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Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.
The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.
“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.
The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.
U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.
‘Trajectory Is Worse’
“Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,” Hess said in a telephone interview.
Moody’s said it expects there will be “constructive efforts” to reduce the deficit and control entitlement spending. It predicted 10-year Treasury yields will rise toward 5 percent without surpassing that level.
Yields on the benchmark securities were little changed at 3.39 percent today as of 6:26 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 22/32. Demand for U.S. debt has pushed the rate down from 5.27 percent a decade ago.
The U.S. Dollar Index, which tracks the currency against six counterparts, climbed to 77.791 today from a low during the global financial crisis of 70.698 on March 17, 2008, as the U.S. economy recovered.
‘Remote’ Downgrade Odds
The odds of a U.S. ratings cut are remote, said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $42.2 billion in assets and is part of Japan’s second-largest publicly traded bank.
“I don’t think the U.S. will be downgraded,” Nakamura said. “The U.S. may try to cut spending. Those kinds of policies will support the rating.” Mizuho Asset bought Treasuries in December, he said.
President Barack Obama’s deal with congressional Republications, announced Dec. 6, calls for a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax for $120 billion for a year.
The U.S. has the highest government debt-to-government revenue of any Aaa rated country, Moody’s said yesterday. The ratio, at 426 percent, is more than double that of Germany, France and the U.K. and more than four times higher than Australia, Sweden and Denmark, according to Moody’s.
‘Trend May Continue’
“Other large Aaa countries have plans to reduce deficits substantially over the coming few years, indicating that this trend may continue,” Hess said.
S&P cut Japan’s credit rating for the first time in nine years, saying the government lacks a “coherent strategy” to address the nation’s 943 trillion yen ($11 trillion) debt burden.
The ratings firms also have downgraded Europe’s so-called peripheral countries on rising deficits and slumping growth.
Fitch Ratings cut Greece to BB+ on Jan. 14, following S&P and Moody’s in lowering the country to below investment grade. Moody’s began reviewing Portugal and Spain in December.
Credit-default swaps on U.S. Treasuries climbed for a fourth day yesterday, rising 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it would cost the equivalent of $51,570 a year to protect $10 million of debt against default for five years.
Prices of the swaps compare with 59.8 basis points for debt issued by Germany, 83.1 for Japan, and 897.3 for Greek bonds.
Reduce Fed Borrowing
The U.S. Treasury Department said yesterday it will reduce its borrowing on behalf of the Federal Reserve to $5 billion from $200 billion because of concerns about the federal debt limit. The Obama administration and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.
Focus on the debt ceiling, which was increased a year ago, has risen since Republicans won control of the House of Representatives in November with pledges to challenge the Obama administration on spending. Republican lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the U.S. debt limit.
Treasuries are poised to fall as the debate on increasing the U.S. debt limit intensifies, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. was quoted by the Associated Press as saying.
U.S. debt “will sell off as this get more press and with more invective,” Gross said, according to AP. “Investors like us, we sell now.” Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
China needs to extend interest-rate increases and allow the yuan to gain by about 5 percent annually to combat inflation and avoid fuelling asset bubbles, said Li Daokui, a central bank monetary policy committee member.
“We should gradually increase rates in the first and second quarter,” Li said in an interview at the World Economic Forum in Davos yesterday. Rising real-estate prices are the “biggest danger,” he said.
China has raised benchmark lending rates twice since mid- October and the State Council last night expanded a crackdown on real-estate speculation by increasing minimum down-payments for second homes. Citigroup Inc. forecasts that the central bank may raise rates and reserve requirements for lenders before or during a Lunar New Year holiday starting Feb. 2. The one-year lending rate is 5.81 percent.
The yuan non-deliverable forwards traded at 6.4475 at 2:42 p.m. in Hong Kong, near its 2 1/2-year high. The forwards reached 6.3920 per dollar on Oct. 18, the strongest level since July 18, 2008.
Asian countries are battling inflation pressures as food and commodity costs climb and foreign capital inflows spur asset-price increases. China’s currency reserves swelled to a world-record $2.85 trillion last year and domestic bank lending breached a government target, pumping more money into the fastest-growing major economy.
