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Saturday, November 17, 2012

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Some weekend catch-up reading for me

Posted: 16 Nov 2012 08:20 PM PST

Just a few of the things I’m reading this weekend, thought some if it might be interesting/useful:

Read of the Day: Why Greater Skill Leads to More Luck, link to the Pragmatic Capitalism blog, from there to the full pdf.

The good (political) times are over for risk assets at FTAlphaville

Bernanke suggests Mortgage Lending Standards are “Overly Tight”, “Pendulum has swung too far” from the Calculated Risk blog

Solving the Too Big to Fail Problem William Dudley at the NY Fed

 

Have a good weekend all!

 

 

The 10 best central bankers since the crisis

Posted: 16 Nov 2012 01:43 PM PST

If you can name more than 25 central bankers, you’re probably a foreign exchange trader. Here are 10 central bankers who distinguished themselves since the crisis began.

3. Dallas Fed President Richard Fisher

In my mind, economic forecasting is the most important part of central banking. On that front, Fisher has been a failure. His repeated overly-optimistic forecasts and warnings about inflation have been way off the mark.

So why is he on my list? Every central bank needs some balance. Even at a time that calls for the most dovish monetary policy in history, there needs to be someone warning about the risks. Fisher is in the position to do that because he has no real power.

He also gets points because he is a great communicator. As we saw yesterday, he isn’t afraid to speak his mind but he remains relatively diplomatic and doesn’t fight battles as if they’re life and death. At the end of the day, he’s a good central banker but he would make a great politician.

2. St. Louis Fed President James Bullard

There is a good chance that Bullard will be FOMC president one day so keep an ear open when he’s speaking. He’s on my list because he has a rare talent — the ability to change his mind.

In the hyper-critical modern world, it’s a bigger sin to change your mind than to be wrong. But at the end of the day, isn’t the aim to get it right?

Bullard has seemingly been on both sides of every QE debate. As the facts changed, he changed. As any good FX trader knows, there is nothing wrong with that.

1. BOE MPC member David Blanchflower (2006-2009)

It’s tough to love a dove.

Hawks get all the respect in central banking; they are the ‘adults’ who warn about the long-term effects of looser policy now. Being a dove is equated with a panicky, worrisome personality.

Enter the crisis: The global financial system was collapsing yet so many central bankers were looking at lagging CPI numbers, warning about inflation. Most of them should have been dragged out of office years ago for their ineptitude.

Blanchflower was voting for rate cuts for a full year before the Bank of England finally figured out the global economy was in trouble (after Lehman collapsed).

He is a poor diplomat and has made enemies by repeatedly criticizing the Mervyn King-led Bank of England but he is out there (on twitter) telling it the way he sees it.

On my list, a central banker is like a foreign exchange trader — credits for for style are secondary, being right is what counts. Not many central banks saw the crisis as clearly as Blanchflower.

The rest of the list:

4. Ben Bernanke – a controversial figure because politicians have used him to score points but history will ultimately put him at the top of every list.

5. Fmr ECB vice president Lucas Papademos – Trichet’s right hand man was a steady hand throughout the crisis. He gets full points for resigning to be Prime Minister in Greece’s caretaker government after Papandreou abruptly quit.

6. Fmr Deputy RBA gov (2007-2012) Ric Battellino – This guy called the bottom of the crisis in Australia. He said things were getting better at the very depths of the crisis. I laughed at the time, but he was right. He loses points because later (including this year) he was far too hawkish.

7. Bundesbank chief Jens Weidmann – A welcome departure from the comical hawkishness of successive BUBA leaders.

8. BOC Governor Mark Carney – A model for modern central bank communication. He was also the fore-bearer of the ‘calendar-driven’ guidance that the Fed eventually adopted.

9. BOJ Governor Masaaki Shirakawa – Dealt an incredibly tough hand, having taken over in March 2008 and forced to deal with the tsunami disaster. Didn’t have many cards to play but he has battled.

