Moody's downgrades Illinois debt ratings - (www.reuters.com) Moody's Investors Service on Tuesday downgraded Illinois' general obligation bond rating to A2 from A1, citing the state's financial woes stemming from the U.S. recession. Moody's cut other Illinois ratings, affecting about $24 billion of outstanding debt, including the state's Build Illinois sales tax revenue bonds, also cut to A2 from A1. The downgrade gave Illinois the second lowest U.S. state rating from Moody's, with California having the lowest at Baa1, a Moody's spokesman said. Moody's said Illinois has yet to take action to tackle a structural budget gap of more than $11 billion, equal to about 35 percent of its expenditures. "The downgrades are the result of high structural imbalances and little time to effect modifications to the budget in the current fiscal year, which ends June 30, 2010, as well as evidence of significant weakening in the state's 2009 results," Moody's said in a statement. With an 11 percent jobless rate in October, Illinois was among half a dozen U.S. states with double digit unemployment. Other states, such as California and Michigan have also suffered debt rating downgrades this year as the recession and unemployment punched holes in their budgets. Moody's revised the outlook for Illinois' GO and related ratings to negative, "reflecting the continuing likelihood of large structural budget deficits, growing negative year-end fund balances, strained operating fund liquidity and mounting pressure from pension and retiree health benefit obligations." Moody's put the state on review for a potential downgrade shortly after Illinois enacted its fiscal 2010 budget in July. UNPAID BILLS: Other rating agencies took action on Illinois' GO rating this summer. Standard & Poor's Ratings Services rates Illinois AA-minus with a negative outlook it gave the state in August. Fitch Ratings dropped Illinois' rating two notches to A in July, citing the state's "large structural budget deficit." With Illinois facing a growing backlog of unpaid bills, Governor Pat Quinn has proposed a $500 million cash-flow borrowing, which would add to the $2.25 billion in outstanding short-term borrowing the state must pay off in June. A spokesman for Quinn did not immediately respond to a request for comment on the downgrades. Illinois has slated a nearly $155 million Build Illinois competitive sale for Thursday, followed by a $375 million negotiated sale through Cabrera Capital Markets next week.
Dubai's stock market closes at 38-week low - (www.arabianbusiness.com) Dubai's index tumbled to a 38-week low as widespread confusion about the emirate's debt problems spurred more panic selling. Most heavyweight stocks fell by almost 10 percent, the maximum allowed, and with no buyers coming in at these levels, trading was moribund for much of the session. Emaar Properties dropped 9.9 percent and Dubai Islamic Bank and Dubai Investment Co each lost 10 percent. The index fell 6.4 percent to 1,533 points, its lowest close since March 19. "All Dubai-related companies will find it hard to raise finance and I think it will be harder for the Gulf as a whole," said Keith Edwards, head of asset management at Doha-based investment company The First Investor. "(Dubai World's restructuring) will raise the cost of capital for Dubai property and investment companies." Abu Dhabi's index slumped to a 32-week low as stocks tumbled, led by banks and real estate. These were the two most liquid sectors and so are easiest for investors to offload. Sorouh Real Estate and Aldar Properties each dropped more than 9 percent, while Abu Dhabi Commercial Bank reversed early gains to end 8.2 percent lower. The index fell 2.8 percent to 2,467 points. The cost of insuring Dubai's debt against restructuring or default rose sharply as investors grew increasingly nervous about Dubai World's $26bn restructuring. Saudi Arabia's index suffered its largest 1-day loss since October 31, slumping to a 12-week low as Dubai's debt worries sent Middle East markets tumbling.
