Brazilian Oil Bankruptcy Largest in Latin History

Brazilian oil and gas company OGX earned the dubious distinction of becoming the largest bankruptcy filing in the Latin world Wednesday after it failed to reach a deal with secured creditors.

OGX reportedly needed upwards of a half-billion dollars to stay out of insolvency, and the company’s once brazen leader Eike Batista apparently tried to negotiate for a little more of half of that amount from creditors with no success. The record filing was not a surprise even before the former giant missed debt payments a month ago or since it predicted publicly this week that it would likely run out of money before 2014 hits.

The filing is significant not just because of its size. The fall from grace of OGX is similar in some ways to the decline from Brazil’s hot economic growth at the beginning of the decade that earned labels like “the Pearl of Latin America” and a power position within the powerful BRICs bloc with other emerging economies Russia, India and China. Now, both secured and especially unsecured creditors are expected to take on massive losses, even if its debt restructuring plan is ultimately successful and leads to a prosperous OGX rebound. Even with a plan filing due within 60 days, Brazil has a notoriously poor reputation for speed of bankruptcy proceedings compared to other nations or for hope of a creditor-friendly recovery.

To wit, Brazil’s Business Restructure Law (Law 11.101) that was enacted in 2005 gave a lot more leverage and leeway in paying off debt following insolvency problems. The periods in which they can pay, judging from an increasing number of cases since them, can be stretched for many years.

“The law there is terrible to the creditors,” said Octavio Aronis, an attorney at Brazilian firm Aronis Advogados, in a spring 2013 interview with NACM. “The Brazilian version of Chapter 11 can go on for 10 or 15 or 20 years. It’s hard for international clients to understand that. Can you imagine how hard it is to explain to those who have $1 million owed to them, and have to tell them they may receive that in 20 years?” Aronis, who is the speaker in an upcoming FCIB webinar on “Doing Business in Brazil,” added that the best course of action often is agreeing to take something like 40%, for example, or even less in the near-term rather than holding out for a better payout that could come in years or decades later. As such, this bankruptcy could serve as a giant reminder of the importance of knowing the health of a customer in Brazil as well as the potential of using more restrictive terms or credit insurance to reduce risk.

- Brian Shappell, CBA, CICP, NACM staff writer

October Credit Managers' Index Mostly Unfazed by Political Turmoil

Despite the threat of a political impasse in the United States that some thought could derail the entire global economy, October’s Credit Managers’ Index (CMI), issued by the National Association of Credit Management (NACM), was largely unfazed. The combined CMI actually improved slightly in October, marking the highest reading in over a year and a half.

The October CMI may have been the most watched in years, according to NACM Economist Chris Kuehl, PhD. "The dominant story for the bulk of the last quarter was the political impasse that resulted in a government shutdown for three weeks and posed a threat to the U.S. credit rating," he said. "Everyone was hanging onto the edge of their seats to see what this would do to the economy.”

Look for surprising data in the October CMI’s favorable factors index, and particularly positive readings in new credit applications and amount of credit extended. Kuehl believes some of the activity means companies confidently expect improvements in the economy by 2014.

If the October CMI reflected any of the negative economic effects of the political brinksmanship in Washington, it did so in the unfavorable factors, specifically in categories like rejections of credit applications and accounts placed for collection. Still, the overall unfavorable index has by and large remained somewhat stable and trended in the right direction.


The complete CMI report for October 2013 will be available Thursday at the NACM website and contains more commentary, complete with tables and graphs. CMI archives may also be viewed on NACM's website.

Federal Reserve Stays Course on Rates, Purchases

The Federal Reserve emerged from its economic policy meeting Wednesday with little news of change on interest rates or its current securities purchases policy. That said, it did attempt to offer some clarity on what could cause a change of policy direction.

The Fed’s Federal Open Market Committee left rates untouched at a range between 0% and 0.25%. The FOMC also gave some guidelines for when that would change, and it’s unlikely in the next year. In fact, the FOMC noted highly accommodative monetary policy will stay in place “for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

“This exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2% longer-run goal and longer-term inflation expectations continue to be well anchored,” the Fed said in a statement.