10. Minneapolis Fed President Narayana Kocherlakota – He’s on my list for the same reason as Bullard, flexibility.

US Tsy’s Geithner/BBG TV:Must Avoid Damage to Econ,Stakes High

Posted: 16 Nov 2012 01:40 PM PST

-Had Good, Constructive Meeting w/Hill Leaders, Committed to Deal
-Preventing Middle Class Tax Increase Most Important Thing to Diffuse Risks

WASHINGTON (MNI) – Treasury Secretary Tim Geithner said the administration
had “constructive” talks with Hill leaders Friday on preventing the fiscal
cliff, and he stressed that the goal must be to prevent damage to the economy,
and extending middle class tax cuts are the best way to achieve that.

In the transcript of an interview with Al Hunt, host of Bloomberg’s
Political Capital, Geithner said leaders are committed to reaching a deal, which
he said much lock in up front savings.

“It was a good meeting, and the tone was very good. And you heard each of
the leaders say coming out that it was a very constructive meeting,” he said of
the White House meeting, the first since the election. “You know, they said what
you’d hope for them to say at this point, which is that this is something we can
do, we’re committed to do it, we want to do it as soon as we can, we know the
stakes are very high.”

Geithner said he believes President Barack Obama’s focus on extending the
Bush-era tax cuts for middle class families – but allowing rates to return to
their previous level for those making $250,000 or more – will prevail, and is
the best course.

He stressed that “we want to do things that are going to help make the
economy stronger in the short term. And so extending these middle-class tax cuts
are central that. That’s probably the most important thing you could do to
defuse many of the risks in the fiscal cliff.”

The talks also will aim to replace the sequester – drastic,
across-the-board spending cuts set to kick in Jan. 1 – “with something that is
better designed mix of savings for the long term that stays in more gradually,
he said.

In addition, though, any deal would have to “lock in upfront, enough
savings so that people believe there’s going to be meaningful change ahead,” he
said.

And further delay would be a “mistake,” he said, because “you leave this
huge cloud of uncertainty hanging over the economy. And more importantly,
perhaps, you reduce the incentives both sides now have to come together.”

While the situation remains uncertain it “already is having an effect on
consumer confidence and the economy.”

“What we just need is people to come with a spirit of compromise and
recognize that there’s going to be hard things on both sides, but there’s lots
of ways” to accomplish what needs to be done, Geithner said. “I think you can do
a lot in a lame-duck session.”

However, he dismissed the notion Treasury could do an end run around
Congress by instructing the IRS to stop payroll withholding on the first
$250,000 of earnings.

“Don’t over-interpret what that authority gives me,” Geithner said of the
Treasury’s role in supervising the IRS. “Again, it does not give me the
authority … to let them avoid making some decisions on rates and policy.”

He also said he agrees with former Federal Reserve chair Alan Greenspan
that the debt limit should be abolished, but that is something only Congress can
accomplish.

Repeating his pledge to stay in his position only until mid-January,
Geithner said he expects the President will have a replacement ready by then.

** MNI Washington Bureau: 202-371-2121 **

–email: hscott@mni-news.com

[TOPICS: M$U$$$,MC$$$$,MFU$$$,MGU$$$]

Flickers Of Optimism Detected On US Hill After Budget Meeting

Posted: 16 Nov 2012 01:30 PM PST

-President Obama, Hill Leaders Agree To Use Word ‘Constructive’
-House, Senate Leaders Say Talks Got Off To Good Start

By John Shaw

WASHINGTON (MNI) – There is one timeless, even cosmic, rule of
budget negotiations. It is this: the first meeting is always the easiest
one.

So it comes as little surprise that both congressional leaders and
President Obama left their first budget meeting Friday saying that the
session was “constructive” and the two parties must work together for
the good of the country.

Obama met Friday morning with House Speaker John Boehner, Senate
Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell, and
House Minority Leader Nancy Pelosi for more than an hour in the White
House.

The administration’s team included Treasury Secretary Tim Geithner,
White House chief of staff Jack Lew and National Economic Council
director Gene Sperling.

Everyone appeared to be on their best behavior.

“I believe that we can do this and avert this fiscal cliff,”
Boehner told reporters after the meeting.

“I feel confident that a solution may be in sight,” Pelosi said,
standing next to her congressional colleagues.