Britain Slaps Banks With 50% Tax on Bonuses - (www.cnbc.com) British finance minister Alistair Darling set the stage for the coming election, announcing on Wednesday a one-off super tax on bank bonuses and other higher taxes on the rich. His Labour Party is on course to lose an election that must take place in less than six months and desperately needs this pre-budget report to help close the opposition Conservative Party's commanding lead in opinion polls. But the recession has turned out to be much deeper than forecast in April and Darling had to revise up his borrowing forecast for this fiscal year to a record 177.6 billion pounds ($290 billion) or 12.6 percent of GDP, from 175 billion. Borrowing for 2010/11 was also revised up by 3 billion pounds to 176 billion pounds. Though Darling stuck to his economic growth forecast for next year of 1 to 1.5 percent he was forced to admit he expected the economy to shrink 4.75 percent in 2009, instead of the 3.25 to 3.75 percent decline originally predicted. "Because of the underlying strength of our economy, the pick-up in world demand, and the substantial spare capacity opened up by the recession, my Budget forecast ... of growth of 3.5 percent in 2011 and 2012 remains unchanged," Darling said. With little money to spend on giveaways when markets are very keen to see more measures to get the record budget deficit down Labour turned up the heat on bankers who many blame for Britain's worst recession since World War Two. Bank Bonus Hit: Darling said banks would be charged a 50 percent tax rate on bonuses they pay to their staff above 25,000 pounds starting today until April 5, 2010, a powerful disincentive for big payouts in this year's Christmas bonus round. The new tax would apply to all banks, building societies and branches of foreign banks operating in Britain. The government hopes the move will encourage banks to use additional cash to shore up their capital bases, rather than pay high salaries. But banking groups have warned that penalizing high earners in the financial sector will lead to an exodus of talent overseas. European Central Bank Governing Council member Axel Weber said late on Tuesday that a windfall tax on bankers' bonuses would not be effective in encouraging less risky behavior among banks in the long term.
EU Ready to Bailout Greece; Debt Downgrades in Baltic States; Can Euroland Even Survive? - (Mish at globaleconomicanalysis.blogspot.com) Euro bulls need to consider the implications of an EU bailout of Greece or the implosion of Eastern European debt in Lithuania and Latvia. Some are even wondering about the prospects of Euroland itself. With that backdrop please consider Almunia Says EU Officials Ready to Assist Greece in Budget Plan. The European Commission “stands ready to assist the Greek government in setting out the comprehensive consolidation and reform program, in the framework of the treaty provisions for euro-area member states,” said Joaquin Almunia, who is in charge of economic and monetary affairs, in a statement late yesterday. He didn’t say what form any assistance could take. Almunia’s comments come as investors debate whether EU governments would bail out Greece if it was unable to pay its bills. Former German Finance Minister Peer Steinbrueck said in February that euro members would “in reality” rescue states in difficulty. Almunia said yesterday Greece “is a matter of common concern” for euro nations, echoing language he has used since November. He didn’t elaborate further. “The situation in Greece is very difficult,” European Central Bank President Jean-Claude Trichet said Dec. 7. “We all know the figures, and we all know the very important, courageous decisions that have to be taken to put the situation back on track.” Greece Government Bonds Tumble: Bloomberg is reporting Greece Government Bond Tumble Fails to Entice Pictet, Frankfurt. The biggest drop in Greece bonds in more than a decade isn’t enough to entice some of Europe’s biggest fixed-income investors amid deepening concern the nation won’t be able to fix its deteriorating finances. Frankfurt-Trust Investment GmbH, Smith & Williamson Investment Management and Pictet Asset Management, which manage a combined $100 billion, say they are not ready to buy even after the biggest tumble in two-year notes since 1998. Standard & Poor’s put the nation’s debt on watch for a downgrade two days ago, and Fitch Ratings followed yesterday by cutting Greece’s credit rating one level to BBB+ from A-. S&P said two days ago Greece’s debt burden may climb to 125 percent of gross domestic product in 2010, the largest among the 27 European Union nations, and stay at that level or higher in the “medium term.” Fitch cited “concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework.” Downward Pressure on Latvia and Lithuania: According to Fitch, Baltic Ratings Remain Under ‘Downward Pressure’: Fitch Ratings said Latvia and Lithuania’s sovereign ratings remain under “downward pressure” as the Baltic states’ economic plight sends their deficit and debt levels higher. Latvia’s BB+ rating, the highest non-investment grade, and Lithuania’s BBB rating, two levels above junk, are more at risk of a downgrade than Estonia’s BBB+ rating, Fitch said in a statement today. The Baltic states are suffering the deepest economic contractions in the European Union after their debt-fueled property bubbles burst and their governments forced through tough austerity measures. Can Euroland Survive?: The Levy Economics Institute of Bard College is asking Can Euroland Survive? Social unrest across Europe is growing as Euroland’s economy collapses faster than theUnited States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. RandallWray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union (EU).
