KeNo's Housing and Economic Portal: Friday June 18 Housing and Economic stories

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Bankruptcy talk spreads among California municipal officials – (news.yahoo.com) Two years after Vallejo, California, filed for bankruptcy protection, officials in nearby Antioch are also tossing around the 'B' word. Antioch's leaders earlier this month said bankruptcy could be an option for the cash-strapped city of roughly 100,000 on the eastern fringe of the San Francisco Bay area. Antioch's fiscal woes are standard issue for local governments in California: weak revenue from retail sales and property taxes is forcing spending cuts, layoffs and furloughs. But cost-cutting measures may not be enough to keep Antioch's books balanced, so its city council is openly discussing bankruptcy. "We just want to alert people to the possibility," Antioch Mayor Pro Tem Mary Helen Rocha said. Orange County Treasurer Chriss Street would not be surprised if more local governments across the Golden State sound a similar alarm. Street expects more talk of municipal bankruptcy across California because local government finances are in such dire shape -- a situation underscored on Wednesday when a top finance officer for Sacramento County projected a worse-than-expected shortfall for the county of $181 million, which could force more than 1,000 layoffs from the county's payroll.

Is Europe heading for a meltdown? - (www.telegraph.co.uk) This financial crisis is worse than the sub-prime crash of 2008 because the sums are so much bigger and it is governments that are in dire straits. Edmund Conway explains the dangers. Mervyn King, the Bank of England Governor, summed it up best: "Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop." In other words, were this a computer game, the politicians would be down to their last life. Any mistake now and it really is Game Over. Or to pick a slightly more traditional game, it is rather like a session of pass-the-parcel which is fast approaching the end of the line. The European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details – the breakdown of the euro, the crumbling of the Spanish banking system to take just two – and what you are left with is the next leg of a global financial crisis. Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets. This kind of card-shuffle trick has a long-established pedigree: after the dotcom bust, Alan Greenspan slashed US interest rates to (then) unprecedented lows, which helped dull the pain, but only at the cost of generating the housing bubble that fed sub-prime. It is not so different to the Ponzi scheme carried out by Bernard Madoff, except that unlike his hedge fund fraud, this one is being carried out in full public view.

United States and Germany remain divided over financial regulation issues - (www.washingtonpost.com) Top U.S. and German officials on Thursday acknowledged differences over key financial regulation issues, and they said a "broad agreement" on basic concepts may not produce uniform rules in all the world's capital markets. After what German Finance Minister Wolfgang Schaeuble described as "very intense discussions," Treasury Secretary Timothy F. Geithner ended a two-day European trip meant to smooth out differences in how the major economies are approaching financial regulation in the wake of the recent crisis. It is not clear how much progress he made. Schaeuble, defending a German approach that has become more unilateral in tone and substance, said that Germany had "done its national homework" before adopting a ban on certain types of stock trading, known as naked short selling. The ban, announced last week, surprised U.S. and European officials, who were expecting cooperation over such decisions.

Greece May Yet Have to Restructure Its Finances - (online.wsj.com) Even as investors grapple with the short-term economic impact of the European debt crisis, an important longer-term issue lingers in the background—the likelihood that Greece will have to restructure its debt. Analysts and investors don't think this is likely soon. The financial markets are too unsettled to weather such a dramatic step and the bailout by the European Union and the International Monetary Fund gives Greece much-needed breathing room. While a restructuring may not take place for another year or two, it's a move that Greece may be unable to avoid, many say, despite assurances to the contrary from officials at the EU and IMF. Restructuring is essentially a default, under which Greece would renegotiate its debt with bondholders, either lengthening its maturities or reducing the amount it owes, causing bondholders to take a loss. "At this point, it is very clear that restructuring is the only option," says Lena Komileva of Tullett Prebon in London. Josef Ackermann, the chief executive of Deutsche Bank, said earlier this month he thought it "doubtful" that Greece would be able to repay all its borrowings. The EU and IMF's bailout plan, which involves €80 billion ($99 billion) in loans from the 15 other euro-zone countries and 30 billion from the IMF, is designed to keep Greece afloat for a few years while the country enacts giant cuts and fiscal reforms.

Cost concerns threaten jobs bill in Congress - (www.reuters.com) Congressional Democrats on Thursday floated more cuts to a package of tax hikes and safety-net spending ina bid to round up more votes for a job-creation bill some in their ranks said was too costly.

Democratic leaders in the House of Representatives, who had already scaled back the bill, proposed dumping a further $30 billion in healthcare subsidies to appease centrist "Blue Dogs" worried about adding further to the budget deficit. The latest version would add about $60 billion to the deficit over 10 years -- less than half the cost of the version that Democrats had hoped to pass on Wednesday. "We're just interested in keeping the cost down," said Representative Henry Cuellar, a Blue Dog who outlined the latest changes to reporters. "It's a lot better than what it was."

Insurers ‘Live and Die’ With $2.2 Trillion in Corporate Bonds - (www.bloomberg.com) Insurance investors are betting the corporate bond rally that bolstered industry stocks can withstand concern that the Greek rescue plan will be insufficient to stabilize debt markets. Prudential Financial Inc., American International Group Inc., MetLife Inc. and Allstate Corp. had a net unrealized gain of $13.2 billion on the securities on March 31, compared with a $38.6 billion loss a year earlier. The figures reflect market fluctuations that aren’t counted toward earnings and are tracked by investors and rating firms as a gauge of financial strength. U.S. insurers, which hold more than $2.2 trillion in corporate debt, added to their portfolios in early 2009 when the bonds sunk in value, and then benefited from their rebound over the next year. Corporate bonds have returned 22 percent since March 31 of last year, including reinvested interest, after losing about 5 percent in 2008, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. “One of the reasons I’m overweight the group is it really lives and dies by U.S. corporate bonds, which I still think is a relatively good asset class,” Randy Binner, an analyst with FBR Capital Markets, said of life insurers. “When you mention the rally in corporate bonds, that really drives their book values.” The 24-stock KBW Insurance Index gained 11 percent this year through yesterday, compared with the 1.1 percent drop in the Standard & Poor’s 500 Index. Prudential is up 19 percent since Dec. 31.