Econowrap: European downgrades, much more


The really big news comes from Europe, where another ratings agency delivered bad news to governments struggling with weakened economies, rising unemployment, and an increasingly troubled central currency.

Then there’s the latest commodity news from Afghanistan and some troubling oil news, plus some positive oil news from Nigeria, where a massive general strike over radically hike gas prices has united warring Christians and Muslims.

But we’ll start at home.

Unemployment claims rise

That Christmas hiring spike has been followed by the inevitable letdown, and a bigger one than economists had predicted.

From Shobhana Chandra of Reuters:

More Americans than forecast filed applications for unemployment benefits last week, raising the possibility that a greater-than-usual increase in temporary holiday hiring boosted December payrolls.

Jobless claims climbed by 24,000 to 399,000 in the week ended Jan. 7, Labor Department figures showed today in Washington. The median forecast of 46 economists in a Bloomberg News survey projected 375,000. The number of people on unemployment benefit rolls rose, while those receiving extended payments decreased.

Hiring by package delivery companies and retailers during the holidays to meet demand for gifts may now be giving way to an increase in dismissals. At the same time, claims figures are subject to greater volatility during this time of year, as the government has trouble adjusting the data for the seasonal swings in employment.

Read the rest.

Grim predictions for an unhappy new year

The pundit is economist Nouriel Roubini, who’s both a prof at NYU’s Stern School and a noted market strategy firm, and he has a lot more to say at EconoMonitor, and this excerpt is a small sample:

US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?

First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.

At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.

Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).

Read the rest.

Weep for those JP Morgan banksters

Yeah, the headline’s ironic. But when even the banksters are taking a haircut, you know things are really, really bad.

But given that the company’s 2011 earnings fell by nearly a quarter, they’ll have to make do with smaller bonuses.

From E. Scott Reckard and Nathaniel Popper of the Los Angeles Times:

JPMorgan Chase & Co. kicked off bank earnings season with a 23% decline in profit and sagging revenue that investors saw as an ominous precedent for other big financial companies that report results next week.

An increase in consumer credit card usage and an uptick in business lending couldn’t offset weaknesses elsewhere at JPMorgan, Friday’s report showed. Investment banking, where revenue fell 30%, was particularly hard hit.

Read the rest.

European credit downgrades, starting with France

Standard & Poor downgraded a flock of European countries Friday, and we’ll start with France because President Nicolas Skarozy is half of the Merkozy team which has been calling the shots and changing governments in a desperate bid to save both the European Economic Community and its sagging euro.

From Agence France-Presse:

France’s finance minister confirmed on Friday that the ratings agency Standard and Poor’s had warned the government of its intention to strip the country of its triple-A credit rating.

Speaking on public television, Francois Baroin said the firm would bring its rating down one notch to AA+, but insisted that it was the government and not private agencies or the markets that would decide on economic policy.

“It’s not good news, but it’s not a catastrophe,” Baroin told the France 2 network after crisis talks with President Nicolas Sarkozy, adding: “It’s not ratings agencies that decide French policy.”

European markets had expected the downgrade, which was widely reported during the day even if S&P was not expected to confirm it until later in the evening, and stocks only slid back slightly.

But the single currency itself was rocked by the news, which coincided with a breakdown in talks to agree a Greek debt writedown, and the euro slipped to 16-month lows against the dollar.

Read the rest.

Will the downgrade hurt Sarko at the polls?

Given that the first round of presidential voting is just weeks away, the news has got to have the French president sweating.

From Liz Alderman of the New York Times:

Keeping that top credit rating had long been a badge of honor for France — and a political point of pride for President Nicolas Sarkozy, who now enters a difficult re-election campaign with a stigma that his opponents quickly moved to exploit.

News of the downgrade blared from French airwaves and on Web sites, as the finance minister, François Baroin, declared that the event was “not a catastrophe.” Members of the opposing Socialist party wasted no time painting a gloomier picture. “He’s the president of the degradation of France,” Martine Aubry, the party’s secretary, said of the French president.

