A Walk-Thru The First Shadow Bank Run… 250 Year Ago

Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn’t.

As the NY Fed’s blog (whose historical narratives are far more informative and accurate than its attempts to “explain away” the labor force participation collapse) recounts, the first tremor in the shadow banking system took place not in 2008 but some 250 years ago… during the Commercial Credit crisis of 1763, whose analog today is the all too shaky and largely unregulated core shadow banking system component: Tri-Party Repo.

From the NY Fed blog, by James Narron and David Skeie:

Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market

During the economic boom and credit expansion that followed the Seven Years’ War (1756-63), Berlin was the equivalent of an emerging market, Amsterdam’s merchant bankers were the primary sources of credit, and the Hamburg banking houses served as intermediaries between the two. But some Amsterdam merchant bankers were leveraged far beyond their capacity. When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged. In this issue of Crisis Chronicles, we review how “fire sales” drove systemic risk in funding markets some 250 years ago and explain why this could still happen in today’s tri-party repo market.

Early Credit Wrappers

One of the primary financial credit instruments of the 1760s was the bill of exchange—essentially a written order to pay a fixed sum of money at a future date. Early forms of bills of exchange date back to eighth-century China; the instrument was later adopted by Arab merchants to facilitate trade, and then spread throughout Europe. Bills of exchange were originally designed as short-term contracts but gradually became heavily used for long-term borrowing. They were typically rolled over and became de facto short-term loans to finance longer-term projects, creating a classic balance sheet maturity mismatch. At that time, bills of exchange could be re-sold, with each seller serving as a signatory to the bill and, by implication, insuring the buyer of the bill against default. This practice prevented the circulation of low-credit-quality bills among market participants and created a kind of “credit wrapper”—a guarantee for the specific loan—by making all signatories jointly liable for a particular bill. In addition, low acceptance fees—the fees paid to market participants for taking on the obligation to pay the bill of exchange—implied a perceived negligible risk. But the practice also resulted in binding market participants together through their balance sheets: one bank might have a receivable asset and a payable liability for the same bill of exchange, even when no goods were traded. By the end of the Seven Years’ War in 1763, high leverage and balance sheet interconnectedness left merchant bankers highly vulnerable to any slowdown in credit availability.

Tight Credit Markets Lead to Distressed Sales

Merchant bankers believed that their balance sheet growth and leverage were hedged through offsetting claims and liabilities. And while some of the more conservative Dutch bankers were cautious in growing their wartime business, others expanded quickly. One of the faster growing merchant banks belonged to the de Neufville brothers, who speculated in depreciating currencies and endorsed a large number of bills of exchange. Noting their success (if only in the short term), other merchant bankers followed suit. The crisis was triggered when the brothers entered into a speculative deal to buy grain from the Russian army as it left Poland. But with the war’s end, previously elevated grain prices collapsed by more than 75 percent, and the price decline began to depress other prices. As asset prices fell, it became increasingly difficult to get new loans to roll over existing debt. Tight credit markets led to distressed sales and further price declines. As credit markets dried up, merchant bankers began to suffer direct losses when their counterparties went bankrupt.

The crisis came to a head in Amsterdam in late July 1763 when the banking houses of Aron Joseph & Co and de Neufville failed, despite a collective action to save them. Their failure caused the de Neufville house’s creditors around Amsterdam to default. Two weeks later, Hamburg saw a wave of bank collapses, which in turn led to a new wave of failures in Amsterdam and pressure in Berlin. In all, there were more than 100 bank failures, mostly in Hamburg.

An Early Crisis-Driven Bailout

The commercial crisis in Berlin was severe, with the manufacturer, merchant, and banker Johann Ernst Gotzkowsky at the center. Gotzkowsky’s liabilities were almost all in bills of exchange, while almost all his assets were in fixed capital divided among his silk works and porcelain factory. Berlin was able to mitigate the effects of the crisis when Crown Prince Frederick imposed a payments standstill for several firms. To prevent contagion, the prince also organized some of the first financial-crisis-driven bailouts after he examined the books of Gotzkowsky’s diverse operations. Ultimately, about half of Gotzkowsky’s creditors accepted 50 cents on the dollar for outstanding debts.

