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

Senate Moves H.R. 674 Forward, But More Debate Looms

The Senate voted 94-1 in favor of advancing H.R. 674, a bill that would repeal an onerous 3% withholding requirement, set to take effect on all government contracts starting in 2013. However, a great deal of debate looms on the horizon as senators from both parties aim to address the bill’s pay-for provisions and also tack on a previously reported jobs plan that would benefit businesses that hire veterans.

Tonight’s vote was on a motion to proceed on H.R. 674, not a final vote of approval. Nonetheless, government contractors eager to see the repeal of the 3% withholding requirement can take heart in the motion’s overwhelmingly bipartisan support.

The debates that will occur this week will have more to do with how the repeal is paid for, rather than the actual repeal itself, and with any luck, the near-universal distaste for the 3% tax will translate to a relatively uneventful ride through the amendment process and swift passage.

NACM congratulates the Senate on agreeing to move forward on this piece of common sense legislation and hopes that both chambers of Congress can work together on making the repeal of the 3% withholding requirement a reality.

Jacob Barron, CICP, NACM staff writer

Veterans Jobs Bill to be Attached to 3% Repeal - Vote Set for 5:30pm

Senate Majority Leader Harry Reid (D-NV) planned today to attach a tax cut for businesses that hire veterans to H.R. 674, which, on its own, would repeal the 3% withholding tax.

The veterans jobs bill, dubbed the VOW to Hire Heroes Act, would provide a tax credit to businesses that hire unemployed veterans that were discharged in the last five years and provide an additional tax cut to companies that hire veterans with service-related disabilities. H.R. 674 would eliminate the imposition of a 3% withholding requirement on all government contracts starting in 2013, and pay for such a repeal with a readjustment to last year's Affordable Care Act, also known as "Obamacare" or simply the health care reform bill.

Each piece of legislation enjoys heavy support on a partisan basis; the veterans jobs bill is a democratic proposal and the 3% repeal a republican one. Support from each proposal's originating party is firm.

Ideologically speaking, the tax cut for businesses that hire veterans is firmly in the republican wheelhouse, but it's something that would, at least theoretically, increase the deficit, anathema to republican legislators swept into office by the Tea Party. Meanwhile, democratic support for a repeal of the 3% withholding tax has been strong, but several party members aren't wild about paying for it by taking a swipe at the party's signature legislative achievement.

Coupling these two bills together, each with its own partisan pedigree, could potentially give democrats more of a reason to support the 3% repeal, and republicans more of a reason to support the veterans jobs bill.

Only time will tell. The vote is scheduled for 5:30pm EST.

Stay tuned to NACM for more updates.

Jacob Barron, CICP, NACM staff writer

Senate Schedules Vote on 3% Repeal; NACM Urges Members to Make Their Voices Heard

The Senate will vote on H.R. 674, the House-approved 3% withholding repeal bill, on Monday evening. Majority Leader Harry Reid (D-NV) successfully moved for cloture, meaning the legislation can now be considered by the full Senate.

NACM, and government contractors across the country, are hoping the vote will finally mark the end of the 3% withholding tax, a requirement set to go into effect on all local, state and federal government contracts starting in 2013. As mentioned previously, the House of Representatives has already voted in favor of repealing the withholding tax in a rare bipartisan landslide vote of 405-16.

Reid had earlier suggested that he would amend the bill, to ensure that the 3% withholding requirement would still apply to any tax delinquent contractor. The details of this proposal remain vague, but such an amendment could potentially derail the repeal effort, or present greater implementation challenges should the repeal even succeed. NACM has always supported, and continues to support, a full repeal of the withholding requirement, and encourages the Senate to enact more targeted tax compliance measures at government contractors, as even the Obama Administration has suggested.

Another measure that could find itself pinned to the repeal bill is a largely non-controversial piece of legislation that offers a tax credit to certain businesses that hire veterans.