China may allow more gains in the yuan to contain consumer prices and ease trade tensions. The Chinese currency closed at 6.5819 per dollar yesterday, after President Barack Obama said last week that it remains undervalued.
‘Excessive’ Yuan Gains
While an annual gain of 5 percent to 6 percent in the yuan is acceptable, any “excessive” appreciation would hurt Chinese exporters, said Li, who’s an academic adviser to the People’s Bank of China overnight pay day loans.
Most global investors see a bubble in China, a Bloomberg poll shows. Fifty-three percent of respondents held that view in a quarterly survey of 1,000 Bloomberg customers who are investors, traders or analysts.
One area of concern is the property market, with an International Monetary Fund study last month indicating that luxury home prices in Beijing and Nanjing and mass-market prices in Shanghai and Shenzhen have become “increasingly disconnected from fundamentals.” Premier Wen Jiabao said Dec. 26 that curbs on the housing market “were not well implemented” last year.
‘Aggressive’ Policies
The State Council yesterday increased the minimum down- payment for second-home purchases to 60 percent from 50 percent and said local officials will be held accountable if they fail to set and meet targets for limiting house price gains.
The latest measures were “more aggressive than expected,” Deutsche Bank AG said in an e-mailed note today.
Consumer prices rose 3.3 percent in 2010, breaching a government target of 3 percent. Across 70 cities, property prices rose 6.4 percent in December from a year earlier.
China won’t suffer a “hard landing,” Li said. Its economy will grow about 9.5 percent this year and the average inflation rate will be 3.8 percent to 4 percent, he forecast.
China’s economy expanded 10.3 percent in 2010, the fastest pace in three years, after growing 9.2 percent in 2009. The nation’s standing as the No. 2 economy may be confirmed on Feb. 14 when Japan reports fourth-quarter gross domestic product.
An abandoned railway station outside Paris will be turned into a memorial for the tens of thousands of French and other European Jews who were deported from the site to death camps during World War II, an official said Tuesday.
The French national rail network, known as SNCF, is giving the former station in the Paris suburb of Bobigny to local officials as part of an agreement to create the memorial there.
SNCF last year for the first time expressed “sorrow and regret” for its role in the deportation of Jews during World War II.
Speaking at a handover ceremony at the site, SNCF Chief Executive Guillaume Pepy said the memorial would be “a witness to the madness that once overcame men.”
“The SNCF, a state-owned company, was _ under duress and requisition _ a cog in the Nazi extermination machine,” he said. “We don’t forget that.”
The railway concedes that the SNCF’s equipment and staff were used to haul 76,000 French and other European Jews to Germany, where they were sent on to death camps. Fewer than 3,000 returned alive.
The company’s role in the Holocaust _ and for years its refusal to apologize to victims _ have long been a subject of criticism. Last year, the SNCF’s bid to win high-speed rail contracts in California and Florida sparked the anger of some U.S. Jews who opposed giving a contract to a company with a role in the deportations.
Pepy denied that the creation of the memorial had anything to do with criticism from the United States, saying the railway’s actions were not “dictated by the circumstances, but by its convictions.”
No date has been set for the memorial’s completion.
In 2007, an appeals court overturned a ruling that France’s state railway network should compensate the family of a group of World War II deportees.
The appeals court said the case did not fall within the jurisdiction of the original court, and it also accepted the SNCF’s arguments that it was not responsible because it was acting under requisition orders. The ruling was an important victory for the SNCF because at least 1,200 other families and groups had asked for similar compensation following the original case.
The SNCF is bidding on a $2.6 billion high-speed rail project that would connect Tampa and Orlando, Florida, but has run into resistance from Holocaust survivors there.
California is working toward the construction of a system that would extend 800 miles (1,290 kilometers), linking Sacramento and San Francisco to San Diego. Construction is expected to begin in late 2012. SNCF has expressed interest in that project, too.
European Central Bank President Jean-Claude Trichet signaled the bank won’t react to a temporary jump in inflation caused by higher commodity prices as long as it doesn’t fuel wage increases, or so-called “second-round effects.”