Meanwhile, banks in Hamburg and the Exchange Bank of Amsterdam tried to extend securitized loans to deflect the crisis. But existing lending provisions restricted the ratio of bank money to gold and silver such that the banks had no real power to expand credit. These healthy banks were legally limited in their ability to support the credit-constrained banks. To preserve cash on hand, Hamburg and Amsterdam banks were slow to honor bills of exchange, eventually honoring them only after pressure from Berlin. The fact that Amsterdam and Hamburg banks re-opened within the year—and some even within weeks—provides evidence that the crisis was one of liquidity and not fundamental insolvency.

The crisis led to a period of falling industrial production and credit stagnation in northern Europe, with the recession being both deep and long-lasting in Prussia. These developments prompted a second wave of bankruptcies in 1766.

Distressed Fire Sales and the Tri-Party Repo Market

From this crisis we learn that it is difficult for firms to hedge losses when market risk and credit risk are highly correlated and aggregate risk remains. In this case, as asset prices fell during a time of distressed “fire sales,” asset prices became more correlated, further exacerbating downward price movement. When one firm moved to shore up its balance sheet by selling distressed assets, that put downward pressure on other, interconnected balance sheets. The liquidity risk was heightened further because most firms were highly leveraged. Those that had liquidity guarded it, creating a self-fulfilling flight to liquidity.

As we saw during the recent financial crisis, the tri-party repo market was overly reliant on massive extensions of intraday credit, driven by the timing between the daily unwind and renewal of repo transactions. Estimates suggest that by 2007, the repo market had grown to $10 trillion—the same order of magnitude as the total assets in the U.S. commercial banking sector—and intraday credit to any particular broker/dealer might approach $100 billion. And as in the commercial crisis of 1763, risk was underpriced with low repo “haircuts”—a haircut being a demand by a depositor for collateral valued higher than the value of the deposit.

Much of the work to address intraday credit risk in the repo market will be complete by year-end 2014, when intraday credit will have been reduced from 100 percent to about 10 percent. But as New York Fed President William C. Dudley noted in his recent introductory remarks at the conference “Fire Sales” as a Driver of Systemic Risk, “current reforms do not address the risk that a dealer’s loss of access to tri-party repo funding could precipitate destabilizing asset fire sales.” For example, in a time of market stress, when margin calls and mark-to-market losses constrain liquidity, firms are forced to deleverage. As recently pointed out by our New York Fed colleagues, deleveraging could impact other market participants and market sectors in current times, just as it did in 1763.

Crown Prince Frederick provided a short-term solution in 1763, but as we’ll see in upcoming posts, credit crises persisted. As we look toward a tri-party repo market structure that is more resilient to “destabilizing asset fire sales” and that prices risk more accurately, we ask, can industry provide the leadership needed to ensure that credit crises don’t persist? Or will regulators need to step in and play a firmer role to discipline dealers that borrow short-term from money market fund lenders and draw on the intraday credit provided by clearing banks? Tell us what you think.

* * *

Fast forward to today when we find that the total collateral value in the Tri-Party repo system as of December amounts to $1.6 trillion.

… or 10% of US GDP. What can possibly go wrong.


    



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Consumers Max Out Their Credit Cards In Month When Personal Savings Tumble

One week ago we remarked that in the month of December, in order to fund their purchases of Holiday gifts and year-end trinkets, Americans burned through a whopping $46 billion in personal savings, in the process taking the US saving rate down to a one year low of 3.9% and dropping.

 

Today, we got the credit side of the ledger with the December consumer credit report, in which we learned that in addition to the now traditional draw of Car and Student loans, which came out to $13.8 billion, or exactly in line with the 12 month average draw, sending the total notional to a record $2.24 trillion, it was revolving credit, i.e., credit cards, which saw a substantial $5 billion increase in outstandings – the most since May 2013 – bringing total revolving credit to $862 billion if still far below the nearly $1.1 trillion in student loans outstanding.