Dubai utility faces $2bn debt demand - (www.ft.com) The credit downgrades of Dubai’s government-owned companies have triggered an accelerated payment clause on a $2bn debt issued by the emirate’s utilities provider. Dubai Electricity and Water Authority’s $2bn securitisation programme, Thor Asset Purchase Company, an instrument originally maturing in 2036, may have to be redeemed in full on December 14 – the day Dubai World’s property developer, Nakheel, is due to redeem a $4bn Islamic bond, or sukuk. The payment acceleration underlines how Dubai’s attempts to restructure $26bn of debts at the Dubai World conglomerate is spreading to other, healthier parts of the economy. The Dubai Financial Market fell a further 6.1 per cent and the cost of insuring Dubai debt against default rose sharply. Gains of 22 per cent this year have been wiped out in four brutal trading sessions. Government officials have been eager to distance themselves from the debts of Dubai World. But DEWA, the emirate’s only utility provider, enjoys explicit government backing and a sovereign guarantee. The utility is seen as one of the emirate’s more solid companies, with healthy cash flows, and analysts expect the repayment to be met or renegotiated. Dubai’s department of finance said: “DEWA is a government company. Its debt is sovereign and the government remains 100 per cent committed to meeting its sovereign debt obligations.” Fitch was the first to downgrade the Thor instrument on November 30 to below the single A grade, triggering the payment acceleration, but has kept it at BBB-, or investment grade. “The economic uncertainty in Dubai has soured our view of the sovereign capacity to meet its commitments,” said Jaime Sanz, Fitch’s head of emerging markets structured finance. “The creditors can agree to a waiver on the acceleration, but whether it constitutes a default depends on the terms.”
Former BOE Official Buiter Says Greece May Be First EU Default - (www.bloomberg.com) Former Bank of England policy maker Willem Buiter said Greece may be the first major country in the European Union to default on its debts since the aftermath of World War II. “It’s five minutes to midnight for Greece,” Buiter, who will join Citigroup Inc. as its chief economist next month, said in a Bloomberg Television interview today. “We could see our first EU 15 sovereign default since Germany had it in 1948.” The EU’s economic affairs commissioner said late yesterday that officials are ready to help Greece with its budget deficit after concerns about its public finances sparked a rout in Greek government bonds. Fitch Ratings cut its rating on the nation’s debt yesterday to BBB+ and two other major ratings companies are threatening to follow. “Default is not unavoidable,” Buiter said. “But unless there are radical fiscal actions, lasting cuts in spending and tax increases of at least 7 percent of GDP, the writing is on the wall” for Greece. There’s “absolutely” no risk Greece will default, Finance Minister George Papaconstantinou said in an interview today with Bloomberg Television. Greek banks are “fundamentally sound” and Greece will not seek an EU aid package, he said. Greece, the lowest-rated country in the euro region, is struggling to cut a budget deficit of 12.7 percent of gross domestic product.
Ireland to Appease ‘Vigilantes’ as Greece Punished - (www.bloomberg.com) Ireland is poised to show Greece a way to cut ballooning budget deficits. Finance Minister Brian Lenihan will today announce plans to cut spending by 6 percent in the face of the worst recession in Ireland’s modern history. On the other side of Europe, the yield on Greece’s two-year note yesterday rose the most since November 2008 as it struggles to convince investors it will be as bold. Lenihan is trying to shore up confidence in Ireland, once Europe’s most dynamic economy, a day after Fitch Ratings cut Greece by one step to the third-lowest investment grade. A successful strategy may lead investors to reward Ireland and add pressure on Greece to follow. “The bond vigilantes are back and watching,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “Greece is a worst-case scenario, Ireland’s more solid.” Lenihan is scheduled to deliver the budget at 3:45 p.m. to the parliament in Dublin, his fifth attempt since July 2008 to fix the public finances. He’s seeking 4 billion euros ($6 billion) in savings to stop the shortfall climbing above 12 percent of gross domestic product. ‘Medicine’: “It is going to be a very difficult budget, but it’s the last of the very difficult budgets,” Lenihan said in an interview with Dublin-based broadcaster RTE late yesterday. “It’s important the public understand this. If we take the medicine now we will bring this economy out of its difficulties.” While Ireland has lost its top credit rating at Moody’s Investors Service and Standard & Poor’s, Greece is being pushed harder to act after Fitch yesterday cut it one step to BBB+, the third-lowest investment grade. The previous day S&P put the country’s A- rating on watch for a possible downgrade, signaling it may be reduced within two months.