Meanwhile, the committee decided to continue purchasing agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at $45 billion. The FOMC believes these actions and continuing to reinvest principal payments from current debt holdings “should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery.”

- Brian Shappell, CBA, CICP, NACM staff writer

Federal Reserve VP to Speak Directly to NACM Members

As part of the Federal Reserve's continuing effort to study and improve electronic and other payment systems, NACM will host a free teleconference for its members next week.

The teleconference, Collaborating to Improve the U.S. Payment System, is slated for November 5 at noon (EST) and will feature Fed Senior Vice President of Industry Relations Sean Rodriguez discussing the Payment System Improvement: Public Consultation Paper report. The study outlines aspects of payment systems the Fed sees as problems, and is the start of a lengthy effort to improve systems. Rodriguez will also discuss the associated open study/questionnaire about payment systems, which is now available for business professionals including trade credit managers, to complete online. Areas of particular Fed concern therein include fraud potential, international electronic payments and timeliness of funds availability. Rodriguez will also take member questions at the end of the hour-long event.


For more information on the NACM teleconference or to register, click here. For the full Fed report, visit For more information on each of the six associated Fed Town Hall meetings, click here.

Chapter 9: The Crisis of the Cities

As the Detroit Chapter 9 bankruptcy eligibility hearings have gotten underway, the situation has illuminated that more and more urban areas are starting to resemble the Motor City. The travails of the federal government have dominated the analysts time for the last few years and, now, it is the turn of the cities as more of these entities slip further toward or into insolvency.

The solutions to the budget crisis have ranged from additional taxes and fees for almost every aspect of city service to deep budget cuts that affect these services. One of the more challenging issues is the massive burden that previous city governments have left for the current administrations. The primary cause of that has been an unresolved pension debt.

It was far too common in decades past to mollify the public sector employees with extremely generous retirement programs. The cities could not afford to pay competitive wages and, instead, they promised generous benefits later. That worked fine as long as most of the workers were not drawing these pensions. Now they are, and far more beneficiaries exist than had been anticipated. Many cities now are struggling, and will well into the future, because they simply do not have the money to pay these benefits and take care of day-to-day business at the same time.

- Chris Kuehl, PhD, Armada Corporate Intelligence

Fed Goes beyond Basel in New Liquidity Requirements

The Federal Reserve proposed its first-ever standardized minimum liquidity requirement for large and internationally-active banks this week. The new rules would also apply to systemically important non-bank financial companies as designated by the Financial Stability Oversight Council and ultimately subject U.S. financial institutions to more stringent reserve requirements than they would face under the dictates of the global Basel III framework.

Each institution covered by the proposal would be required to hold minimum amounts of high-quality liquid assets (HQLA) that can be converted quickly into cash. Things like central bank reserves and government and corporate debt would count toward the liquidity buffer, while other items such as private-label mortgage securities, covered bonds and municipal debt would not. Still other types of assets would count toward the buffer but only at a fraction of their value.

Firms would have to hold HQLA in an amount that's equal or greater to each institution's projected cash outflows minus its projected cash inflows during a short-term stress period. The ratio of the firm's liquid assets to its projected net cash outflow is its "liquidity coverage ratio," or LCR, which would apply to all internationally active banking organizations, which the Fed considers generally those institutions with $250 billion or more in consolidated assets, or $10 billion or more in on-balance sheet foreign exposure, as well as to the previously-mentioned systemically important non-bank financial institutions. A less stringent LCR will apply to bank holding companies and savings and loan holding companies that aren't internationally active but have more than $50 billion in total assets.

The proposal mirrors Basel III, but also diverges in important ways, most notably in how compliant institutions will have to calculate their assumed rate of outflows. The Fed will require banks to calculate their LCR using whatever particular day when the bank's outflows are at their highest, and since these outflows can vary greatly over the course of a month, this could result in a relatively large reserve requirement. Basel III would require banks to calculate a similar ratio, but on a much more lenient basis.

Another noteworthy difference is that the Fed's proposal puts banks on an accelerated timeline for compliance, which, according to the Fed, is due in part to the fact that many U.S. banks have already begun to stockpile these assets in the wake of the financial crisis. Whereas under Basel III institutions would have to comply by 2019, the Fed's transition period begins on January 1, 2015 and requires banks to be fully compliant by January 1, 2017.

