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US may default on its debt a half-month earlier than expected, new analysis shows

8 Jan

The government hit the $16.4 trillion statutory debt limit on Dec. 31 , but the Treasury Department is able to undertake a number of accounting schemes to delay when the government runs into funding problems.

The Treasury has said that the accounting schemes, known as “extraordinary measures,” ordinarily would forestall default for about the first two months of the year, though officials were clear that they could not pinpoint a precise date because of an unusual amount of uncertainty around federal finances.

“Our numbers show that we have less time to solve this problem than many realize,” Steve Bell, senior director of economic policy at the Bipartisan Policy Center, said in a statement. “It will be difficult for Treasury to get beyond the March 1 date in our judgment.”

The fast-approaching deadline to raise the debt limit is likely to be Washington’s next fiscal battleground. Republicans say they plan to use the occasion to demand deep federal spending cuts, with House Speaker John A. Boehner insisting on a dollar reduction in federal spending for every dollar increase in the nation’s borrowing limit.

But the White House says President Obama will not negotiate this point, since the debt ceiling represents a limit to obligations that Congress already has promised to pay.

“What he will not do — as he has made clear — is negotiate with Congress over Congress’s sole responsibility to pay the bills that Congress has already incurred,” White House Press Secretary Jay Carney said on Monday. “Nobody forced Congress to rack up the bills that it incurred. And it is an abdication of responsibility to say that we’re going to let the country default and cause global economic calamity simply because we’re not getting what we want in terms of our ideological agenda.”

The Bipartisan Policy Center’s debt-limit deadline is based on several assumptions, two of which conceivably could change the calendar.

One is that the confusion around end-of-year tax policy could lead to delays in the filing of taxes and refunds, throwing a curveball into projections about the nation’s finances.

The other is the overall pace of economic growth; faster growth tends to lift tax receipts.

If Congress does not raise the debt ceiling by the deadline, the White House has said that the nation likely would default. In a previous episode — in the summer of 2011 — officials determined that the best course would be to withhold all of a given day’s federal payments until enough money became available to pay them.


Eurozone crisis far from over, ECB, IMF warn

6 Dec

— The eurozone’s crisis is far from over and its members must consolidate their budgets and forge a banking union to put the bloc on a more stable economic footing, the leaders of the IMF and European Central Bank said on Friday.
Underlining the bloc’s woes, data showed both German retail sales and French consumer spending falling faster than expected as well as stubborn Spanish inflation that will likely lift the cost of state pension rises for an already hard-pressed budget.
Eurozone wide numbers showed another 173,000 people joining record jobless queues in October, while a dive in consumer price inflation offered only limited relief to households struggling with the recession.
Speaking in Paris, where the government is trying to dispel concerns raised by the IMF that France could be left behind as Italy and Spain reform at a faster pace, ECB President Mario Draghi said the eurozone’s three-year-old crisis was likely to stretch deep into next year.
“We have not yet emerged from the crisis,” Draghi told Europe 1 radio. “The recovery for most of the euro zone will certainly begin in the second half of 2013.”
“It’s true that budgetary consolidation entails a short-term contraction of economic activity, but this budgetary consolidation is inevitable,” Draghi said, speaking through a translator.
A Greek bankruptcy could lead to the break-up of the eurozone
German lawmakers approved the latest bailout for Greece on Friday by a large majority despite growing unease about the cost to taxpayers less than a year before federal elections.
The package, which aims to cut the Greek debt load to 124 of national output by 2020, coincides with increased speculation among German lawmakers and media that eurozone governments will eventually have to write off much of the Greek debt they hold.
Finance Minister Wolfgang Schaeuble said in the Bundestag debate that such speculation could undermine the Greek government’s reform drive.
“If we say the debts will be written off (Greece’s) willingness to make savings is correspondingly weakened. Such false speculation does not solve the problems,” he said. “A Greek bankruptcy could lead to the break-up of the eurozone.”
ECB policymakers hold their regular monthly policy meeting next week and are widely expected to leave interest rates on hold at a record low of 0.75%. Economists are divided on whether the central bank will cut next year.
Draghi has stressed the ECB is ready to help tackle the crisis by buying potentially unlimited amounts of sovereign debt under its new bond-buy plan but until Spain applies for aid, a prerequisite for the ECB to intervene, it cannot use the tool.
Resisting fresh ECB action, Bundesbank chief Jens Weidmann said on Thursday central bankers had done more than enough to fight the crisis and it was now up to governments to act by reforming their economies and making the banking sector solid.
Draghi, in Paris for a conference with top financial officials, said eurozone governments should push ahead quickly with implementing a banking union which must apply to all banks to avoid fragmenting the sector.
His position puts the ECB, which would take on the role of pan-European banking sector, at odds with Germany. Berlin has said that unified banking supervision under the aegis of the ECB should apply only to the bloc’s largest banks.
Joerg Asmussen, one of the ECB’s key negotiators for a closer integration of the eurozone and a former deputy German finance minister, said late on Thursday a new European banking supervisory body would not be ready to operate fully before 2014.
But International Monetary Fund head Christine Lagarde pressed for swift implementation of a banking union that would have powers to supervise all banks in the eurozone.
“Banking union seems to us to be the first priority,” Lagarde said during the meeting with top financial officials in Paris, adding that closer budgetary consolidation should be the next priority.
The economic situation in the eurozone remained fragile and governments should maintain a “reasonable” pace of budgetary consolidation to avoid crimping growth, she added.