In the final run-up to the Senate’s repeal vote on Monday night at 5:30pm, NACM encourages all of its members to contact their senators to encourage them to support H.R. 674. A full repeal of the 3% withholding tax is the only way to ensure that the nation’s government contractors can stop worrying about a potentially mandatory reduction in cash flow, and get back to the important work of growing to create jobs and provide governmental entities with the best prices on future projects.

Find your senators and their contact information by clicking here.

To learn more about NACM’s effort to repeal the 3% withholding tax, visit our advocacy page here.

Jacob Barron, CICP, NACM staff writer

Greek PM Backtracks on Referendum Gamble

After two tumultuous days, Greek Prime Minister George Papandreou backed off a plan to put the new bailout from the EU and International Monetary Fund up for a referendum vote to be determined by Greek votes after his attempt to bolster support on the home front essentially blew up in his face.

After the EU settled on a new Greek bailout and other areas of concern, Papandreou shocked the EU and even some party loyalists with the announcement on Tuesday that the latest bailout would be put to Greek voters that would likely reject it. However, two days later, the prime minister reversed his decision.

Soon after announcement of the referendum, Germany and France pushed to freeze all financial aid to Greece until after the public vote, which they characterized as a virtual vote to determine whether the nation plans to stay in the EU. Meanwhile, Papandreou saw defections from many of his own party loyalists, leaving him without majority backing for a time. Amid growing calls for his resignation both at home and internationally and preparations for a vote of no confidence designed to oust him from power, the prime minister cancelled the planned referendum.

"The Greece situation, at this point seems to be unending," said Greg Fager of the Institute of International Finance, which has represented the private sector in some EU debt talks.
"We thought everything was put to bed, and then, again, we were dragged right back into it."

Even with the cancellation of the referendum, Papandreou’s political sneak-attack already seems to have had a dramatic negative impact on the EU's attempts to calm markets and foster continued investor activity.

"It just adds so much uncertainty into the financial market," Chmura Economist and Analytics Economist Xiaobing Shuai told NACM.

Ken Goldstein, meanwhile notes, the real question is where the euro is heading as a currence. In his mind, "there is no way to go back to the euro as we've known it for the past decade. Either the euro breaks up or tightens up. And neither is politically popular."

Brian Shappell, NACM staff writer

Economic Stats Roundup: Construction, Auto Sales Up, Manufacturing Falls

The question of whether or not the economy is on the right track seems to depend on where you look.

An array of statistics were released earlier this week, and taken together they seem to suggest a still hesitant economy that nonetheless seems to be tipping slightly toward growth. For example, car dealers sold more than 1 million vehicles in October, marking a 7.5% gain from the same month a year prior, according to Autodata Corp. This type of growth in the auto sector translates to an annual sales rate of 13.3 million vehicles, which is one of the highest readings in years.

Elsewhere in the economy, the news wasn’t as uniformly positive. The Institute of Supply Management (ISM) released its most recent purchasing managers’ index (PMI), and although it continues to signal continued economic growth in the manufacturing sector, it still fell, from 51.6 to 50.8. Like NACM’s most recent Credit Managers’ Index (CMI), this indicates a slower pace of progress that continues to foreshadow tepid growth.

The best news from ISM’s October report was that the New Orders Index increased 2.8%, to 52.4% total, reversing the downward trend that gripped this index for the last three months.

Meanwhile, the U.S. Census Bureau of the Department of Commerce announced that construction spending during September 2011 was estimated at a seasonally adjusted annual rate of $787.2 billion, a 0.2% increase from the revised August 2011 estimate of $786.0 billion. Private construction drove the increase, as spending on government projects fell by 0.6% in the same month.

As heartening as the minor increase was, construction spending remains 1.3% below the September 2010 estimate of $797.3 billion.

Jacob Barron, CICP, NACM staff writer

Fed Tries to Paint Rosy Picture in Staying Course Even Amid Lowered GDP Expectations

Despite what seem to be good day-bad day/good month-bad month scenarios seeming to be ever-present in markets and conditions through much of 2011, the Federal Reserve noted it has seen economic growth strengthen in the third-quarter. As such, it is continuing its plans on rates and Treasury purchases.