"Since financial crises usually begin with a liquidity squeeze that further weakens the capital position of vulnerable firms, it is essential that we adopt liquidity regulations to complement the stronger capital requirements, stress testing and other enhancements to the regulatory system we have been putting in place over the past several years," Federal Reserve Gov. Daniel Tarullo said. "This rule would help ensure that the liquidity positions of our banking firms do not weaken as memories of the crisis fade."

Many have voiced concerns that the Fed's proposals, which have tended to skew towards not risk-weighting assets when calculating a bank's reserve requirements, could reduce credit availability in the U.S., particularly for low-risk transactions such as those involving trade financing. Stay tuned to NACM's eNews, blog and Business Credit magazine for more analysis on how the Fed's proposals could affect trade creditors.

- Jacob Barron, CICP, NACM staff writer

Fed Unveils Town Hall Meetings, in Electronic Payments Project

As part of the Federal Reserve’s effort to study and improve payment systems, it has set six Town Hall meetings for members of various industries, including trade credit and collections to begin on November 12.

As noted in the October 3 and October 10 editions of eNews, the Fed is trying to identify key gaps and opportunities to improve U.S. payment systems in an effort to craft solutions for the business-to-consumer and business-to-business areas that will avoid unintended consequences. Spokespeople with the Fed’s Financial Services division reiterated in discussions with NACM this week that they are keenly interested in the B2B side of discussion and in fostering a relationship with credit managers regarding the payment systems improvement effort. The following dates and host cities for the Town Hall meetings, which require advanced registration, have been confirmed, and more information is available on each here:

  • November 12      1:00-4:00pm (EST)       Federal Reserve Bank of Atlanta

  • November 13      1:00-4:00pm (EST)       Federal Reserve Bank of Cleveland

  • November 14      8:30-11:30am (CST)     Federal Reserve Bank of Chicago

  • November 15      8:30-11:30am (PST)     Federal Reserve Bank of San Francisco

  • November 18      8:30-11:30am (EST)     Federal Reserve Bank of Boston

  • November 20      8:30-11:30am (CST)     Federal Reserve Bank of Dallas
NACM strongly encourages credit managers to attend one of these events and have their voices heard to help shape the future of electronic payments.

- Brian Shappell, CBA, CICP, NACM staff writer
Much more on this topic including information on a free November 5 NACM teleconference with a Federal Reserve VP in this week's edition of eNews, available weekly late Thursday afternoons.

Which is the Bigger Threat in Europe' Inflation or Deflation?

The answer may vary based on location, but ask almost any German if inflation or deflation is the bigger threat to Europe and the answer will be an emphatic "inflation." The Germans have a particular sensitivity to inflation and are prepared to react to any threat as soon as it even hints at manifesting. The historical connection between rampant inflation and the rise of the Nazi Party in the 1930s is etched into the German psyche. Besides that, wealthier societies, like Germany, are far more sensitive to inflation than others anyway

If you ask the rest of Europe which of these two are causing the most concern, you will likely hear the other response. Even the European Central Bank is starting to become more concerned that inflation targets are consistently undershot. It is not as if people want inflation to come back, but a little inflation can be something of a tonic to an ailing economy, at least in the short run.

The latest statistics show that consumer prices rose by just 1.1%, indicating the sluggish economy of Europe is still mired in high unemployment and weak growth. The factors that tend to drive inflation include wage pressure, higher producer prices and more expensive commodities. In the beginning, this kind of price hike is welcome news, as it signals that some of the damage from a recession has eased. There is not much chance for wage inflation as long as unemployment rates are in the double-digits. The price of products will not rise when the consumer is too broke to afford the current prices.

Therefore, the ECB is under no real pressure to hike rates. There is even some possibility the ECB would cut rates except for the fact that there is no real evidence that this would provoke growth. The real message from all these low inflation predictions is that the ECB will stand firm for a while longer.

- Chris Kuehl, PhD, Armada Corporate Intelligence

Canada-EU Finalize Trade Pact

By finalizing the details of a free trade agreement (FTA) with the European Union that has in the works since 2008, Canada has forged the largest trade pact in its nation’s history.