“All central banks, in periods like this where you have inflation threats that are coming from commodities, have to go through the hump and be very careful that there are no second- round effects,” Trichet said in an interview with the Wall Street Journal, according to a text published by the Frankfurt- based ECB late yesterday. “This is what we are doing,” he said, adding the ECB doesn’t see any second-round effects “at this stage.”
Trichet earlier this month toughened his rhetoric on inflation after it accelerated to 2.2 percent in December, breaching the ECB’s 2 percent limit for the first time in more than two years. The change in tone prompted some economists to bring forward forecasts for ECB rate increases and helped drive the euro more than five cents higher against the dollar. Since then, ECB policy makers have indicated markets may have over- interpreted the central bank’s message.
Trichet said the ECB’s benchmark interest rate remains “appropriate” at a record low of 1 percent, suggesting he sees no need to raise it soon. At the same time, “on the side of energy and commodity prices we have a number of developments that we will continue to monitor closely,” he said. “Everybody knows we would not let second-round effects materialize.”
The price of crude oil has more than doubled in the past two years, driving up energy costs. Chemical workers in Germany, Europe’s largest economy, on Dec. 7 demanded up to 7 percent more pay, and the country’s IG Metall union has asked for a 6 percent increase for workers at companies including Volkswagen AG.
The state should cut its losses on a major natural gas pipeline if, by summer, it doesn’t look like a project will be viable, a leader of a powerful state Senate committee said.
Sen. Bert Stedman, co-chairman of the Senate Finance Committee, told The Associated Press that he doesn’t want the state spending much more money on a “dead project.”
Under an exclusive license issued in 2008, the state committed to pay Alberta, Canada-based TransCanada Corp. up to $500 million to advance a major line to carry gas from Alaska’s North Slope to market. Reimbursements so far have topped $36 million. More than $100 million remains set aside, and Gov. Sean Parnell has requested $160 million more for next fiscal year.
TransCanada, which hoped to have shipping agreements signed by December, missed the self-imposed target. But the company and Larry Persily, federal coordinator for Alaska gas pipeline projects, said negotiations are complex and no official deadlines have been missed.
“They didn’t make it. So what?” Persily said, noting that the only failure was the failure to meet expectations.
But that’s been enough to stoke the skepticism among lawmakers who already are antsy about securing the long-hoped-for line and are less than bullish on its chances.
Stedman said it’s time the state starts looking at cutting its losses, “and if that’s not going to move forward, we need to shut it down.”
“I think you’ve got to give them a bit more time; I would not say next week,” Stedman, R-Sitka, said this week. “But I would say we have to start having that discussion. I am hoping the governor will start having that discussion with TransCanada on how to pull the plug on this, and if it doesn’t look like it’s going to be viable, that, you know, we pull the plug on it this summer.”
Parnell remains committed to the process, moving ahead under terms of the Alaska Gasline Inducement Act championed by his predecessor, Sarah Palin. He said the state is closer than ever to realizing a line _ a position some House Democrats share _ and he has urged lawmakers to be patient.
TransCanada and Denali-The Alaska Gas Pipeline, a competitor moving ahead without state support, each reported receiving bids from gas producers who want to use the line. But the producers imposed conditions whose nature has not been disclosed.
Tony Palmer, vice president of major projects development for TransCanada, said Friday that the negotiations have unveiled “major issues” that the pipeline and shippers must resolve. He gave no new target for completing talks and no determinant point for when the parties would walk away _ a point he said TransCanada is not near.
Palmer said the plan to have the line in service around 2020 remains unchanged, and work on other aspects of the project is moving forward.
Companies must weigh a number of factors, including the competitiveness of Alaska gas against the rise of North American shale, price and gas market forecasts, and the resolution of disputed leases seen as a key to further unlocking the state’s development potential. There’s also the issue of long-term certainty from the state on taxes and other fiscal issues.
Project costs have ranged from an estimated $20 billion to $41 billion, depending on the route. Both TransCanada and Denali have proposed lines that would deliver about 4.5 billion cubic feet of gas per day to North American markets by larger lines to Canada.
TransCanada is working with Exxon Mobil Corp. to advance a line. Denali is working with BP PLC and ConocoPhillips.