So just as the US consumer was tapped out, and saw their personal income remain unchanged from November and real disposable income cratered, as a result having to draw down on their savings, the remainder of all purchases was funded through the use of credit cards, which may or may not be repaid in 2014. There is always hope that this time will be different and incomes finally pick up.


    



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WTI Crude Oil Surges To Highest Price On Record For This Day In History

Whether driven by real supply-demand issues, concerns over terrorism (sparked by the Sochi plane debacle), or hopes a renewed un-tapered QE on the basis of 2 piss-poor jobs reports in a row is unclear. What is clear is that WTI crude is having its best day in over 2 months – now at its highest in 2014, back above $100 a barrel and its most expensive in history for this time of year.

2014 highs, biggest jump in 2 months, back over $100 per barrel

 

and the most expensive barrel of oil for this time of year in history…

 

Charts: Bloomberg


    



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Consumers Paying More As Nat Gas Cash Prices Spike

Submitted by Joao Peixe via OilPrice.com,

As natural gas prices climb, reaching over $5/mcf again on 4 February, and with an unseasonably cold winter, local utilities say that natural gas customers’ bills are 30-40% higher now than last winter.

Last week, we saw natural gas prices rise above $5 for the first time in three years, then falling back a bit only to rise again on 4 February, with March futures trading above $5.25/mcf—or more than 6%, according to expert trader Dan Dicker.

Customers are footing the bill for higher gas prices and the coldest November-January period in four years in the Midwest and Northeast.

In Omaha, Nebraska, weather has been about 30% colder this year than last, and utility regulatory officials saying that gas use among customers is up while bills are up by 34-38% over last year.

Utilities are paying high prices for gas because demand has been higher and consumption rates at a level that has reduced storage by about 17% over the average of the previous five years.  

In the meantime, there is a great deal of disconnect between cash prices and futures prices for natural gas, with futures trading an increasingly volatile business. While 6 February saw a spike in next-day prices, according to Reuters, 5 February saw natural gas futures fall sharply due to longer-term mild weather forecasts.  

“The futures market appears to be disconnected from key developments occurring in the physical market,” Reuters quoted BNP Paribas analyst Teri Viswanath as saying on 6 February. “Today we witnessed a marked increase in spot prices for every consuming region, suggesting that utilities might be rationing limited inventories by purchasing gas off the market.”

As Dicker noted for The Street, “Low stockpiles caused by sequestration and a rush of domestic exploration and production companies away from natural gas production in favor of shale oil is taking its toll and providing the first real and consistent support of prices since 2007. Suddenly, natural gas markets are vulnerable to price spikes and traders are afraid to be short.”


    



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Europe Is Fixed: Spanish Yields Tumble To 8 Year Lows (Below US Treasuries)

Is it any wonder Mario Draghi didn’t lift a quantitative-easing finger this week? Despite record unemployment, record (and disastrous youth unemployment), record suicide rates, record non-performing loans, and an inextricably-linked banking system facing $3 trillion in exposure to emerging markets… Spanish bond yields have collapsed to their lowest since 2006 (and Italian close behind). With an entirely broken transmission mechanism of monetary policy, it seems the “market” for European bonds knows no bounds as spreads on the riskiest sovereigns drop to pre-crisis levels and 10Y Spain yields are now lower than 30Y US Treasuries.

Europe must be fixed?

 

Spanish 10Y yields are now back below US 30Y yields for the first time in 4 years…

 

With the European banks holding the bulk of this crap and facing what many HOPE is a real stress test; we can only imagine the contagion should fears ever re-ignite – though we always have the magical OMT.

 

It seems much of this exuberance is the hope that a European think-tank expressed that March will see the ECB announce QE… as usual, any minute now.

 

Chart: Bloomberg


    



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Fundamentals, Schmundamentals

Fundamentals, schmundamentals. Here is an easy lesson on how to navigate the current market.

