KeNo's Housing and Economic Portal: Sunday August 28 Housing and Economic stories

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Spanish towns face funding crisis, rack up debts - (finance.yahoo.com) In this hillside town, topped by a medieval castle and surrounded by olive groves, the 120 municipal workers haven't been paid since May. Police have new orders not to use their patrol cars unless they get word of a traffic accident or a crime in progress. The town pool is closed for the summer despite temperatures over 104 (40 Celsius) in the shade. Fees for the public day-care center have doubled. Water bills will soon go up 33 percent and local business owners are seething over euro9 million ($12.7 million) in unpaid bills owed by the town hall, much of it to them. Spain's 8,115 municipalities are being hit by a crushing revenue hangover from a nearly two-decade building boom that went bust in 2008. Officials in Moratalla believe they are the first in Spain to publicly declare their town is on the verge of going broke -- and that the only way out is an unprecedented program of drastically reducing services while boosting local taxes and fees in an austerity drive that could last eight years. Moratalla and its mammoth debt "are the mirror image of a lot of towns" that have not yet fully admitted the extent of their dire financial circumstances, said Deputy Mayor Juan Soria. "These are hard measures, but they're necessary and I think we have to reinvent ourselves because we've lived beyond our means and we have to lower expectations."

Bond Brush Fires Spreading in Europe - (www.nytimes.com) HOW many fires can one central bank deal with? The European Central Bank this week began to buy Spanish and Italian government bonds, and yields on such bonds immediately fell by more than a percentage point. But market pressure shifted immediately to France. For France, the rise in yields must have come as a shock. At the end of last week, Standard & Poor’s had gone out of its way to declare that the country deserved a Triple-A rating, and this was at the same time it was taking that rating away from the United States. As soon as the French bond yields began to rise, rumors appeared that major French banks might be in trouble because of their holdings of government, or sovereign, debt. The banks insisted they were fine. The accompanying charts show the trend in yield spreads between 10-year government bonds issued by Germany, by far the largest and strongest country in the euro zone, and the four other largest countries that share the common currency.

Europe short-selling ban reveals divisions - (www.reuters.com) A piecemeal ban on short-selling of financial stocks in Europe sparked a rush of alternative proposals from countries and regulators Friday, while stronger bank shares pulled Europe's stocks higher. After a week of wild swings on European markets on rumors about the health and funding needs of indebted governments and some of their major banks, France, Italy, Spain and Belgium imposed short-selling bans, which varied according to country. Britain, the Netherlands and Austria said they saw no need for action, while Germany said it would instead push for a Europe-wide ban on so-called naked short-selling. The European Commission said a European framework would be more effective, and the chairman of the European Securities and Markets Authority urged policy makers to adopt a plan for bloc-wide rules on short selling "as quickly as possible." Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.

'Junk' Bonds Point to Recession - (online.wsj.com) Investors are pricing a recession into the value of high-yield bonds, a dramatic turn of fortune for securities that had been market darlings over the two years after the financial crisis. Following the Federal Reserve's dim outlook on the U.S. economy, investors have pushed risk premiums on high-yield, or "junk," debt in the secondary market to an average of 7.39 percentage points above comparable Treasury yields. "Now that we are in the 700- to 750-basis-points range, the market is pricing in a decent chance of a recession," said Michael Anderson, a high-yield strategist at Citigroup. By way of comparison, during the previous recession in 2001, risk premiums ranged between eight and 10 percentage points until early 2003, when lower rates helped more money flow into system. During the downturn in 1990-91, these premiums were in the 7 to 10 percentage points range. Risk premiums are the added yield investors demand to compensate for the additional risk in owning corporate bonds instead of benchmark Treasurys. The premium, or spread, is measured in basis points, or hundredths of a percentage point. To be sure, the health of companies with speculative-grade ratings improved markedly since 2009, so much so that 45 of them are pegged to cross over to investment grade. Robust investor demand, low cost of borrowing and belt-tightening have made companies leaner and fiscally stronger.

The Beginning Of The Endgame - (www.businessinsider.com) Greed and politics bring the financial system down. “‘The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be. Technology has changed, the height of humans has changed, and fashions have changed. ‘Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis. ‘As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.