France remains steadfast in its opposition to a restructuring of Greece’s debt under any terms, the government’s spokesman said on Wednesday, showing a divergence of opinion with Berlin.
German Finance Minister Wolfgang Schaeuble raised the prospect of a restructuring, saying in a letter to EU partners this week that private bondholders should bear some of the burden of a debt relief deal, preferably via a bond swap and a rescheduling.
The health insurance program for seniors is the nation’s biggest financial challenge.
The first of 77 million Baby Boomers turn 65 this year and qualify for Medicare. Enrollment will grow from 48 million in 2010 to 64 million in 2020 and 81 million in 2030, according to Medicare actuaries. That 33-million increase in the next 20 years compares with 13 million in the last 20.
This demographic burst ”” combined with the addition of a prescription drug benefit in 2006 and rising health care costs generally ”” has created an unfunded liability of nearly $25 trillion over the lifetime of those now in the program as workers and retirees. That is the taxpayers’ obligation, beyond what Medicare taxes will bring in or seniors will pay in premiums for Medicare Part B ”” also called supplemental coverage ”” that helps pay for doctor visits and other expenses outside the hospital.
In early 2008, Libya’s sovereign-wealth fund controlled by Col. Moammar Gadhafi gave $1.3 billion to Goldman Sachs Group to sink into a currency bet and other complicated trades. The investments lost 98% of their value, internal Goldman documents show.
What happened next may be one of the most peculiar footnotes to the global financial crisis. In an effort to make up for the losses, Goldman offered Libya the chance to become one of its biggest shareholders, according to documents and people familiar with the matter.
Negotiations between Goldman and the Libyan Investment Authority stretched on for months during the summer of 2009. Eventually, the talks fell apart, and nothing more was done about the lost money.
As an interviewer, Mr. Haines was acerbic and skeptical, known for taking the wind out of the sails of over-optimistic executives.
Eastman Kodak Co.’s CEO George Fisher in a 1998 interview denied rumors of an impending film price war. Days later, Kodak kicked off a discount campaign. Mr. Haines repeatedly ran the soundbite on subsequent shows, denouncing Mr. Fisher.
“Rule one is don’t lie,” Mr. Haines said in a 2001 interview with Investor Relations Business magazine. “If you do, I’ll kill you.”
Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor, discusses the European sovereign-debt crisis. Ferguson speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.”
From 2001-07, he argues, the dollar underwent a long, steady decline against the euro, tacitly encouraged by U.S. monetary authorities. In response to the dollar’s decline, investors diverted capital into inflation hedges, notably real estate, leading to the subprime bubble. By mid-2007, the real-estate bubble had burst. In response, the Fed reduced short-term interest rates rapidly, which lowered the dollar further. The subprime crisis was severe, but with looser money, the economy appeared to stabilize in the second quarter of 2008.
Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch””exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses””the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.
In March 2009, the Fed woke up and enacted QE1, lowering the dollar against the euro, and signs of recovery soon appeared. But in November 2009, QE1 ended and the dollar soared against the euro once again, pushing the U.S. economy back toward recession.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said probably the most worrying development for the euro was the surge in Italian government bond yields in response to S&P’s move.
He said: “Italy has the largest government bond market in the eurozone and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets.
“With the authorities still seemingly divided over how to proceed with the debt crisis there remains considerable short-term risks for the euro.”
Keeping debt under control, Merkel said in a speech at an event held by her party, the conservative Christian Democratic Union, in the western German town of Meschede, isn’t the only priority. “It is also important that people in countries like Greece, Spain and Portugal are not able to retire earlier than in Germany — that everyone exerts themselves more or less equally. That is important.”
She added: “We can’t have a common currency where some get lots of vacation time and others very little. That won’t work in the long term.”
There are indeed significant differences between retirement ages in the two countries. Greece announced reforms to its pension system in early 2010 aimed at reducing early retirement and raising the average age of retirement to 63. Incentives to keep workers in the labor market beyond 65 have likewise been adopted. Germany voted in 2007 to raise the retirement age from 65 to 67 over the next several years.
The problems of old age (chronic illness, outliving savings, loneliness) are real, but age by itself is not an indicator of need. The blanket defense of existing Social Security and Medicare isn’t “liberal” or “progressive.” It’s simply a political expedient with ruinous consequences. It enlarges budget deficits and forces an unfair share of adjustment ”” higher taxes, lower spending ”” on workers and other government programs. This is the morality of the ballot box.
