowing in the Italian bond market have soared to their worst and most expensive level since 1997 this week on repeated and indentifying calls for Prime Minister Silvo Berlusconi to step down, the Italian leader confirms he will do just that. Berlusconi said he will step aside if/when the debt reform package is passed by the Italanian Parliament.

The last straw, unless the sometimes definate leader pulls an about-face, came in what was considered a routine budget vote Tuesday. More than half of the lawmakers in the Italian Parliament, abstained from voting, indicating Berlusconi has effectively lost majority power over the goverment even as he said, at the time, he would not resign. While, NACM Economist Chris Kuehl notes Berlusconi has been close to ouster before on various public embarrassments and scandals only to survive, this one rings differently because he lost some of his top supporters.

That said, Simonson told NACM on Tuesday that the new austerity measures, and more severe ones at that, need to be enacted quickly. Still, he is confident in Italy’s ability to come through the other end of this debt crisis without doing too much collateral damage to other EU nations and the global recovery.

“The Italians are very adaptable,” he said. “They will grumble and maybe have some general strikes but buckle under to austerity -- This crisis will pass more easily than Greece.” He suggested that the bigger question, and one that’s not far behind, will be talk about the euro as a currency and the 1 trillion euro bailout fund. “That’s next week’s headline and market headache.”

Meanwhile, after much prodding and a massively failed attempt to sabotage the EU’s newest Greek bailout, Greek Prime Minister George Papandreou finally has confirmed a readiness to step aside as leader in deference to a unity government with shared power among his and an opposition political party. It’s about the first news taken as positive by the markets since the EU bailout plan was unveiled late last month, of which its market-calming, investment-boosting potential was scuttled within a couple of days by a Papandreou trying to look good and stay powerful amid angry Greek voters uninterested in making additional sacrifices for the nation’s runaway debt.

Brian Shappell, NACM staff writer