Spain has taken painful steps to clean up its banks, but more may yet be needed

6 Dec

European Union regulators approved Spain’s plans to restructure its troubled banks, allowing them to get bail-out funds. One of the lenders, Banco de Valencia, is being sold off for a token €1 ($1.30).
THE delightful (though small) plates of tapas that often accompany an evening drink in Spain can, if eaten with gusto, end up replacing the meal they were meant to precede. After four years of appetiser-sized bank restructurings, bail-outs and reforms, Spain’s banking system may finally be getting its fill of public money.
On November 28th the European Commission approved restructuring plans that will allow it to inject €37 billion ($48 billion) in euro-zone funding into four Spanish banks. The money will allow for a clean-up of bank balance sheets begrimed by dud loans granted to property developers during the inflation of Spain’s colossal property bubble. Many of these loans are now worth just cents on the euro. Yet an earlier refusal by supervisors and banks to recognise the scale of the problem contributed to an erosion of confidence in both banks and in government finances.
Under the new plan, four banks including Bankia, itself the failed product of an earlier half-hearted restructuring of bust regional savings banks, will get cash from two of Europe’s bail-out funds. In return they have promised to cut their balance-sheets, stop lending to risky property developers and focus instead on lending to small and medium-sized businesses.

The sharpest cuts will be at Bankia, which has already been nationalised and which will receive public funds worth almost €18 billion (including €4.5 billion injected into the bank by the state in September). It will cut its branch network by almost 40% and its staff by 28%. Investors in the bank’s debt will also take a hit, with as much as €4.8 billion in additional capital coming from the mandatory swapping of hybrid instruments and subordinated debt for new shares worth less. Across all four banks, holders of hybrid instruments may take a hit of about €10 billion.
Forcing investors in some of the banks’ debt to take losses was a condition imposed by contributors to the bail-out funds to minimise the burden on taxpayers. Yet it will probably prove unpopular in Madrid, since much of this debt is held by tens of thousands of small investors, many of whom bought it after being assured by banks that it was as safe as deposits.
Bankia optimistically hopes to return to profitability next year and to be generating healthy returns by 2015. One bank, Banco de Valencia, was deemed beyond salvation. It will be recapitalised with €4.5 billion and then sold to CaixaBank, Spain’s third-largest bank.
A second key element of the bail-out will be the creation of a new “bad bank” in December. It will take dud loans from those being restructured. The government hopes this will help them regain the confidence of markets. It may also kickstart lending, and help revive an economy that contracted by about 5% in the year to August. Little detail was provided as to exactly how much debt the bad bank, known as Sareb, will take, but officials in Brussels said some €45 billion in Spanish banking assets would be transferred to it.
Officials in Brussels hoped that the markets would welcome the restructuring, saying it would “restore the viability of banks”. Yet even this new recapitalisation and restructuring plan may underestimate the voracious appetite of the Spanish banking system.
A report by staff at the International Monetary Fund (IMF) released on November 28th sounded warnings of further loan losses as Spain’s economy contracts. Losses on corporate loans have already increased sharply, yet those on mortgages remain remarkably subdued (see chart). Some deterioration in these seems likely if, as the IMF expects, house prices contract and unemployment also rises.
The IMF reckons that house prices, which have slumped 30% from their peak, may fall further given the stock of unsold homes and weak growth in household incomes. Unemployment, already at about 25%, may rise to almost 27%, the OECD warned in a separate report this week. The main course of bank restructuring may have been served, but a sour postre (dessert) may still be on the menu.