People do not lose their obligations to the larger society by turning 65. We need to refocus these programs on their original purposes. Social Security was intended to prevent poverty, not finance recipients’ extra cable channels. Medicare provides peace of mind as well as health insurance; wealthier recipients can afford to pay more for their peace of mind. Burden-sharing needs to include the elderly. This is the crux of the budget problem.
Facing it is both a moral and financial imperative. With the 2012 election looming, major overhauls of these programs seem unlikely. Still, more modest changes (slow increases in eligibility ages, added taxation of Social Security benefits, costlier Medicare for upscale beneficiaries) could produce significant savings. If even these are absent, the meaning will be plain: Old stereotypes continue to trump new realities.
Richard McGuire, a bond strategist at Rabobank in London, said there was a risk of a “domino effect” through the financial system reminiscent of the aftermath of Lehman if the crisis was mishandled.
He said: “The implications of a Greek default are nightmarishly complicated and would affect Britain through a number of channels.
“It is only when Greece defaults and the rug is pulled from under this complex web of cross-border relationships that we see where the risk really lies.”
The federal government will not run short of money to pay its bills on May 16, when the federal debt reaches the legal maximum of $14.3 trillion.
Even after Aug. 2, the deadline the Treasury Department set this week for Congress to lift the borrowing limit, the government might be able to delay a crisis, perhaps even for a few months, through extraordinary measures such as asset sales.
But with every passing week of stalemate over the debt ceiling, the risk increases that investors will start to fret that the United States will not pay its debts, and demand higher interest rates for loans to the federal government.
Should that happen, the cost could be vast and the damage difficult to reverse.
…while President Obama has presided over an unprecedented federal spending spree, he’s far from the first White House occupant to run up big debt numbers while insisting that he’s moving toward lowering them — eventually.
He’s also not the first politician caught between contradictory public demands of lower spending and higher benefits. A Washington Post-ABC News poll released last week reports that 78 percent of Americans oppose cutting Medicare spending, and 69 percent oppose cutting Medicaid.
Yet even most liberal Democrats, including the president, concede this indisputable point: America’s long-term debt crisis will never be solved without containing the soaring costs of Medicare and Medicaid.
A group of the largest US banks and fund managers stepped up the pressure on Congress and the Obama administration to reach a deal to increase the country’s debt limit, saying that even a short default could be devastating for the financial markets and economy.
The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors about the US political system’s ability to forge a consensus on fiscal policy.
The most pressing budgetary issue confronting Congress and the Obama administration is the need to raise the US debt ceiling, which stands at $14,300 billion.
[Here is the Bloomberg Headline: Swiss Franc Reaches Highest In At Least 40 Years Versus Dollar]
This is painful and sad and (go under the chart to the time box and click “max” all the way to the right) for an even longer term perspective check this out.
The U.S. dollar’s downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.
With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.
The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The ICE U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified.
Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That’s a dangerous game, given the need for investment to drive economic development. But it’s also increasingly typical of the world’s reaction to America’s mismanagement of the dollar and its eroding financial leadership.
The dollar is the world’s reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.
The Fed’s relentlessly easy monetary policy combined with Congress’s reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on….
“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures….”
–S&P credit analyst Nikola Swann in a statement today explaining why S and P shifted its outlook on America’s credit to “negative”
This is a timely reminder of the seriousness of America’s fiscal issues, for the country and for the rest of the world.
The continued failure to come up with a credible medium-term fiscal reform program would increase borrowing costs for all segments of US society, thereby undermining investment, employment and growth. It would also curtail foreigners’ appetite to add to their already substantial holdings of US assets. And it would weaken the dollar.
The US also risks eroding its standing at the core of the global monetary system.
Shares on Wall Street opened sharply lower and Treasury prices fell on Monday after the Standard & Poor’s rating firm lowered the outlook for the United States to negative, saying that there was a risk that lawmakers might not reach agreement on how to address the country’s fiscal issues.
“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” a credit analyst with Standard & Poor’s, Nikola G. Swann, said. At the same time, the firm affirmed the government’s AAA rating.
S&P sees a “material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion as the metal reaches a record, according to the fund’s board.
The fund, whose $19.9 billion in assets ranked it behind Harvard University’s endowment as of August, according to the National Association of College and University Business Officers, last year added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The holdings reached about $987 million yesterday, as Comex futures closed at $1,486 an ounce….
“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” [Kyle] Bass said today in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”
In reality, finding a way to raise taxes may well be the central political problem facing the United States.