Holdups within a couple of industries, mainly food-related, were overcome on the way to the Friday announcement of the comprehensive agreement, dubbed the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). It eliminates about 98% of tariffs between the two nations. A 2008 joint study concluded that such an agreement could increase Canada’s income by $12 billion annually. Canadian Prime Minister Stephen Harper called the deal a “historic win” for both his nation and the more than two dozen nations tied to the EU. “It represents thousands of new jobs and a half-billion new customers for Canadian businesses,” he said. It is expected that the agreement will be ratified and enacted by 2015.

It’s not the only major trade pact either nation is pursing. Among others, Canada remains a player in the Trans Pacific Partnership (TPP), which also includes the United States and several Southeast Asia/Pacific Rim economies. Meanwhile, the EU has been hard at work throughout the year with the U.S. on improving its massive existing trade agreement, which already involves a fairly short list of business-stymieing obstacles.

- Brian Shappell, CBA, CICP, NACM staff writer

Regional Manufacturing Outlook Paints Bright Future

A bellwether regional report out of the Philadelphia Federal Reserve Bank shows positive signs for growth in manufacturing for the greater region and possibly beyond.  Its monthly Business Outlook Survey found that firms reporting increased activity (36%) more than doubled firms that responded about diminished activity for the last month. The category measuring demand for manufactured goods, increased to its highest level since March 2011 (27.5, up six points). Statistics tracking manufacturer optimism also tracked upward, by three points, to a level of 60.8. That mark was last reached in 2009.

“All the broad indicators were positive, with firms reporting improvements in new orders and hiring,” The Philadelphia Fed said in its report. “Firms’ outlook [sic] has shown notable improvement in recent months, with a majority of firms now expecting to expand manufacturing activity over the next six months.” The Fed added that more than one-third of those polled in October plan to increase hiring by early 2014.

Though the overall diffusion index actual fell from a two-year high reported in September, the number (19.8) was still considered highly encouraging. In fact, the performance and outlook for manufacturing far exceeded experts’ projections.

- Brian Shappell, CBA, CICP, NACM staff writer

Brinksmanship Puts U.S. Back on Ratings Agency Radar

Just as it did earlier in the Obama Administration, partisan-based political gridlock on the part of the U.S. Congress has caught the ire of at last one of the three major credit ratings. The continued fighting that led to the government shutdown and a tight window to raise the debt ceiling could result in a downgrade to the United States’ pristine credit ratings for the second time since 2011.

Fitch Ratings essentially warned Congress Tuesday by putting the U.S.’ longer-term foreign and local currency issuer default ratings, as well as all sovereign debt securities, into the “rating watch negative” category. And a deal that pushes the debate off until mid-February likely won’t do much to reduce the ire. Though noting the economy’s resilience, its standing on the world stage and ability to absorb shocks, Fitch predicted that continued delays in raising the debt ceiling could further “dent confidence in the effectiveness of the U.S. government” and send shockwaves throughout domestic and global markets.

“Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinksmanship and reduced financial flexibility could increase the risk of a U.S. default,” Fitch explained in a statement. “The U.S. risks being forced to incur widespread delays of payments to suppliers and employees as well as social security payments to citizens—all of which would damage the perception of U.S. sovereign creditworthiness and economy.”

Some believe that, even with a deal this week, the dispute already has caused what are sure to be ongoing problems. “Even if one of the stop gap measures is put in place to keep the U.S. economy from falling off a cliff, there has been considerable damage done to the economy—enough to threaten the recovery and perhaps enough to throw the whole system back into recession,” said NACM Economist Chris Kuehl, PhD. Kuehl added that he believes the cost of credit borrowing will increase, regardless of the outcome in the next few days.

- Brian Shappell, CBA, CICP, NACM staff writer
More in this week’s edition of eNews, available late Thursday afternoon at

Surprises in Asia

Just a month ago, it appeared China was righting the ship economically. At the same time, there appeared to be some creeping concerns regarding Singapore. What a difference a matter of weeks can make.