The Fed’s Federal Open Market Committee (FOMC) emerged from its two-day economic policy meeting to announce it would hold the target range for the federal funds rate between 0% and ¼% and would also continue reinvesting in Treasury securities. The FOMC announced conditions improved notably in most areas, including inflation and household spending, with employment rates being a glaring exception. Additionally, the FOMC limited its concerns to continued growth acceleration to one sentence that revolved around “significant downside risks [from] strains in global financial markets.”

However, in a statement unrelated to the FOMC rates/Treasuries announcement, the Fed illustrated more of a mixed-bag with its updated economic projections. On one hand, the Fed anticipated accelerating growth in each of the next two calendar years. However, said projections all are at weaker levels then they predicted just in June:
  • Projected changes in GDP 2011: +1.6 to 1.7 (previous projection 2.7 to 2.9)
  • Projected changes in GDP 2012: +2.5 to 2.9 (previous 3.3 to 3.7)
  • Projected changes in GDP 2013: +3 to 3.5 (previous 3.5 to 4.2).
Brian Shappell, NACM staff writer

State Mechanic's Lien Change Welcomed in Construction Circles

Bucking recent trends both nationally and within the state, Oklahoma has simplified its Mechanic’s Lien statute. One expert says its a case of common-sense prevailing and hoped it is a harbinger of similar changes to come in other states in upcoming months and years.

Senate Bill 277,  signed into law by Governor Mary Fallin on April 6, 2011, became effective Tuesday and changed the threshold for a notice to a value of $10,000. It also repeals the pre-notice requirement for notice on residential property -- the 75-day from last furnishing is now effective for both residential and commercial. Greg Powelson, Director of NACM’s Mechanic’s Lien and Bond Services, hailed the move as "a real victory for suppliers and sub contractors.

"The Oklahoma statue has been difficult to manage for years," he said. "For the first time, suppliers and subcontractors know their deadlines and have consistency.”

(Note: More on this story in Thursday's NACM eNews).

Source: NACM staff

Greek PM Throws Wrench into EU Debt Plan

After the EU seemingly locked up a new Greek bailout and other areas of concern last week, Greek Prime Minister George Papandreou shocked the EU and even some party loyalists with the announcement Tuesday that the latest bailout would be put to Greek voters, notably angry ones seemingly uninterested in more austerity demands. If they reject the EU’s bailout plan, which appeared all but finalized with the support of much of the union if not the world, the debt-hobbled nation would almost certainly careen into default.

A trio of economists reacted in the following ways when polled by NACM in the hours after the announcement that the matter would be put up for a referendum in Greece:

“I think the announcement just adds so much uncertainty into the financial market,” Chmura Economists & Analytics Economist Xiaobing Shuai told NACM. “The U.S. economy may be in a better position than European economy, but we don’t know the exposure of large U.S. banks and other financial institutions to Greek debt, and other euro debt.  That is the key in deciding how big the impact is to global economy.  In short, a more likely Greek default is a bad development.”

“The Greek announcement will make it increasingly difficult for France and Germany to get investors to put their money into the EFSF,” said Moody's Analytics Economist Enam Ahmed. “At best the Greek's have delayed the implementation of firewalls. With the euro zone also showing recessionary signs, this is very much unwelcomed. At worse, this is a game-changer, and we enter a new danger level in the debt crisis which has the potential to trigger another deep and prolonged recession in the region.”

“There is no way to go back to the euro as we’ve known it for the past decade. Either the euro breaks up or tightens up; And neither is politically popular," said Ken Goldstein, of the Conference Board.

"The referendum will allow the prime minister to go to the Europeans and demand far more than has been on offer, but there is nothing to suggest that euro zone officials will have any more desire to give than they do now," said NACM Economist Chris Kuehl. "The markets are assuming that Greek default is more likely and inevitable than ever."

Editor's Note: More in Thursday's eNews coverage of this developing story.

Brian Shappell, NACM staff writer