Archive for June, 2011

Exclusive: S&P to deeply cut U.S. ratings if debt payment missed

Thursday, June 30th, 2011 | Finance News

NEW YORK (Reuters) – The United States would immediately have its top-notch credit rating slashed to "selective default" if it misses a debt payment on August 4, Standard & Poor's managing director John Chambers told Reuters.

Chambers, who is also the chairman of S&P's sovereign ratings committee, said on Tuesday that U.S. Treasury bills maturing on August 4 would be rated 'D' if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

"If the U.S. government misses a payment, it goes to D," Chambers said. "That would happen right after August 4, when the bills mature, because they don't have a grace period."

Fears of a technical default have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week. Even a brief default by the United States would immediately increase the country's borrowing costs, weighing on the fragile economic recovery and eroding the dollar's status as a reserve currency.

On August 4, the Treasury Department is due to pay off $30 billion in maturing short-term debt.

With the debt talks stalled, new ideas are surfacing such as prioritizing debt payments. But Treasury Secretary Timothy Geithner warned lawmakers on Wednesday that such a move would still cause investors to shun Treasury securities.

Geithner said that because the United States now borrows roughly 40 cents of every dollar it spends, prioritizing payments with no debt limit increase would require cutting 40 percent of all government expenditures.

S&P is not the first agency to say it will downgrade the United States if a payment is missed. Rival credit rater Moody's on June 2 was the first to say it would downgrade the United States shortly after a possible ceiling-related default to the Aa range.

Moody's on Wednesday said a U.S. credit downgrade would also affect the ratings of some states and municipalities with strong credit links to the federal government.

Chambers insisted that the likelihood of a U.S. default is "extremely low," as S&P expects a last-minute increase to the country's debt ceiling just like it has happened more than 70 times since the 1960s.

He also noted a default on U.S. Treasuries -- a benchmark against which all other debt is measured -- would dwarf any worries about U.S. credit ratings as global markets would crumble.

Chambers made clear, however, that S&P is more worried about the ability of the government to meaningfully cut its deficit over the next two years, with presidential elections in 2012 making a bipartisan agreement much tougher.

S&P is so far the only of the big-three credit ratings agencies to revise the outlook on the U.S. AAA credit rating to negative. It has said it sees a one-in-three chance of a downgrade within the next two years.

Moody's Investors Service and Fitch Ratings have expressed concern about the pace of budget negotiations in Washington, but still maintain a stable outlook on U.S. ratings.

Yet they have been more vocal about the risks of a "technical default" in August. Fitch said earlier this month it would cut U.S. issuer ratings to "restricted default" if the government misses a more substantial debt payment on August 15.

The Treasury reached the country's $14.3 trillion debt limit on May 16 and has been making use of extraordinary measures to keep servicing its debt since then. It will run out of alternatives to avoid a default on August 2, Geithner has said.

(Editing by Carol Bishopric)


Trichet flags ECB rate rise with "strong vigilance"

Thursday, June 30th, 2011 | Finance News

BRUSSELS (Reuters) – The European Central Bank signaled it would raise interest rates again next week as data showed inflation in June stabilized well above the bank's target.

"We are strongly determined to secure that inflation expectation remain firmly in-line (with our expectations)," ECB President Jean-Claude Trichet told the European Parliament's economic and monetary affairs committee in regular testimony.

"The current monetary policy is accommodative and ... as I said we are in a state of strong vigilance," he said.

The phrase "strong vigilance" has regularly been deployed to signal a rate hike at the next meeting and the ECB is meeting on interest rates next Thursday.

The euro hit a fresh three-week high against the dollar in response, while it also remained supported as Greece moved a step closer to securing international aid after voting in favor of austerity measures.

The European Union's statistics office said consumer prices in the 17 countries using the euro were 2.7 percent higher in June than a year earlier, the same as in May. Economists polled by Reuters had forecast a figure of 2.8 percent.

The ECB wants to keep inflation below, but close to 2 percent and already raised its refinancing interest rate in April by 25 basis point to 1.25 percent to curb price growth.

No breakdown of monthly data is available with the early estimate, but the June inflation is likely to be largely an result of more expensive oil.

"There are signs that euro zone price pressures are starting to ease, although much will clearly depend on oil price developments," said Howard Archer, economist at IHS Global Insight.

"Slowing euro zone growth after the first-quarter spike up and still relatively high unemployment are likely to put a brake on underlying inflationary pressures," he said.

"It is notable that the European Commission's business and consumer confidence survey for June showed consumers' inflation expectations falling back appreciably for a second successive month and pricing expectations among companies falling back in all sectors," he added.

Trichet's use of the key "strong vigilance" phrase to signal a rate rise ends market speculation that the bank could delay another increase in borrowing costs because of the debt crisis in Greece and the contagion threat it poses to other euro zone countries.

But economists said Greece's problems and their potential impact on the euro zone could still make the bank delay the next interest rate rise, which economists expect will happen later this year, taking the refinancing rate to 1.75 percent.

"Slowing euro zone growth, evidence that underlying inflationary pressures remain moderate and still serious concerns over the Greek situation suggest that the ECB could hold off from acting for some time to come after the signaled July interest rate hike," Archer said.

(Reporting by Jan Strupczewski, additional reporting by Paul Carrel in Frankfurt, editing by Rex Merrifield)


Greece set for final vote on cuts after riots

Thursday, June 30th, 2011 | Finance News

ATHENS, Greece – Greek lawmakers are set to pass a bill Thursday to fast-track fresh austerity measures demanded by creditors, following two days of rioting in Athens that left some 200 people injured.

Greece's international creditors have insisted that Greece back an austerity package and the associated implementation bill in return for giving more money to the country. On Wednesday, parliament approved the five-year euro28 billion ($40 billion) package of spending cuts and tax increases, leaving details of the cuts to be approved Thursday.

Once, and if, Thursday's bill to implement the austerity measures is cleared, the eurozone and the International Monetary Fund will be in a position to release the euro12 billion ($17 billion) that is due from last year's package of rescue loans for Greece.

Without the financial assistance, Greece was facing bankruptcy as soon as the middle of July. A Greek default on its debts could trigger a major banking crisis and potential turmoil in global markets, similar to what happened when the Lehman Brothers investment house collapsed in 2008 in the United States.

As a result, markets around the world breathed a sigh of relief after Wednesday's vote.

The euro12 billion will tide Greece over till mid-September, according to government officials, but it looks like it will need a lot more money in the years to come. Creditors are considering giving Greece a second, major support package to cover upcoming financing gaps.

Last year's euro110 billion ($159 billion) package was predicated on Greece being able to tap bond market investors for cash next year but with the country's interest rates at exorbitant levels, that looks highly unlikely.

The austerity measures being imposed in Greece in return for outside help are being met with resistance.

On Wednesday, riots erupted for a second day outside the parliament in Athens, with police clashing and firing tear gas at protesters after a failed attempt to blockade the building.

Government officials said they were unhappy with policing of the riots which lasted nearly 10 hours Wednesday, but police spokesman Thanassis Kokkalakis said they had succeeded in protecting parliament and preventing serious injuries and property damage.

No major protests were planned Thursday, and power company workers called off a strike which had caused days of rolling blackouts.

A civil servants' union said it would stage a central Athens rally later Thursday.