Chinese exports for September came in well below the expected gains, with a 0.3% decline for the month, according to the Chinese General Administration of Customs. With problems still somewhat apparent in markets like the European Union and Brazil, the confidence-jarring government shutdown in the United States could fuel another disappointing month for trade out of export-dependent China in October, if not beyond.

On the flip side, news out of Singapore was much more positive and quite bit surprising. Third quarter gross domestic product (GDP) growth was more than 5% better than the same period in 2012. The improvement came largely on the back of exporting activity. Wells Fargo Securities Global Economist Jay Bryson said the news was significant because Singapore, often one of the first nations globally to report its quarterly data, is somewhat of a “bellwether for trends in global trade.” The Wells Fargo report predicted that any sustained growth in the improving export activity out of the nation would likely foster itself into noticeable improvements to lackluster consumer spending there.

- Brian Shappell, CBA, CICP, NACM staff writer

More Moves to Boost Global Use of Chinese Currency

For several years, there has been a question of how long the US dollar will remain the global currency of choice. The likelihood is very low that countries will replace the good old greenback with something else, but it is highly likely the dollar will get additional company as other currencies are accepted more readily in terms of trade.

The latest move has the European Central Bank arranging a currency swap with the Chinese. This swap line of about $57 billion will be the third largest China has been involved in, behind only the swap lines arranged in Hong Kong and South Korea. It is not seen as a real substitute for the way that trade is handled right now, but it provides a kind of currency backstop and continues to move the renminbi forward as a true global currency.

The chief motivation for the swap agreement is that there has been a dramatic increase in bilateral trade between Europe, mostly Germany, and China. As downturns affected EU member nations, the United States and Eastern Europe, German companies needed to look elsewhere, such as China and other Asian markets, for growth. China is now the euro zone’s second biggest trading partner—behind only the zone itself.

The day of the dollar is anything but over, as the vast majority of global transactions continues to be handled with the greenback. There is no evidence that most nations have any interest at all in trying to trade with Chinese currency. If anything, the dollar has gained strength as a global currency given the travails of the euro. The point is that China and other nations want options that can make trade and investment easier.

- Chris Kuehl, PhD, Armada Corporate Intelligence

Cash Flow Stats Stabilize, but Revenues Signal Economic Slowdown

While cash flow trends stabilized in the most recent readings from the Georgia Tech Financial Analysis Lab, a continued decline in company revenues and a drop in capital spending suggest a looming economic slowdown for the U.S.

The lab, led by NACM Graduate School of Credit and Financial Management (GSCFM) Instructor and Georgia Tech Accounting Professor Charles Mulford, examines cash flow trends on a quarterly basis, measuring free cash flow, meaning a company's discretionary cash flow that can be used for acquisitions, debt retirement, stock buybacks and dividends without affecting the firm's ability to grow and generate more revenue. Each quarterly report produces a free cash margin index by surveying nearly 3,000 companies, all with a market capitalization of at least $50 million, and dividing their free cash flow by their revenue.

Put simply, according to the report, the second quarter of 2013's decline of 1.39% from the prior quarter and decline of 2.19% from the prior year signal a slowdown for the U.S. economy, as the reduction in selling, general and administrative (SG&A) expenses and capital spending observed in recent reports is not sustainable in the long term. "Free cash margin has ticked up, just as it did during the recession, but for all the wrong reasons," the report warned.

"As we complete this report, so-called 'nonessential' operations of the U.S. government remain closed as members of Congress debate aspects of the Affordable Health Care Act specifically, and overall government spending generally. Making discussions difficult is the added pressure of the upcoming debate focused on increasing the debt limit," the report said. "Such high-level brinksmanship does not foster business confidence and weighs on business activities."

- Jacob Barron, CICP, NACM staff writer

A full copy of the most recent report can be found here and a more in-depth version of this story is available in this week's eNews at

NACM and FCIB Launch GSCFM International

Recognizing the growing importance of international business, NACM is pleased to announce the Graduate School of Credit and Financial Management International (GSCFMI) beginning in June 2014. Developed in partnership with FCIB, the new, four-day program will run concurrent to the traditional Grad School program.