Reid, upon returning from the White House, told congressional
reporters that he really does feel positive. “It was a good meeting.
There were no harsh words. There was a general feeling that we need to
get something done and both sides are going to have to give,” Reid said.

After the meeting, White House press secretary Jay Carney issued a
statement in which he called the first meeting positive and said
policymakers must do everything possible to avert the fiscal cliff.

“Both sides agreed that while there may be differences in our
preferred approaches, we will continue a constructive process to find a
solution and come to a conclusion as soon as possible,” Carney said.

While there are hundreds of details to work out and dozens of major
decisions, there is one central dynamic that will drive the parties
either to a deal or lead to an ugly derailment.

That is the linkage between the Democratic demand for more revenue
and the Republican insistence on entitlement reform.

“We’re prepared to put revenue on the table as long as we solve the
real problem,” McConnell said, adding that “most of my members
without exception believe that we’re in the dilemma we’re in not because
we tax too little but because we spend too much.”

Put starkly, Democrats believe the nation’s main fiscal problem
concerns revenues and Republicans say it centers on entitlements.
Crafting an agreement that reconciles these conflicting views will be
difficult — but also essential.

After the White House session, an aide to Boehner said the Speaker
proposed that the leaders agree on long term revenue targets to guide
tax reform, spending targets to shape entitlement reform and enforcement
mechanisms to achieve these goals.

Congressional and White House staffs will be working over the
coming week and then congressional leaders will meet again with the
president the week after Thanksgiving.

This session and others are likely to be much more difficult,
contentious and consequential than the first meeting.

** MNI Washington Bureau: (202) 371-2121 **

–email: jshaw@mni-news.com

[TOPICS: M$U$$$,MC$$$$,MFU$$$,MGU$$$]

Lockhart: Aggressve B-Sheet Use Approp For Some Time;Justified

Posted: 16 Nov 2012 01:30 PM PST

-Can’t Say Remotely Close To Substantial Employment Improvement
-Use Of Balance Sheet Tools Justified Even If Fiscal Cliff Averted
-Warns Lawmakers Against Any Action That Compromises Econ Recovery

By Brai Odion-Esene

WASHINGTON (MNI) – Atlanta Federal Reserve Bank President Dennis Lockhart
Friday said the central bank’s aggressive use of its balance sheet to speed up
the economic recovery will remain appropriate “for some time,” even if lawmakers
are successful in addressing the threat of the looming fiscal cliff, due to a
growth rate that is still not up to speed.

And on the subject of the approaching deadline of expiring tax reliefs and
spending cuts, Lokchart had a stark warning for the administration and Congress
– “if the fiscal cliff is mishandled, the economic outcome could be a
recession.”

In remarks prepared for a conference at the University of Virginia in
Charlottesville, Lockhart said he remains comfortable with the path chosen by
the Federal Open Market Committee, the Fed’s policymaking body.

“I expect that continued aggressive use of balance sheet monetary tools
will be appropriate and justified by economic conditions for some time even if
fiscal cliff issues are properly addressed,” Lockhart said. He is a voter on the
FOMC this year.

He noted that despite some signs of firming in the overall U.S. economy, he
retains a base outlook in which real growth is only modestly above a 2% growth
trend.

The FOMC has vowed to keep its accommodative policy in place until it sees
sustained improvement in the labor market, and Lockhart said that recent jobs
numbers have been encouraging.

However, “I am not prepared to say we are remotely close to substantial
improvement on the employment front,” he said.

He noted that there is still a disproportionate share of part-time jobs
reflected in the overall employment gains, long-term unemployment remains
“unacceptably high,” labor force participation rates are still surprisingly low,
and initial unemployment gains have not yet fallen to levels that seem
consistent with a truly robust jobs picture.

As a result, “I think that monetary policy is appropriately calibrated to
give the U.S. economy its best shot at ongoing, or even accelerating, growth,”
he said.

Lockhart stressed that monetary policy is not yet at its limit but is very
accommodative at this time, describing it as “well out there on a spectrum
measuring degrees of accommodation.”

Lockhart’s support for current monetary policy is also likely bolstered by
the signs of life he is seeing in the housing market — from sales to inventory
levels and prices.

