Must-Know News - Jan. 19

• 1) Investment Line: Japanese debt fears could spark global sovereign debt meltdown

“Borrowing is set to surpass tax revenues as the Japanese government’s most important source of income this year, raising fears that even the slightest increase in bond yields could spark a global sovereign debt crisis.”

“Dylan Grice, a strategist at SG, warns: ‘If international investors were to demand triple the current 1.5% yield, pricing JGBs in line with international bond market peers the game would soon be up because Japan’s current debt service already amounts to 35% of pre-bond issuance revenues.

‘Next year, tax revenues will be less important than borrowing as a source of income. So I doubt there is any yield international capital markets can find acceptable that will not bankrupt the Japanese government.’”

……………………..1A) Japan Bond Risk Jumps to Nine-Month High on Japan Air, Greece

“The cost of protecting Japanese sovereign bonds from default climbed to a nine-month high amid concern that Japan Airlines Corp. may file for bankruptcy as soon as today.

Five-year credit-default swap contracts on Japan’s sovereign debt increased to 81 basis points yesterday, according to prices from CMA DataVision in New York. That’s doubled since Sept. 17 and is the highest since April 3, the data show.”

• 2) Millions needed for city pensions (San Diego)

“Just when San Diego city officials thought they had closed a $179 million budget gap, another has opened up because more money will be needed to pay for employee pensions.

The city will have to contribute $231.7 million to the retirement fund in the fiscal year that starts in July. That’s up $19 million from the forecast used when the last budget gap was closed in December.

The increase is a result of the fund’s investment losses and more employees signing up for pension benefits because of fears they will be cut.”

“A new report from the city’s pension system indicates that the city has 66.5 percent of the money it needs to cover promised pensions — the lowest level since 2004. The amount the city lacks to meet its long-term pension liability is $2.1 billion as of June 30, up from $1.3 billion in June 2008.”

• 3) Record new debt in Germany

“Budget consolidation will be necessary in the coming years to help maintain the stability and credibility of the euro, German Finance Minister Wolfgang Schaeuble said Tuesday, defending his first budget which foresees record new debt. ”

“Defending his government’s 2010 budget, in which more than one quarter of the EUR325.4 billion earmarked for spending will be funded with new debt, Schaeuble said that high debt this year is necessary because of the severeness of economic crisis.

But he pledged that the government would cut back on borrowing in the coming years.

He warned that without budget consolidation, inflation expectations and long-term interest rates would rise, which would push up refinancing costs.

“It is in our best interest to maintain the stability of the euro and its credibility on international markets” also in the coming years, Schaeuble said.

Germany’s budget deficit is likely to reach almost 6% of gross domestic product this year, after a deficit of 3.2% of GDP last year, he said. He said the country will fulfill its commitment to get the deficit in line with the 3% threshold set by the European Union in 2013. ”

• 4) Greece May Need to Do More on Debt, EU Ministers Say

“European finance chiefs said Greece may have to step up its efforts to tackle a fiscal crisis that threatens to spread to other countries across the region.”

“Greece last week presented its plan to push down a budget deficit that is still more than four times the EU limit of 3 percent of gross domestic product. Moody’s Investors Service said today that the plan’s success “cannot be taken for granted” and kept its rating on the nation’s debt at A2, the lowest among the 16 euro member states. ”

• 5) Advanced economies: the risky rich (Nouriel Roubini)

“A weak economic recovery and an aging population are likely to increase the debt burden of many advanced economies, including the U.S., the U.K. and Japan.

More ominously, monetization of these fiscal deficits is becoming a pattern in many advanced economies, as central banks have started to swell the monetary base via massive purchases of short-and long-term government paper. Eventually, large monetized fiscal deficits will lead to a fiscal train wreck and/or a rise in inflation expectations that could sharply increase long-term government bond yields and crowd out a tentative recovery.”

“If America’s Democrats lose in November’s midterm elections, there’s a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts. Monetizing the fiscal deficits would then become the path of least resistance: Running the printing presses is much easier than politically painful deficit reduction.