"Dealing cross-border and cross-culture can result in many pitfalls that, if not managed correctly, can negatively impact the value and collectability of receivables and, as a result, a company's balance sheet," said Craig Schurr, senior vice president and manager of international banking at FirstMerit Bank and instructor for GSCFM International. "The speed of business today, facilitated by technology and a seemingly endless sea of information heightens the importance of getting 'it' right every time. The added pressure of dealing with new and ever-expanding regulatory environments makes the job of today's international credit and finance professional even more challenging. It is more critical than ever that international businesspeople have up-to-date information, tools and connections to facilitate flawless performance of their responsibilities."

GSCFM alumni, CCE, CICP and ICCE designation-holders are encouraged to attend the program, which includes 24 hours of total educational programming on top of various networking opportunities. Michelle Sparks, CCE, a regional credit manager with Allied Building Products Corporation who recently completed Grad School, said she believes there is a need and demand for continuing education opportunities focused on international business and credit developments. "So many companies are international today, and the way credit is handled when dealing out of the country is so different. A program of this nature will be very helpful," Sparks said.

The schedule of classes and instructors list for GSCFMI is as follows:
  • Export Compliance: Lizbeth Rodriquez, Esq., Holland & Hart LLP
  • Investigation & International Business Ethics: Harry Brandon and Gene Smith, Smith Brandon International, Inc.
  • Foreign Exchange: Kevin Hebner, JPMorgan Chase Bank
  • Sovereign & Political Risks and the Role of International Credit Insurance: Jim Dezell, Marsh USA, Inc.
  • Payment Methods and Legal Structures: Craig Schurr, FirstMerit Bank
  • Incoterms and Their Applicability: Michael Ford, BDP International
For more information on GSCFMI, visit


"End-Users" Wanted For Input into Fed Study on Payment System Improvements

The Federal Reserve has reached out to the business community, particularly those involved in facilitating and using payment systems, to improve such systems, especially in the area of electronic processing. However, United TranzActions' Rudet Fountain said easy, across-the-board fixes will be hard to create by the agency.

In the report, Payment System Improvement–Public Consultation Paper, the Fed highlighted the rapidly evolving changes in payment systems, especially due to demographic shifts, application of new technology, increased cross-border business and other factors. The Fed wants to bring industry stakeholders together to create a framework to address obstacles to payment systems safety, efficiency and innovation. Therein, a survey linked from the report landing page lists questions to help determine existing and potential gaps in efficiency of the U.S. payment system, outcomes that should be pursued, the potential for increased fraud risk and what role the Fed should take. The deadline for responses is December 13.

Fountain told NACM that coming up with a workable solution will be “a very broad and massive undertaking.” In addition, he said there are many obstacles in the way of a ubiquitous solution that helps business-to-business as well as business-to-consumer transactions. Still, he said involvement of merchants is paramount.

“I think there is room to get involved and have our voices heard as end-users,” Fountain said. “The Fed said they wanted to have end-users involved because they are going to be the ones who have to use the solution. I think it is important for businesses to say what they think the solutions are.”

It’s worth noting that the Fed has a reputation for skewing more toward consumer-based fixes, rather than B2B ones. After all, the B2B sector represents a smaller number of parties. However, absent of businesses coming forward to talk about what they need and the critical nature of knowing the deep differences between consumer-based and B2B transactions, solutions could be even more mismatched to a B2B world. That is a headache small and medium-sized businesses do not need, going forward.

For more information on the Fed electronic payments effort or to fill out its online survey on the topic, click here.

- Brian Shappell, CBA, CICP, NACM staff writer

Check out this week’s eNews, available late Thursday afternoon at for much more on this story.

Recession Inevitable with a Debt Ceiling Impasse?

Some of the most respected economists from both sides of the ideological divide are uniting in their assessment of what happens to the U.S. (and global) economy if the debt ceiling is not raised and the U.S. ends up defaulting on its obligations.

If the U.S. fails to make good on its obligations, the economy will sink into a severe recession, and there are no tools available to reduce an impact that could be deeper and longer than the one we just encountered in 2009. This time, the cause of the recession would not be the least mysterious – It will be laid squarely at the feet of 535 men and women in Congress.

The government has roughly 45% of the funds it needs coming in from tax revenue and other fees, and that means that 55% comes from some kind of loan. If the debt ceiling is not raised, the government is short of its needed revenue by a considerable amount. There will be a lot of people not getting paid in that event. Unlike the budget impasse, there is no exempt program.