Figure 1 is a weekly chart of the SP500. The trend channel (in green) is drawn from the 2009 lows. The failed breakout is noted. Pretty simple stuff!

TACTICALBETA IS 100% FREE ALL OF THE TIME.  TIMELY, NO NONSENSE, CONCISE….GO NOW!!

Figure 1. SP500/ weekly

fig1.2.7.14

Failed breakouts often result in much lower prices as undisciplined investors, whom were late to the party to begin with, buy the breakout and dump their positions on the slightest of discomfort. Thus the markets had a mini spasm. But why did the market bounce when it did? Once again, it is very elementary as our weekly chart of the SP500 shows. The orange trend line is drawn from the 2013 bottom.

Figure 2. SP500/ weekly

fig2.2.7.14

But there are several problems going forward at least from a technical perspective. It was only 3 short weeks ago that everyone was all in. Not a lot of people. I mean everyone as the bullish sentiment numbers were pushing very, very extreme. Those folks most likely are underwater and are probably thinking to themselves, “Geez, the market has rebounded some this week; I better sell as I don’t want to go through the trauma of seeing my account dip more than 2%.” In my opinion, sellers lurk at higher prices, and this puts a cap on higher prices. The second problem is less anecdotal and is one I am well familiar from my own studies and data. A market that fails to turn bulls into bears at periodic intervals is not a strong market, and this has been a problem with this market for a long time. If dips remain shallow (and this has been a shallow dip), then bulls are not converted to bears. Short covering to power the market higher doesn’t exist, and the price action loses momentum quickly without that short covering fuel. The venerable (love that word) market technician, Richard Russell, used to say and I paraphrase: that “bull markets are like bucking broncos; they will do their best to throw you off. As an investor, your job is to ride that bull as long as you can without getting thrown off.” These 5% dips or mini swoons that we are seeing really have not tested investors’ resolve. This kind of price action isn’t consistent with bull market action, but more consistent with a market top. The best thing that the bulls could hope for is a break of that 2013 trend line. This would bring the sellers in and ultimately set up the next leg higher provided the fundamental/ schmundamentals are supportive.

TACTICALBETA IS 100% FREE ALL OF THE TIME.  TIMELY, NO NONSENSE, CONCISE….GO NOW!!


    



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Puerto Rico Re-Junked, This Time By Moody’s – Full Report

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody’s turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today’s disappointing jobs number which until this moment barely managed to push the S&P higher by 1%.

 

Muni bonds, having shrugged off the initial downgrade, are starting to crack as the looming fear of forced (mandate-driven) sales rise rapidly… the 2017s tumbled over 4 points today!

 

 

Full release:

Moody’s downgrades Puerto Rico GO and related bonds to Ba2, notched bonds to Ba3 and COFINA bonds to Baa1, Baa2; outlook negative

 Approximately $55B of rated debt affected

New York, February 07, 2014 — Moody’s Investors Service has downgraded the general obligation (GO) rating of the Commonwealth of Puerto Rico to Ba2 from Baa3. Ratings that are capped by or linked to the commonwealth’s GO rating were also downgraded two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded to Ba2 from Ba1. At the same time, Moody’s downgraded the Puerto Rico Sales Tax Financing Corporation’s (COFINA’s) senior-lien bonds to Baa1 from A2 and its junior-lien bonds to Baa2 from A3. The outlooks for ratings on the GO and the related bonds, as well as the COFINA bonds, are negative. For the ratings affected by this action, all of which were placed on review on December 11, 2013, see the list at the end of this report.

SUMMARY RATING RATIONALE

The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession. These factors have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained. In the face of these problems, the administration has taken strong and aggressive actions to control spending, reform the retirement systems, reduce debt issuance, and promote economic development. Despite these accomplishments, however, in our view the commonwealth’s credit profile is no longer consistent with investment grade characteristics.

While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth.