As countries become richer, their citizens tend to want more public services, be it a strong military or a decent safety net in retirement. This country is no exception. Yet our political culture is an exception. It has made most tax increases, even to pay for benefits people want, unthinkable.
This is where the Bush tax cuts come in. They have created a way for inertia to be fiscally responsible.
The US lacks a “credible strategy” to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.
In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.
The Republican budget released on Tuesday is a daring one in many ways. Above all, it would replace the current Medicare with a system of private health insurance plans subsidized by the government. Whether you like or loathe that idea, it would undeniably reduce Medicare’s long-term funding gap ”” which is by far the biggest source of looming federal deficits.
Yet there is at least one big way in which the plan isn’t daring at all. It asks for a whole lot of sacrifice from everyone under the age of 55 and little from everyone 55 and over. Representative Paul Ryan, the Wisconsin Republican who wrote the plan, calls the budget deficit an “existential threat” to the United States. Then he absolves more than one-third of all adults from responsibility in dealing with that threat.
This decision doesn’t make him unique in Washington. There is nearly a bipartisan consensus that any cuts to Medicare and Social Security should spare the baby boomers and the elderly. And, certainly, retirees or people on the verge of retirement shouldn’t have their benefits changed radically. But the consensus, like Mr. Ryan’s plan, goes too far.
The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ”“ it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.
Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.
The President’s difficulties in positioning himself as the champion of a jobs renaissance were compounded by two new reports on the nation’s fiscal condition, one by the Congressional Budget Office (CBO), another by the General Accountability Office (GAO).
The CBO analysed the President’s proposed budget for the next fiscal year and estimates the federal deficit over the next decade will clock in at $9.5 trillion (£5.8tr), a mere $2.3 trillion (£1.4tr) higher than the White House estimate. And the GAO, re-assessing the nation’s long-term outlook, concluded that the fiscal situation has deteriorated. If the nation’s debt is to be stabilised at 62% of GDP, an immediate tax increase of 15%, or a spending cut of 13%, or some combination of the two is needed.
The Peter G Peterson Foundation, a sort of budget watchdog and nag, concludes that even under a set of optimistic assumptions, “large and persistent deficits still lead to an unsustainable growth in debt… and a steady growth in net interest payments to service this growing debt”. By 2030, unless the President and Congress come to grips with the fiscal situation, net interest payments and entitlements (pensions, healthcare costs) will consume almost the entire budget, leaving nothing for spending on defence, education and other programmes.
Portugal’s admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone’s debt crisis: Is Spain next?
The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.
But if Spain can continue to repair investors’ trust, as in recent weeks, then Europe stands a chance of containing the debt crisis to three countries, Greece, Ireland and Portugal, whose combined economies are half the size of Spain’s.
The Archbishop of Canterbury has repeated calls for a “Robin Hood” tax to be imposed on financial transactions as he spoke of the “acute” dangers of “paralysing” the voluntary sector through heavy public spending cuts.
Dr Rowan Williams said a tax of 0.05% on transactions in currency, stocks and derivatives between major financial institutions – and not High Street banks – could generate £20 billion a year for the UK.
Moody’s downgraded its credit rating on Spain Thursday, citing worries over the cost of the banking sector’s restructuring and the government’s ability to achieve its borrowing reduction targets.
The agency said it was reducing its rating by one notch to Aa2 and warned that a further downgrade could be in the offing if there are indications that Spain’s fiscal targets will be missed and if the public debt ratio increases more rapidly than currently expected, or if the funding requirements for the so-called savings banks””the cajas””are greater than anticipated.
Though noting the government’s resolve in dealing with its problems and that Spain’s debt sustainability is not under threat, Moody’s said that “Spain’s substantial funding requirements””not only those of the sovereign, but also those of the regional governments and the banks””make the country susceptible to further episodes of funding stress.”
As expected, the U.S. Senate failed Wednesday to advance either the House Republicans’ spending bill or an alternative proposal offered by Democrats, leaving lawmakers just nine days to work on a compromise plan or face a government shutdown.
Neither plan achieved even a simple majority of support in the chamber. The vote in the Senate was 56-44 against the plan approved by the Republican-led House last month, which would cut current spending levels by $61 billion. A subsequent vote on the alternate proposal from Senate Democrats, which offers cuts of $6.5 billion, failed 58-42. Sixty votes were needed to advance the measures.
The vote comes as President Obama faces new pressure to exert greater influence over the congressional debate. As the Senate readied for votes on the competing measures Tuesday, freshman Democrat Sen. Joe Manchin (W.Va.) accused both parties of engaging in “political theater.”