The business community will be slammed hard by the abrupt decline in government spending, as there are 156,000 companies that currently do business with the U.S. that will be cut off. This will provoke the same reaction that took place as the fiscal cliff loomed: They will instantly stop production and start mass layoffs. Meanwhile, the whole consumer mood is crashing because of a lack of faith in the ability of political leaders to do anything at all to benefit the economic recovery.

No nation will have ever allowed itself to slide into default with the ability to avoid it so close at hand. If the members of Congress are unable to reach consensus, the U.S. economy will suffer damage, and there will be a recession that could rival that of the 1930s in a worst case scenario. It is also entirely possible that the downturn would be milder than that. The question is whether such a catastrophe should be risked at all when such a risk is entirely avoidable.

- Chris Kuehl, PhD, Armada Corporate Intelligence

Mexico Continues to Keep Industry Guessing

Mexico’s place as one of the key emerging economies to watch after the BRICs (Brazil, Russia, India, China) slipped considerably in early 2013. However, there are still some very pro-Mexico market watchers and trade credit grantors undeterred by potential headwinds. In any case, Mexico continues to be one of the most heavily debated countries in the world regarding its economic prospects.

July statistics unveiled by the Mexican government in late September showed an encouraging 0.47% increase in economic activity from the previous month. Though the consensus from analysts is that annual economic growth in 2013 will pale in comparison to the 3.8% posted in 2012, the July statistics offer “tidbits of better times ahead,” according to a Wells Fargo Economics Group commentary. The report highlighted notable improvement in the service sector, the economy turning a bit of a corner after a weak first half and the important positive implications of fiscal reform in the long term.

However, Wells Fargo Senior Economist Eugenio Aleman warned that Mexico isn’t “out of the woods” yet and that fears over reforms, real or perceived, about their enactment under new President Enrique Pena Nieto, could have a chilling effect on growth in the short or even medium term.

On the trade credit front, Mexico was a hot topic at September’s FCIB Global Conference in Philadelphia. A number of attendees expressed concern about offering open terms to Mexican-based buyers, with some saying they flat-out won’t do it. Perceptions of problems continue to weigh heavily on creditors, including fear of slow payment, the government’s inability to reign in the violent drug war in several regions and that the various states can have varying and inconsistent laws that impede collection efforts. However, an even greater number of FCIB Global attendees spoke in defense of Mexican customers and business partners. Their sentiment was that there were few if any problems with timely payments and that they were not overly concerned with recent economic challenges that have faced the nation as a whole. Those credit managers also spoke of the high value they put on developing a strong relationship with their Mexican business debtors as much as any in the world.

- Brian Shappell, CBA, CICP, NACM staff writer

September CMI Inches Up on Strength of Unfavorable Factors

The National Association of Credit Management's (NACM's) Credit Managers' Index (CMI), now available at, improved slightly in September. The figures continued the growth trend begun in May of this year, driving the CMI to its highest reading in more than three years.

September's growth was driven primarily by increases in the index's unfavorable factors, all of which registered improvements and some by substantial margins. Look for big improvements in accounts placed for collection, dollar amount beyond terms and filings for bankruptcy. .

NACM Economist Chris Kuehl, PhD noted that this reflected a shift in debtor behavior toward friendlier payment behavior with regard to their trade creditors. Essentially, businesses are settling their debts rather than trying to test the waters of late payment. "When times are tough, debtors begin to take advantage of what leverage they have and start to test those that have given them credit. There are more slow pays and many of the negative indicators get progressively worse as companies try to hang on to their cash and test the patience of the credit manager," Kuehl said. "There comes a point when these companies want to get access to credit again and that prompts them to try to catch up and get back in the good graces of those from whom they seek credit. This phenomenon could explain why the data within the unfavorable categories has improved."

Elsewhere in the index, all but one of the favorable factors fell in the overall index, though each of them remain well above 50, the line that indicates each of these categories is still in expansion. Much of this decline in the favorable factors can be attributed to a slide in sales.


For a full copy of the report, complete with charts and graphs, click here.