Just how “Italian” are Italian Olive Oils?

1 Dec

Olive Oils labeled “Italian” are in fact 66% Spanish, says a report recently released by the Turin newspaper, La Stampa.

Italy accounts for 65% of all olive oil exports from Spain. Their food industry, one of the world’s most powerful and with large multinationals that dominate the crop-processing absorbs most of the Spanish olive oil producers’ harvests. These transactions are conducted via tanker lorries collecting bulk olive oil from depots and cooperatives around the country, including Valencia where I live, which is one of the major producing areas of Spain after Andalucia. Spain’s neighbour then packages the product, maybe even blends it with other oils and then re-exports it through the leading distribution companies in the EU, of course with the stamp “Made in Italy”. Moreover, two-thirds of the oil it sells in its home market is also Spanish, as has recently reported the largest association of producers in the country, Coldiretti, whose leaders warn that in 2011 oil imports exceeded exports by a long way. So the chances are even the Italians, so proud of their Olive Oil probably haven’t even tried an Italian Olive Oil for quite some time!

Valencia is one of the leading regions for exporting Olive Oil and mainly to Italy. From Maestrat to Vall d’Albaida, among other regions, they continue sending tankers to the Italian industry throughout the season. According to data provided by ICEX, in recent years the value of exports fell compared to the 8, 2 million euros achieved in 2007. Drought and other factors have reduced the harvests considerably and this year it will be even less compared to previous campaigns owing to the lack of rain during the summer. Nonetheless, exports remain a key feature of their business strategy.

The EU is starting to take action in the matter. The Italian producers’ organisation Coldiretti claims that “under the guise of the brand “Made in Italy” national olive oils are mixed with imported Spanish olive oil to acquire the image of the country and pass off as products from historical Italian brands” mentions the report by La Stampa . Olive Oil labelled Italian is in fact two-thirds Spanish says the study carried out by the Italy’s largest association of farmers. Most of the 600,000 tons of oil in 2011 that Italy imported came from Spanish olive groves, but also from Greece, Portugal, France and Turkey. With the case of Spanish Olive Oil, some Italian olive oil producers bought olive oil at a price of 50 cents a kilo, which was then resold on to the domestic market at a cost price of between € 2.50 and €3.

“The speculators are manipulating the business and doing a lot of damage,” laments the environmental technician and expert on the oil sector, Ferran Gregori. The rogue Italian industry is committing a crime, the European Union not so long ago enforced a law on the clarity of olive oil origin for labelling standards, and those who are carrying out this fraud generate about 5,000 million euros in profit annually, warns the representatives of Coldiretti .

According to the technician for the Llauradors Union, “Italy absorbs a lot of Spanish olive oil exports because it runs some of the largest food businesses in the world. The same happens with the almonds in Spain, we import them and then sell them on” Gregori pointed out. In his opinion, the fact that some Italian producers are denouncing this, the volume of imports clearly justifies their complaints. “If there is fraud in the labelling the matter should be taken up with the authorities so not to manipulate consumers,” adds the director of the Union.

In view of the situation, Italy is working on a bill to protect it’s oil against increased imports of foreign oil and counterfeiting. This legal proposal, according to Agrodigital, has been presented by the producers’ organisation Coldiretti, Symbola Foundation (Foundation for the quality of Italian products) and Unaprol (association of growers).