The commonwealth’s general obligation bonds and all the notched and related ratings were downgraded by two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded one notch, to Ba2. This brings them to the same rating as the commonwealth general obligation rating, which reflects recent rate increases enacted by the legislature that will improve net revenues and are expected to reduce the authority’s reliance on commonwealth support.

CREDIT STRENGTHS

  • Politically and economically linked to the US, with benefit of the nation’s strong financial, legal, and regulatory systems
  • Large economy, with gross product exceeding that of 15 US states and population exceeding that of 22 US states
  • Broad legal powers to raise revenues, adjust spending programs, and borrow to maintain fiscal solvency
  • Major actions taken to stabilize commonwealth finances, including significant reform to main pension system, and tax increases to reduce budget deficit

CREDIT CHALLENGES

  • Ongoing economic weakness due to long-term decline in dominant manufacturing sector, decreased competitiveness as a result of expired federal tax benefits, and high energy costs
  • Dependence on capital markets financing to fund operating expenses and debt service during period of increased risk of reduced market access
  • Very large unfunded pension liabilities relative to revenues, even after major reforms to two main plans that helped reduce cash-flow pressure
  • Very high government debt, equal to more than 50% of gross domestic product
  • Multi-year trend of large general fund operating deficits relative to revenues, financed by deficit borrowing

ACTION AFFECTS MULTIPLE CREDITS

The downgrade and negative outlook affect general obligation bonds of the commonwealth and of related entities listed below.

DOWNGRADED TO Ba2 FROM Baa3

  • General obligation bonds
  • Public Building Authority Bonds
  • Pension funding bonds
  • Puerto Rico Infrastructure Finance Authority (PRIFA) Special Tax Revenue Bonds
  • Convention Center District Authority Hotel Occupancy Tax Revenue Bonds
  • Government Development Bank (GDB) Senior Notes
  • Municipal Finance Authority (MFA) Bonds
  • Puerto Rico Highway and Transportation Authority (PRHTA) Transportation Revenue Bonds
  • Puerto Rico Aqueduct and Sewer Authority (PRASA) Commonwealth Guaranteed Bonds

DOWNGRADED TO Ba2 from Ba1

  • Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds

DOWNGRADED TO Baa1 from A2

  • Commonwealth of Puerto Rico Sales Tax Financing Corporation Senior Lien Bonds

DOWNGRADED TO Baa2 from A3

  • Commonwealth of Puerto Rico Sales Tax Financing Corporation Junior Lien Bonds

DOWNGRADED TO Ba1 FROM Baa2

  • Puerto Rico Highway and Transportation Authority (PRHTA) Highway Revenue Bonds

DOWNGRADED TO Ba3 FROM Ba1

  • Puerto Rico Public Finance Corporation (PRPFC) Commonwealth Appropriation Bonds
  • Puerto Rico Highway and Transportation Authority (PRHTA) Subordinate Transportation Revenue Bonds

OUTLOOK

The rating outlook is negative, based on our expectation of continued economic stagnation or decline. The outlook also incorporates continuing demands on liquidity, increased refinancing risk and constrained market access.

WHAT COULD MAKE THE RATING GO UP

  • Strong rebound in economic growth leading to improved and sustained financial performance
  • A trend of declining debt

WHAT COULD MAKE THE RATING GO DOWN

  • Evidence of further constraints on market access or significant further weakening of GDB liquidity
  • Indication that total fixed costs, including pension contributions and debt service on bonded debt, have become unaffordable
  • Steep growth in structural budget gap and an increase in GAAP deficits, solved with non-recurring solutions
  • Economic weakness resulting in declining revenues and continued out-migration
  • Reacceleration of growth in government debt


    



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Puerto Rico Re-Junked, This Time By Moody's – Full Report

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody’s turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today’s disappointing jobs number which until this moment barely managed to push the S&P higher by 1%.

 

Muni bonds, having shrugged off the initial downgrade, are starting to crack as the looming fear of forced (mandate-driven) sales rise rapidly… the 2017s tumbled over 4 points today!