Mr. Sarkozy had often boasted of France’s gilt-edged standing, and the looming prospect of its loss had recently become a prime topic of political discussion, a hot issue on talk shows and fodder for comedians and political cartoonists.

But whether the S.& P. downgrade will have a marked effect on France’s cost of borrowing money is something only the coming months and weeks will tell.

Read the rest.

And it wasn’t just France on the chopping block

Indeed, there are now more downgraded EU countries than there a nations with the rating agency’s coveted AAA rating.

And it’s looking especially tough for Greece, of which we’ll have more below.

From Matthias Sobolewski and Dina Kyriakidou of Reuters:

Standard & Poor’s downgraded the credit ratings of nine euro zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday 13th for the troubled single currency area.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the U.S.-based ratings agency said in a statement.

In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.

If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone’s most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.

Read the rest.

More on the impact on France

Again , from Agence France-Presse:

The looming debt rating downgrade of France and Austria by Standard and Poor’s on Friday will not only push up their borrowing costs, it also threatens to hurt their economies, analysts said.

One immediate consequence of the ratings downgrade will be that the governments concerned have to pay more to borrow money from the markets.

In the case of France, that will lead to an almost immediate jump in rates for 10-year bonds which could rise from around 3.0 percent “to 4.0 percent in the case of a downgrade by one notch and to 5.0 percent with a two-notch downgrade,” said Nicolas Bouzou of the Asteres economic analysis company.

>snip<

Higher interest rates drive up the cost of debt, adding to the debt burden itself and reducing governments’ room for manoeuvre.

“That could generate self-fulfilling phenomena as in the case of Italy,” which was forced to push through austerity plans in the wake of the downgrade of its debt by both S&P and Moody’s in the autumn, Bouzou said.

Banks could be hit in a knock-on effect because of their use of sovereign debt as guarantees to borrow funds from the markets.

And that, in turn, could harm the real economy, because banks will try to pass on the higher costs via higher interest rates to businesses and households, or even cut back on lending, said Barclays Capital economist Thorsten Polleit.

Read the rest.

The latest bad tidings from Athens

By way of Liz Alderman and Rachel Donadio of the New York Times:

Just as significant as the ratings downgrades may be the suspension on Friday of the creditor talks in Greece — whose debt S.& P. long ago gave junk status.

In October, the European Union pledged to write off 100 billion euros ($127.8 billion) of Greece’s debt if bondholders would agree to voluntarily accept 50 percent losses on their Greek holdings. Such an arrangement, known as private-sector involvement, or P.S.I., has been pushed by Chancellor Angela Merkel of Germany as a way of forcing banks, not only European taxpayers, to foot the bill for bailing out Greece.

But talks broke down on Friday between Greece and the commercial banks.

“Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach,” the Institute of International Finance, which negotiates on behalf of the banks, said in a statement on Friday, after its leader, Charles Dallara, left Athens.

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward,” the statement added, “has not produced a constructive consolidated response by all parties.”

The reference to a “voluntary approach” might be a not-so-subtle message that if Europe pushed too hard on this point, then the creditors could no longer accept the agreement as a voluntary one. That is crucial, because an involuntary debt revamping would be seen by creditors as a default — a step Greece and Europe are trying hard to avoid.

If Greece defaults, it could set off the activation of credit default swaps — a type of financial insurance. If the issuers of that insurance have to start paying up, many analysts fear the same sort of falling dominoes of i.o.u.’s that cascaded through the financial industry after the subprime mortgage market collapsed in the United States in 2007 and 2008.

Read the rest.

One more warning of a return to the “Dirty Thirties”

Back when esnl was a tad, folks back in Kansas didn’t use the term “Great Depression” to describe the bleak years of the 1930s; we don’t even recall hearing the phrase, except in school.

Instead, folks talked of “the Dirty Thirties,” referring to the combined effects of the Great Depression and the dust storms that swept the Great Plains during that great era.

Now, with the combined effects of economic collapse and climate change, maybe folks thirty years from now will be talking of the Dirty Tens.”