The main changes contained in the bill are to require larger letters on the labels, measures to prevent and eliminate deceptive brands and the secrets around the names of the companies that import foreign oil.
Also they will include a classification control to supervise the qualitative characteristics of the oils. This aims to build a system of rules that protect consumers and ensure fair competition between businesses, preserving the authenticity of the product, the certainty of its territorial origin and the transparency of information provided to consumers.

So when many thought that Italian olive oil was the best in the world, little did they know that it is in fact most probably Spanish.


Curb excessive executive pay rises, insurers tell top companies

26 Nov

Leading companies should avoid handing disproportionately large pay rises to their executives, a powerful body of shareholders has warned in a call for simpler remuneration packages for senior executives.

The Association of British Insurers is also pressing companies to consider ways to reward boardroom directors on measures other than financial performance, in a new set of pay guidelines.

The ABI, whose members control about a fifth of the stock market in pension funds and insurance policies, is asking the committees that set boardroom pay to ensure they award just one annual bonus and one long-term incentive plan (Ltip) in contrast to the range of pay schemes currently offered to top bosses.

On the back of the so-called “shareholder spring”, the ABI wants companies to be cognisant of the salaries of employees in the wider workforce when awarding pay rises at the top. While the ABI does not demand that companies publish the ratio between the pay of an average employee and the boss in the boardroom, its comments demonstrate that the pay discrepancy will be one of the issues in focus in 2013.

“Shareholders continue to be mindful of employee costs generally, and executive pay specifically, in the context of the general finances of the company, including its investment and capital needs and returns to shareholders,” the guidelines said.

Robert Hingley, the director of investment affairs at the ABI, said: “The ABI guidelines represent UK best practice. They aim to ensure remuneration committees set remuneration structures which are clear and simple, removing unnecessary layers of complexity and ensuring that pay is clearly linked to performance and that shareholders’ interests are protected.”

It is the latest update to guidelines first produced in the 1970s and which were reviewed in 2011 for the first time in five years when shareholders expressed concern about the spiralling levels of directors’ pay, partly caused by the race to keep pace with rises handed to their peers.

No single sector is singled out but the ABI stressed: “Complexity is discouraged. Shareholders prefer simple and understandable remuneration structures; simplicity can be improved by limiting variable remuneration to an annual bonus and one long term incentive scheme.”

The guidelines were welcomed by the Department for Business, Innovation and Skills (BIS) which is introducing measures to give shareholders more powers to clamp down on boardroom excess. From next year, firms will be required to publish a single number for an executive’s pay to avoid the situation where numerous figures can be produced due to the complexity of bonuses awarded in the past and in current years.

“We welcome the ABI’s emphasis on simplicity in pay and long term incentives linked to company strategy and performance. We encourage all shareholders to engage with the companies they own and drive this change, and with the new reforms we are bringing in next year, they will have even more power to do so,” BIS said.

The ABI called for the proposed disclosures from companies to include details of basic salary, with the scope for rises in the future; annual bonuses; the grants of shares as long term incentives, when those plans will pay out including pension provision.

“Under the current [BIS] proposals, there is no specific requirement for companies to disclose the [remuneration] committee’s positioning of remuneration potential against peers. Investors find this form of disclosure informative and think it should be included as a matter of course,” the ABI added.

The ABI repeated its concern about the “quantum of remuneration”. “Undeserved remuneration undermines the efficient operation of the company. Excessive remuneration adversely affects its reputation and is not aligned with shareholder interests. Shareholders are likely to object to levels of pay that do not respect the core principles of paying no more than is necessary and a linkage to sustainable long- term value creation,” the guidelines warn.

The ABI also warned that annual meetings in 2012 had shown shareholders were prepared to vote against or abstain in the votes for non-executive directors, who must now stand for annual re-election.

“Shareholders will scrutinise but not micro-manage” setting of executive pay, which is carried out by non-executive directors.