 

 

Full release:

Moody’s downgrades Puerto Rico GO and related bonds to Ba2, notched bonds to Ba3 and COFINA bonds to Baa1, Baa2; outlook negative

 Approximately $55B of rated debt affected

New York, February 07, 2014 — Moody’s Investors Service has downgraded the general obligation (GO) rating of the Commonwealth of Puerto Rico to Ba2 from Baa3. Ratings that are capped by or linked to the commonwealth’s GO rating were also downgraded two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded to Ba2 from Ba1. At the same time, Moody’s downgraded the Puerto Rico Sales Tax Financing Corporation’s (COFINA’s) senior-lien bonds to Baa1 from A2 and its junior-lien bonds to Baa2 from A3. The outlooks for ratings on the GO and the related bonds, as well as the COFINA bonds, are negative. For the ratings affected by this action, all of which were placed on review on December 11, 2013, see the list at the end of this report.

SUMMARY RATING RATIONALE

The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession. These factors have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained. In the face of these problems, the administration has taken strong and aggressive actions to control spending, reform the retirement systems, reduce debt issuance, and promote economic development. Despite these accomplishments, however, in our view the commonwealth’s credit profile is no longer consistent with investment grade characteristics.

While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth.

The commonwealth’s general obligation bonds and all the notched and related ratings were downgraded by two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded one notch, to Ba2. This brings them to the same rating as the commonwealth general obligation rating, which reflects recent rate increases enacted by the legislature that will improve net revenues and are expected to reduce the authority’s reliance on commonwealth support.

CREDIT STRENGTHS

  • Politically and economically linked to the US, with benefit of the nation’s strong financial, legal, and regulatory systems
  • Large economy, with gross product exceeding that of 15 US states and population exceeding that of 22 US states
  • Broad legal powers to raise revenues, adjust spending programs, and borrow to maintain fiscal solvency
  • Major actions taken to stabilize commonwealth finances, including significant reform to main pension system, and tax increases to reduce budget deficit

CREDIT CHALLENGES

  • Ongoing economic weakness due to long-term decline in dominant manufacturing sector, decreased competitiveness as a result of expired federal tax benefits, and high energy costs
  • Dependence on capital markets financing to fund operating expenses and debt service during period of increased risk of reduced market access
  • Very large unfunded pension liabilities relative to revenues, even after major reforms to two main plans that helped reduce cash-flow pressure
  • Very high government debt, equal to more than 50% of gross domestic product
  • Multi-year trend of large general fund operating deficits relative to revenues, financed by deficit borrowing

ACTION AFFECTS MULTIPLE CREDITS

The downgrade and negative outlook affect general obligation bonds of the commonwealth and of related entities listed below.

DOWNGRADED TO Ba2 FROM Baa3

  • General obligation bonds
  • Public Building Authority Bonds
  • Pension funding bonds
  • Puerto Rico Infrastructure Finance Authority (PRIFA) Special Tax Revenue Bonds
  • Convention Center District Authority Hotel Occupancy Tax Revenue Bonds
  • Government Development Bank (GDB) Senior Notes
  • Municipal Finance Authority (MFA) Bonds
  • Puerto Rico Highway and Transportation Authority (PRHTA) Transportation Revenue Bonds
  • Puerto Rico Aqueduct and Sewer Authority (PRASA) Commonwealth Guaranteed Bonds

DOWNGRADED TO Ba2 from Ba1

  • Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds

DOWNGRADED TO Baa1 from A2

  • Commonwealth of Puerto Rico Sales Tax Financing Corporation Senior Lien Bonds

DOWNGRADED TO Baa2 from A3

  • Commonwealth of Puerto Rico Sales Tax Financing Corporation Junior Lien Bonds

DOWNGRADED TO Ba1 FROM Baa2

  • Puerto Rico Highway and Transportation Authority (PRHTA) Highway Revenue Bonds

DOWNGRADED TO Ba3 FROM Ba1

  • Puerto Rico Public Finance Corporation (PRPFC) Commonwealth Appropriation Bonds
  • Puerto Rico Highway and Transportation Authority (PRHTA) Subordinate Transportation Revenue Bonds

OUTLOOK

The rating outlook is negative, based on our expectation of continued economic stagnation or decline. The outlook also incorporates continuing demands on liquidity, increased refinancing risk and constrained market access.