But if the U.S. does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the U.S. dollar would rise significantly. ”

• 6) Fitch: Large AAA Must Set Out More Fiscal Consolidation In 10

“The large ‘AAA’ sovereign borrowers - like the US, UK, France and Germany - have ‘exceptional financing flexibility’, Fitch Ratings said today, but warned this is not enough to maintain their current rating.

The major AAA states must set out further credible consolidation plans in 2010 to secure their triple-A ratings, the ratings agency announced today in its ‘Sovereign Review and Outlook’ for 2010:

“While current ratings incorporate a further substantial rise in public indebtedness, all major AAA sovereign governments need to articulate more credible and stronger fiscal consolidation plans during the course of 2010 to underpin confidence in the sustainability of public finances over the medium term and the commitment to low and stable inflation”.

The UK, Spain and France particularly need to ‘articulate’ credible consolidation plans this year, “given the pace of fiscal deterioration and the budgetary challenges they face in stabilising public debt.”

“Failure to do so will greatly intensify pressure on their sovereign ratings,” Fitch states. ”

• 7) Standard Life Warns U.K. Over Credit Rating

“The U.K. government’s triple-A credit rating is “extremely vulnerable” and the economic and political situation “highly toxic,” one of Britain’s largest money-management firms warned Monday.

Standard Life is the latest asset manager to express concern about the U.K.’s ballooning public-sector debt and the risk that it will lose its status as one of the world’s most creditworthy borrowers. Standard Life manages £156.5 billion ($254.45 billion) of assets, according to its Web site. ”

………………..7A) Council pension deficit is ‘going to double’

“The pension deficit for local councils in England and Wales could hit £60 billion this year, according to figures unveiled by the Liberal Democrats.

According to the party’s shadow work and pensions secretary Steve Webb, the figures he discovered suggested the deficit might have doubled since it was valued at -£27 billion over two years ago.

The study of pension fund managers in charge of local government pensions discovered that 83 out of 87 schemes were in deficit in 2007.”

• 8) Portugal Debates Razing Soccer Stadiums to Cut Public Costs

“Portuguese cities are under pressure to demolish stadiums built for the 2004 European soccer championships as the government prepares to rein in a widening deficit.”

“Portugal’s 2009 deficit overshot a government forecast of 5.9 percent of gross domestic product, according to Finance Minister Fernando Teixeira dos Santos. On Dec. 7, its credit- rating outlook was cut to negative from stable by Standard & Poor’s, which cited the widening deficits.

Portugal’s debt load will equal 85 percent of GDP this year, according to the European Commission. Portugal and Greece must implement “politically difficult fiscal retrenchment if they are to avoid an inexorable decline in their debt metrics,” Moody’s said Jan. 13. ”

• 9) Dubai aid falls to $5 billion

“”The question is whether there will be more funds coming in; because as things stand today, Dubai without further support will find it very difficult to drive a favourable bargain with its creditors,” said a Gulf-based banker. ”

………………..9A) Borse Dubai Faces $2.5B Bank Loan Maturing By Feb 19

“Government-owned Borse Dubai has to pay back, or refinance a $2.5 billion loan due next month, marking the next major test of the emirate’s ability to pay its debts, according to people familiar with the matter.

“Dubai still needs to cough up cash for these loans and the market is increasingly getting nervous as the repayment date draws near and the government maintains its usual silence,” a banker familiar with the loan, who declined to be identified, told Zawya Dow Jones. ”

• 10) Forecast: Debt to dwarf GDP

Former budget office chiefs say ’something has to give’

“A blue-ribbon panel that includes three former heads of the Congressional Budget Office is telling President Obama and the Democrat-controlled Congress that the federal deficit must be cut now or the national debt within about two generations will be 600 percent of the gross domestic product.

“The debt level of the United States is unsustainable, something has to give,” said Rudolph Penner, former head of the CBO and co-chair of a report issued last week by the National Research Council and the National Academy of Public Administration. ”

• 11) IRS to Expand Audits as Cash Runs Low

“BOSTON (TheStreet) — The Internal Revenue Service, trying to recoup some of the estimated $14 billion that companies underpay in employer taxes a year, plans to wage a three-year campaign to audit 6,000 businesses.