Consider this from Hugo Duncan of the London Daily Mail:

The financial crisis threatens to drag the world back to the dark days of the 1930s and wipe out the gains of globalisation, a hard-hitting report said tonight.

In its annual assessment of the global economy, the World Economic Forum warned of a rising tide of protectionism, nationalism and protests as seen during the Great Depression.

It blamed the ‘chronic’ state of government finances and the widening gap between the rich and poor as the world lurches from one crisis to another.

The WEF, which holds its yearly meeting for leading politicians, economists, businessmen and academics in the Swiss ski resort of Davos later this month, said the ‘seeds of dystopia’ have been sown.

It warned that without action to tackle youth unemployment and support an ageing population the world would become ‘a place where life is full of hardship and devoid of hope’.

The survey of 469 global experts warned the world was ‘vulnerable’ to fresh economic shocks, major social unrest, and food and water crises.

Read the rest.

Italian cabbies stage their own austerity protest

From euronews:

Row upon row of taxi sat empty and idle in Milan on Friday, as drivers called a one-day unauthorised strike in Italy.

Vehicles were not taking fares in Rome, Turin or Naples either, in a protest against new measures proposed by Prime Minister Mario Monti. The government wants to liberalise the industry, creating more licences and more competition.

However, some like taxi driver Sergio Albano, said work was already scarce: “If the cake is now going to be divided into 10 slices as opposed to three – you tell me, what am I going to eat at the end of the month?”

>snip<

Taxi drivers have scheduled another strike on January 23 and in Rome they plan on blocking traffic in the streets near the Circus Maximus on Monday.

Read the rest.

Italian unemployment rises again, youth hit hardest

Nearly one in three young Italian jobseekers hasn’t been able to find work according to the latest numbers from Rome.

The real kicker is that one of the key austerity regime moves has made it even tougher for younger Italians to find a job.

Christopher Emsden reported for the Wall Street Journal last week:

Italy’s official jobless rate rose to 8.6% in November, an 18-month high, and youth unemployment rose above 30% for the first time ever, Istat announced Thursday.

With the employers’ lobby Confindustria predicting a 1.5% contraction in gross domestic product next year, bunched in the first six months of the year, the prospects are fairly gruesome. Add to that all forecasters assume that an eventual return to growth in Italy will be driven by exports as domestic demand shrinks further or at best stabilizes.

While Italy’s official unemployment rate doesn’t seem so bad – it’s still below the euro area average – that only reflects the low rate of participation in the nation’s labor force. Some 37.8% of the country’s adults are neither employed nor looking for a job. Significantly, that figure actually declined from a year earlier, even as the jobless rate rose by 0.4 percentage points.

>snip<

Istat noted that the number of residents under age 34 who were unable to find jobs rose by 157,000 in the third quarter from the same period a year earlier. That will inevitably be noted as a virtual mirror of the estimated 168,000 Italians over 55 who, in a shift from the country’s traditional retirement pattern, kept working this year.

There’s a catch. Most of the latter have permanent contracts, the kind covered by Article 18, whereas two-thirds of the young adults who manage to have jobs do not. In short, the de facto labor law for younger generations has already been liberalized, while doing so now for older people would likely strand them before being able to receive pensions.

Read the rest.

Italy has another worry: Wiseguy vultures

When money is tight, there’s always one group with plenty of cash on hand and willing to lend.

The only problem is all the strings attached, even garottes.

From Valentina Za of Reuters:

When Italian construction group Perego was struggling back in 2008, a white knight flush with cash rode to its rescue.

Unfortunately the “knight” was a powerful mafia organization, the ‘Ndrangheta, which went on to take control of the family-owned Lombardy business and tried to steer it on an expansion path, Italian justice authorities say.

“Luckily it failed,” said Milan judge Giuseppe Gennari. The group has since collapsed and former chairman Ivano Perego is awaiting trial for opening his door to the crime syndicate.

As the Italian economy slips into a recession and its banks answer regulatory pressure by curbing loans, more troubled firms could be tempted to follow in Perego’s footsteps.

Former Bank of Italy governor Mario Draghi warned back in March 2011 that the economic crisis of the last three years had made companies more vulnerable to the mafia.