WHAT COULD MAKE THE RATING GO UP

  • Strong rebound in economic growth leading to improved and sustained financial performance
  • A trend of declining debt

WHAT COULD MAKE THE RATING GO DOWN

  • Evidence of further constraints on market access or significant further weakening of GDB liquidity
  • Indication that total fixed costs, including pension contributions and debt service on bonded debt, have become unaffordable
  • Steep growth in structural budget gap and an increase in GAAP deficits, solved with non-recurring solutions
  • Economic weakness resulting in declining revenues and continued out-migration
  • Reacceleration of growth in government debt


    



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Google Overtakes Exxon As Second-Biggest US Company

Trinkets and Ads trump global energy provision…

 

 

Google, which became the world’s largest online advertiser through its dominant search engine, has a market capitalization of $393.5 billion while oil company Exxon is valued at $392.6 billion, according to data compiled by Bloomberg. Apple has a market value of $465.5 billion. Software company Microsoft Corp. is No. 4 with $302.1 billion.

 

Chart: Bloomberg


    



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When George Clooney Starts Pitching Government Bonds…

Submitted by Simon Black of Sovereign Man blog,

Last week in his State of the Union address, the President of the United States laid the groundwork for a new government program he calls “MyRA”.

As he explained to the American people, this program will allow US taxpayers the ability to loan their retirement savings to the federal government (which, according to POTUS, carries ZERO risk).

Given that US Treasury yields fall far below the rate of inflation, this is a big win for the government, and a big loser for the poor suckers who loan them the money.

The President then hit the road, touting his one-of-a-kind program. The Treasury Secretary hit the newspapers, encouraging Americans to enroll.

I can see this unfolding like a War Bonds campaign, appealing to Americans’ love of country to get them to loan their money to the government at sub-inflation yields.

In Italy they’ve already used football stars in patriotic appeals to get Italians to buy government bonds. In Japan they use teenage girl bands to entice wealthy Japanese businessmen to open their wallets for government bonds.

So let’s see how long it takes for George Clooney and Matt Damon to make the pitch for the MyRA program… and how long after that it becomes mandatory for all Americans.

Meanwhile, the IRS is doing its part.

One of the best solutions that we’ve discussed in the past to liberate your IRA from this destructive trend is to set up a particular type of self-directed IRA.

But the IRS has been intentionally making it more difficult to set up these structures over the past year. Now there’s even more roadblocks.

In order to set up this type of structure, it’s imperative to first obtain a tax ID number. But due to agency budget cuts, the IRS is no longer issuing tax ID numbers for domestic entities through its call center. They’re saying that now you HAVE to use the online system.

This is one website that the government actually got right. The tax ID application website is fairly straightforward, and it works great. EXCEPT if you are trying to set up this type of IRA.

So if you’re an individual trying to obtain a tax ID number for your new company, no problem. The online system works great.

But if you punch in that you are setting up a company to be owned by your IRA (or some other entity), then suddeny the system crashes and times out.

I had my staff ring up the IRS yesterday to demand an answer. After two phone calls, each with a 30+ minute wait time to reach a human being, we finally got an answer. Confirmation, actually.

The agent told us that yes, in fact, the online system has been programmed to intentionally reject tax ID number applications for companies that are owned by entities like an IRA.

So they have essentially eliminated the option to apply online. But they won’t let you apply over the phone either.

You can apply through the mail, but that will take 30-days, according to the agent. Or by fax, provided that you first cough up all sorts of other documentation.

It certainly begs the question– at a time when the President of the United States is whipping up excitement over this new program to loan the government your retirement savings, why is their tax agency putting up huge roadblocks for Americans who don’t want to become victims?


    



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