The cash-strapped government, which separately said it wants to put a levy on large financial firms that received bailouts, will zero in on worker classification, fringe benefits, reimbursed expenses and executive compensation. The selection of the audited companies will be random, and both big and small businesses will be scrutinized. ”

• 12) Illinois Fiscal Crisis

“The state of Illinois is in a very difficult financial situation. The state not only has a $5.7 billion deficit, it is not paying many of its bills.

The state owes the University of Illinois over $400 million dollars. There are fears that the University won`t be able to make payroll in March without some action.

It is reported that some state employees are having to pay their medical bills when they receive services because doctors aren`t being paid by the state. The state owed $5.1 billion in unpaid bills at the end of 2009. That number doesn`t include an estimated $1.4 billion in Medicaid and group health care bills that haven`t been processed and another $2.25 billion in short-term loans that are due.

Jim Nowlan, senior fellow at the University of Illinois` Institute of Government and Public Affairs describes the situation as, `I would describe bankruptcy as the inability to pay one`s bills.`

Legal experts believe that cities and counties can declare bankruptcy but that states can`t. ”

• 13) Budget Challenges - Georgia Not Alone

“Georgia is not alone, or even in the worst shape, when it comes to battling 2010 budget problems. Between them California, Illinois, New Jersey, New York, and Florida go into their 2011 budget cycles staring at a combined deficit of over $46 billion.

By state, the amounts are:

California - $14.4

Illinois - $12.8

New Jersey - $8

New York - $6.8

Florida - $4.7

If you look at the numbers as a percentage of the state budget, Arizona ($2.3 billion) joins California and Illinois as having deficts greater than 40% of the budget total.

Alaska, Nevada, New Jersey and New York face gaps of at least 30% of planned spending.

Federal `stimulus` funds which replaced state spending with Federal funds, start to wind down in mid-2010, which is when many state`s 2011 fiscal years begin.”

• 14) Illinois’ pension bond is a gamble, and a desperate one at that

“With Gov. Pat Quinn and the Legislature unable to agree on a package of tax increases and spending cuts, however, kicking the problem into the future looked like the easy way out. So, earlier this month, the state sold $3.5 billion in taxable bonds that it must repay over five years.

The interest rate tops out at 4.42 percent. That doesn’t sound like a lot, but it’s higher than the yield on A-rated corporate bonds.”

“The difference is significant because a pension bond is essentially an arbitrage play. Officials hope that when pension managers invest the money, they will earn more than the state is paying in interest. That would lower the state’s future pension expense, leaving some spare cash flow to repay the bonds.

The arbitrage game would be easy if you could find a low-risk investment that paid more than 4.42 percent. Right now, though, the only way for Illinois to win is for its pension funds to get lucky and make good money in the stock market.”

• 15) Mortgage-Bond Leverage Hits 10-to-1 as Markets Heal, RBS Says

“Wall Street firms are loosening the terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said.

Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime-jumbo home loans, said Scott Eichel, the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities.

“It’s getting very competitive,” Eichel said in a Jan. 14 interview at Bloomberg headquarters in New York. “We’re at the point where I don’t think we would feel comfortable if things go too much further.” ”

• 16) Iran Says Western Warships Would Be Targeted in Event of Attack

“Jan. 19 (Bloomberg) — Iran will target Western warships in the Persian Gulf should the country come under attack from the U.S. and its allies, Defense Minister Ahmad Vahidi said.

“Why are there so many warships in the Persian Gulf? Is it against Iran?” Vahidi told a conference today in Tehran on issues involving the Gulf region, according to the state-run Fars news agency. “Westerners know that these warships are the best target for an operation by Iran if they undertake anything against Iran.” ”

• 17)Is the US Economy Being Tanked by Mistake or by Intent?

At some point, seeing no way out, maybe a decision was made to default on our debts. There are rumblings that the world economy is being intentionally brought to its knees in order to usher in a one-world currency.

• 18) Oh, The Truth Is The Banks Are Insolvent? (Still) (Ben Johnson)

RealtryTrac says that three million foreclosures are likely this year and that as much as 23% of all mortgages are currently in negative equity.

- Saxplayer00o1