Since then, the situation has only worsened.

Read the rest.

Price soars for another commodity

Call it a shot in the arm for the Afghan economy that’s also a shot in the arm for countless junkies.

From Talia Ralph of GlobalPost:

The price of opium in Afghanistan rose dramatically in 2011, a UN report released Thursday has found.

The 2011 Afghan Opium Survey, an annual report done by the UN Office on Drugs and Crime (UNODC) and the Ministry of Counter Narcotics, found that opium trafficking in Afghanistan saw a 133 percent increase in value from 2010.  Income from the drug amounted to over $1.4 billion, or 9 percent of the country’s total GDP, according to the United Nations.

Prices began to go up in 2010 after the poppy crop was hit by a fungal disease, BBC News reported.

>snip<

Around 90 percent of the world’s opium comes from Afghanistan, according to the UN. The high price of opium means poppy cultivation is still a lucrative business for Afghan farmers, especially since the price of wheat has dropped, AFP reported. Last year, opium generated 11 times more revenue for Afghan farmers than wheat.

Read the rest.

Saudi oil production nears another peak

And that, in turn, could lead to a crisis should Israel and the U.S. go to war with Iran, something which seems increasingly likely, given Israel’s scientist-killing hit squads and the increasing tough talk here in the U.S.

From Reuters:

Top oil exporter Saudi Arabia is nearing its comfortable operational production limits and may struggle to do much to make up for shortages that arise from new sanctions imposed on Iran by the West, Gulf-based sources said.

The kingdom, now pumping just under record rates of 10 million barrels per day, has poured billions of dollars into its vast oil fields, which on paper should ensure it has the ability to ramp up to 12.5 million bpd.

Long-standing oil policy by Riyadh, the heavyweight in the Organization of the Petroleum Exporting Countries (OPEC), sets aside some 1.5 million bpd as protective spare capacity.

But industry sources said pumping anywhere near the declared production capacity might involve extracting heavy crudes the market might not want. It would also be difficult to sustain higher rates for lengthy periods.

Read the rest.

Occupy Nigeria: Massive protests over gas price hike

After major cuts in fuel subsidies that resulted in a 120 percent hike in the cost of fuel, millions of Nigerians have taken to the streets in protest over a move that leaves them faced with paying a day’s wage for a gallon of gas.

Unions have joined the walkout and are threatening to shut down oil fields in which the U.S. depends.

The latest from Elisha Bala-Gbogbo and Chris Kay of Bloomberg.

Nigeria’s biggest labor federations will halt street protests this weekend to give negotiators time to end a dispute over fuel subsidies that has sparked a nationwide strike, the Nigeria Labour Congress said.

The strike will continue, and the main oil workers’ union, Pengassan, said it will meet tomorrow to decide whether to proceed with plans due to start on Jan. 15 to shut down fields operated by companies such as Royal Dutch Shell Plc (RDSA) in Africa’s biggest oil industry.

The general strike entered its fifth day after President Goodluck Jonathan and labor leaders failed yesterday to resolve the dispute over the government’s decision on Jan. 1 to scrap 1.2 trillion naira ($7.4 billion) in fuel subsidies that more than doubled gasoline prices. The action has limited trading in stocks and the national currency, closed ports and banks and sparked street protests.

Read the rest.

The mass action has had another beneficial side effect, the discovery of common cause between warring Muslim and Christian factions which have been engaged in a bitter civil war.

More from Jon Gambrell of the Associated Press:

A human wave of more than 20,000 surrounded the Muslim faithful as they prayed toward Mecca Friday, as anti-government demonstrations over spiraling fuel prices and corruption showed unity among protesters despite growing sectarian tensions in Africa’s most populous nation.

While violence sparked by religious and ethnic divisions left about 1,500 people dead last year alone in Nigeria, some hope the ongoing protests gripping the oil-rich nation will bring together a country that already suffered through a bloody civil war.

“It shows that Nigeria is now coming together as one family,” said Abdullahi Idowu, 27, as he prepared to wash himself before Friday prayers.

Read the rest.

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