Xstrata chairman steps down as shareholders reject £140m pay deal

21 Nov

Sir John Bond is to step down as chairman of the £50bn natural resources giant Glencore Xstrata almost as soon as it is created after shareholders finally approved a £50bn takeover of Xstrata by Glencore but rejected “egregious” £140m retention bonuses.

The City grandee and current chairman of Xstrata had been slated to lead the board of the enlarged group but ended up irking his own investors, first by attempting to persuade them to accept Glencore’s initial approach at what was seen as a low price, and then by proposing enhanced terms for the miner’s top managers after one major shareholder forced Glencore into increasing its offer.

Xstrata’s extraordinary general meeting in Zug, Switzerland, approved the takeover.

Afterwards, Bond said in a statement: “In the light of shareholders’ decision not to support the board’s recommendation, I have informed the Xstrata board and Glencore’s current chairman that, once the merger has completed, I intend to instruct the board to commence an orderly process to appoint a new independent chairman of Glencore Xstrata. Upon the satisfactory conclusion of the search process, overseen by the Glencore Xstrata board nominations committee, I will step down.”

While the timing of Bond’s announcement was a surprise, most observers had been expecting him to be ousted shortly after the takeover was completed and it was clear from Tuesday’s votes that many shareholders had been upset by the way the whole process had been handled.

David Trenchard, vice chairman of Knight Vinke, a top 20 shareholder which voted against all Xstrata proposals, called the planned £140m of bonuses for Xstrata bosses “egregious” and indicated Knight Vinke would be spearheading a campaign to ensure shareholders were represented more effectively by the new board.

He told the meeting: “We have no confidence in the independence and robustness of the current Xstrata board. Good governance must now take centre stage. We intend to broaden our discussion with fellow shareholders to ensure that happens.”

Following Bond’s announcement, Trenchard added: “This is the first step of what needed to be done. It is good news.

“The important thing is that the board appoints a sufficiently robust chairman to represent shareholders with what is clearly a strong presence of Glencore on the board.”

In a series of complex votes, investors defeated a plan to increase incentives for Xstrata executives, with 32.15% of voted shares failing to back a proposal that needed 75% of votes in support. A second resolution asking investors to back a takeover without the pay scheme won 78.88% of votes, limping past the 75% threshold for the deal to be approved.

One Xstrata adviser said: “I’m surprised how high the ‘no’ vote was [on the second resolution]. Everyone knew last week [when Qatar Holding said it would back the deal but not the incentive scheme] you had to vote for the second resolution if you wanted the deal to go through.”

The tie-up was approved by 90.08% of shareholders who voted at the EGM. After receiving the news, Bond told the meeting that the takeover had “received shareholder approval”.

The deal will create a mining and commodity trading business with a combined market capitalisation of £50bn. It has taken nine months to get this far, after Glencore chief executive Ivan Glasenberg was forced into a U-turn over price by Qatar Holding, which had built a blocking stake. The impasse was only resolved after former prime minister Tony Blair intervened.

The merger of the miner and the commodity trader now faces regulatory hurdles, including a decision later this week by EU competition officials over whether to open an in-depth investigation.

Earlier in the day, Glencore shareholders had voted overwhelmingly in favour of the long-awaited takeover. As expected, a huge majority of investors supported the tie-up, with 99.4% of those who voted backing the resolution.


Eurozone crisis live: Anger in Greece as debt talks fail

21 Nov

Good morning, and welcome to our rolling coverage of the eurozone crisis.

Greece’s international lenders have failed to agree a deal over its bailout package, leaving the country’s future in doubt again.

After overnight negotiations in Brussels, eurozone finance ministers, the European Central Bank and the International Monetary Fund again admitted that they could not reach agreement on how to bring Greece’s debts down to a sustainable level.

Talks broke up around 3.30am GMT, with weary participants telling reporters that some progress had been made.

Not enough, though. Instead, the eurogroup intends to meet again on November 26th for another go.

News that the eurozone had flunked its Greek test, again, sent the euro sliding (down half a cent to $1.275). It has also sparked disappointment in Greece, after it met its side of the bargain by agreeing tough austerity plans.

I’ll be tracking all the news and reaction to this latest setback in the crisis through the day, along with other key events in the world economy.