Can the US States Default?

U.S. states face questions about possibility of default. Much attention has been given to Greece's debt crisis, but U.S. states are facing difficulty as well, prompting questions about whether default is a possibility. "For U.S. states, it is not a debt problem, it is a spending problem," said Peter Hayes, head of the municipal bond group at BlackRock. "The length and depth of the downturn is so much greater than anything we have seen that states cannot cut spending fast enough and they cannot really raise taxes further." Financial Times (26 Feb.)

Financial Times Article Link

Bank Will Profit From Greece's Default

Banks that hid Greece's debt aim to profit from default. Many of the banks that helped Greece create derivatives that concealed its borrowing are betting on default, hoping to make additional profit from the nation's financial troubles, according to The New York Times. Banks' and hedge funds' purchases of credit default swaps on Greek bonds are driving up the cost of borrowing that Greece needs to roll over its maturing debt, according to the newspaper. "It's like buying fire insurance on your neighbor's house -- you create an incentive to burn down the house," said Philip Gisdakis, head of credit strategy at UniCredit. The New York Times (free registration) (24 Feb.)

NY Times Link

Analysis: Crisis might bring discontent to EU's "Club Med": Spending cuts and other austerity measures are likely to touch off discontent, possibly creating strikes and protests, across the southern edge of the EU, called "Club Med," The Times reported. Spain, Portugal and Italy, along with Greece, have a soaring budget deficit, high unemployment and a troubled economy. "The young are struggling to find work, the middle-aged are having their earnings squeezed and the old will see pension and benefit cuts," according to the newspaper. The Times (London) (24 Feb.)

Greek Bank Face Downgrade

Greek Banks: Could Downgrade to BBB Lead to a Downward Spiral?

Fitch's downgrade of Greece's four largest banks to BBB from BBB+ on February 24 comes at a very sensitive time, when the ECB is starting to withdraw its liquidity support and tightening its credit standards. Moreover, the ratings outlook is negative, which points to the risk of further downgrades ahead. Expanding on its decision, Fitch cites the negative repercussions the austerity program will likely have on credit quality and loan demand. Fitch also notes limited access to wholesale funding and interbank markets at reasonable prices due to sovereign rating pressures. Fears of a self-fulfilling prophecy are justified given that the eligibility of Greek collateral might be at risk when the ECB tightens its collateral requirements to an A- rating (by at least one ratings agency) at the end of 2010. On the positive side, Fitch notes that Greek banks are mostly deposit-funded.

Source: RGE Monitor 2-25-2010

Bob Prechter Interview

Bob thinks we are at a top. I to am very concerned. But in the end no one truly knows where the market is heading.

The first 5 to e-mail me will receive a copy of the book. You will need to provide complete contact information for me to send a copy of the book.

Wealthtrack Asset Allocation Question

This week on Wealthtrack, Consuelo Mack poses the question: What place do U.S. Treasuries, bonds in general, stocks and alternative investments have in an investment portfolio in today’s markets?

Round Two on Real Estate - Commercial RE

Analysts warn of foreclosure crisis in commercial real estate. Analysts said a wave of foreclosure on commercial properties in the U.S. likely will hit community banks especially hard. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel. "There will be significant bankruptcies among developers and significant failures among community banks." The Washington Post (19 Feb.)

Article Link

Muni Crisis - The Next Hurrdle

The logic here is quite simple:

Lower wages + higher unemployment= lower tax revenues.

Lower tax revenues + greater government spending= greater deficits.

Greater deficits eventually = insolvency or default.

Article Link

Greece Melt Down - Who is Next???

Eurozone gives Greece 1 month to make progress on cutting deficit. Finance ministers from the eurozone took a get-tough approach with Greece, warning the country of additional spending cuts and taxes if a report due March 16 shows that the Greek government is not making progress in slashing its budget deficit. They told Greece it must stick with an austerity plan presented to the EU that promises to cut this year's budget deficit from 12.7% to 8.7% of GDP. "Greece has to actually deliver and is beginning to deliver," said French Finance Minister Christine Lagarde. Google/The Associated Press (15 Feb.) , Financial Times (tiered subscription model) (16 Feb.)

Google/The AP Article Link

In addition, EU wants details of Wall Street deals related to Greek debt: The European Commission wants an explanation from Greece regarding reports that Wall Street banks put together derivatives deals that allowed the country to hide billions in debt. Statistics agency Eurostat told the Greek government to provide details of the transactions by the end of this month, said the commission's Amadeu Altafaj Tardio. EUObserver (Brussels) (15 Feb.) , Financial Times (tiered subscription model) (15 Feb.)

Euobserver Link

Good News for Homeowners

Homeowners are building up equity again, Fed says. After three years of homeowners' equity contracting in the U.S., the longest ever, the trend has reversed. The Federal Reserve's "flow of funds" survey shows that between the first and third quarters of 2009, homeowners' net equity increased almost $1 trillion. Los Angeles Times (14 Feb.)

LA Times Article

Fed Prepares for Fiscal Stimulus Withdrawal

Fed prepares for cautious withdrawal of fiscal stimulus. The Federal Reserve is preparing to talk publicly about its strategy for withdrawing liquidity from the U.S. economy, after flooding it with trillions of dollars. Central bank policymakers and private-sector economists said the process will be tricky and dangerous, coming at a time when unemployment is projected to remain historically high. The Washington Post (09 Feb.)

Washington Post Article Link

Debt Refinancing May Be a Bigger Problem

Moody's warns on debt risks. In Moody's annual report on risks, the rating firm warned nearly 1,000 companies with a junk rating will face significant refinancing needs over the next several years, with around $700B of debt coming due between 2012 and 2014. "Longer-term maturities are vulnerable if the economic recovery doesn't continue to take hold," said Kevin Cassidy, a senior credit officer at Moody's. If unemployment and credit conditions worsen, "things could get tough pretty quick for some companies."

Source: SeekingAlpha.com, "Wall Street Breakfast"

Proposed $3.8 Trillion budget, WHAT???

Obama's budget seeks $100 billion for jobs, sets deficit record. U.S. President Barack Obama is expected propose a $3.8 trillion budget that includes a record-high deficit of $1.6 trillion as well as a $100 billion program to create jobs, Obama administration and congressional sources said. The spending to create employment includes tax cuts for small businesses, financial assistance for state and local governments, and extra money for social programs. To bring the budget deficit under control, Obama will rely on proposals including a freeze on domestic programs, taxes on big banks and the expiration of tax cuts for families with an income of more than $250,000 a year. The Washington Post (31 Jan.) , Los Angeles Times (31 Jan.) , The New York Times (01 Feb.)