Stedman said he’s not sure what the state should do to commercialize its gas if a major line falters or the state walks away. Estimates have put proven gas reserves on the North Slope overall at 35 trillion cubic feet, and a large line has been seen as a way to help create jobs and shore up state revenues as oil production declines.
Stedman was the central figure of one of the biggest fights of the last legislative session: Efforts to change Alaska’s system of taxing oil and gas production together. He and other lawmakers argued that once gas begins flowing through a major line, the state stands to lose potentially $2 billion or more unless the two taxes are split.
Parnell vetoed the bill, which he said would have represented an overall tax increase on energy companies. Oil remains king in the state, with relatively little gas activity.
Stedman wants to take another look at the gas tax this year _ an idea rebuffed by Parnell, who’s pushing an oil tax overhaul _ to see how much the state treasury is losing with “no gas sales to speak of.” Stedman’s own rough estimate is about $150 million during the last fiscal year. He’s unsure yet whether he’ll push the issue further, such as proposing changes to the tax.
On the pipeline issue, “We need to be pretty careful on our conclusions,” Stedman said. “And quite frankly, if the gas structure stays the way it is, the gas tax stays the way it is, we’re better off leaving the gas in the ground.”
The Canadian dollar was below parity with the greenback Thursday morning as commodity prices retreated amid fears China will make further moves to slow its economy to deal with inflation.
The currency, which has closed above parity every day since Dec. 30, lost 0.62 of a cent to 99.83 cents US.
Concerns about the Chinese economy strengthened on news that the country
European Central Bank officials edged back from a threat to raise interest rates, saying markets have over-reacted to their change in tone on inflation.
“The Governing Council of the ECB sees present interest rates as adequate,” council member Ewald Nowotny said at an event in Budapest yesterday. “We do not see a need for an interest rate change in the foreseeable future.” Bundesbank President Axel Weber also said he expects inflation to remain below the ECB’s 2 percent limit in the medium term, softening his language on the risks to price stability.
“It looks like the ECB is now trying to fine-tune market expectations,” said Laurent Bilke, global head of inflation strategy at Nomura International in London, who used to work as a forecaster at the ECB. “The market didn’t get the ECB completely right, but at the same time policy makers will not be successful in telling the market that there hasn’t been a shift in the policy stance.”
The euro has risen four cents against the dollar since ECB President Jean-Claude Trichet last week warned that the central bank will act if needed to contain inflation risks, which he said “could move to the upside.” Nowotny joins Athanasios Orphanides of Cyprus in suggesting markets may have over-reacted to the comments.
‘One-Sided’ Interpretation
“I think the statements of President Trichet at the last press conference have been perhaps interpreted in a rather one- sided way,” Nowotny said. Orphanides said in an interview published on Jan payday loan lenders. 17 that the ECB’s policy statement was not “overly hawkish” and there is sometimes an “overreaction to the underlying message.”
The euro fell a third of a cent to $1.3360 after Nowotny spoke last night.
A stronger currency could undermine European exports just as the region grapples with a sovereign debt crisis that’s forced government to cut spending, damping the outlook for economic growth.
Weber said in a speech in Frankfurt yesterday that while inflation risks “could increase,” they are still “more or less balanced” and prices should remain contained in the medium term. Last week, he said risks to the medium-term inflation outlook “could well move to the upside.”
Inflation accelerated to 2.2 percent last month, breaching the ECB’s 2 percent limit for the first time in more than two years. Trichet said on Jan. 13 it may quicken further before moderating toward the end of the year. The ECB has “never pre- committed not to move interest rates,” he added.
The ECB has held its benchmark interest rate at a record low of 1 percent since May 2009.
The euro surged after Trichet’s comments and Citigroup Inc. immediately revised its forecast for the ECB’s first rate increase to the second half of this year from the first quarter of 2012.
The Toronto stock market was lower Friday as the latest moves by China to slow down its economy in order rein in inflation raised concerns about demand for commodities.
The resource-heavy S&P/TSX composite index slipped 10.69 points to 13,390.79 while the TSX Venture Exchange lost 11.88 points to 2,277.12.
Lower prices for oil and gold helped push the Canadian dollar lower against the American currency, down 0.35 of a cent to 100.74 cents US.
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