“These trends give me some confidence that a sustainable recovery in this
crucial sector is under way,” Lockhart said, adding, “This improvement in turn
reinforces my confidence that our policy actions to support this recovery will
be effective.”

With regard to the fiscal cliff, Lockhart cautioned lawmakers against any
actions that would compromise the progress of the recovery, as the continued
effectiveness of current monetary policy requires no interruption to the
recovery.

“The length and persistence of the FOMC’s asset purchase program, and hence
the ultimate size of the Fed’s balance sheet, depend critically on the pace of
economic recovery,” he said, adding, “Any approach that compromises the
continuation of the economic recovery will be, in my view, very damaging.”

Both sides must find a way to avoid the fiscal cliff or risk very serious
consequences for the economy.

Putting it in blunt terms, Lockhart said that, “the near-term economic
risks presented by failure to deal effectively with the fiscal measures
collectively referred to as the fiscal cliff are so serious that to sidestep
this concern feels like trying to whistle past the graveyard.”

There is a real risk of a disturbance in the financial markets if lawmakers
do not resolve the issue properly, he warned.

Coming back to his outlook for the economy, Lockhart noted that the current
pace of U.S. economic growth is gravitating around 2%, and said this may be
close to the economy’s long-run potential growth rate.

“This sluggish pace of growth implies vulnerability to shocks and
stall-out,” he said.

Inflation, on the other hand, should remain moderate and close to the
FOMC’s explicit 2% target he added.

As for the aforementioned positive signs of some firming of economic
conditions, Lockhart pointed to the uptick in manufacturing activity as
signified by the Institute of Supply Management October index.

On the consumer front he noted that spending continues to grow and
sentiment regarding future conditions is improving.

** MNI Washington Bureau: 202-371-2121 **

–email: besene@mni-news.com

[TOPICS: MAUDS$,MMUFE$,M$U$$$,MC$$$$,MFU$$$,MGU$$$]

ForexLive North American wrap: Cliff notes

Posted: 16 Nov 2012 01:19 PM PST

  • WSJ: White House in talks to replace sequester
  • Positive signals on fiscal cliff deal boost sentiment
  • Geithner: Deal to avert fiscal cliff is within our grasp
  • US Oct industrial production -0.4% vs +0.2% exp
  • Noyer: Maybe one day OMT could be used for Greece
  • ECB’s Noyer: OMT represents a massive backstop against unjustified increases in sovereign yields
  • Dovish comments from Fed’s Lockhart
  • Cyprus: Troika ups final spending cut position by EUR 225 mln
  • Weekly CFTC positioning
  • Hostess to liquidate, laying 18,500 US workers
  • US House passes a bill repealing the cold war ban on trade with Russia
  • S&P 500 gains 0.5% to 1360
  • NZD leads, CHF lags on day
  • CHF leads on week, JPY lags

Whimsical session, as in, the market was driven by the political and stock market whims. Markets were at their worst levels as European stocks closed, with EUR/USD below 1.2700.

Afterwards, comments that indicated some compromise on the fiscal cliff boosted sentiment.

Geithner: Deal to avert fiscal cliff is within our grasp

Posted: 16 Nov 2012 01:03 PM PST

  • Deal can be reached within several weeks
  • Tone was good today; good meeting
  • Debt ceiling should be eliminated (not doing much good, is it?)

Who let Geithner out of the witness protection program?

Atlanta Fed’s Lockhart is really torquing me off

Posted: 16 Nov 2012 12:50 PM PST

What kind of central banker gives a speech at 3:45 on a Friday afternoon? Dude, seriously…

  • QE will “likely be justified for some time”
  • Aggressive easing needed to revive jobs
  • Employment to improve only gradually
  • Inflation will likely stay close to 2% target
  • There is tension between monetary and fiscal policies

Lockhart is a relative moderate on the FOMC so these are very dovish (ie dollar bearish) remarks.

CFTC data: It doesn’t take much to get the euro bears excited

Posted: 16 Nov 2012 12:45 PM PST

Speculative positioning data from the weekly CFTC Commitments of Traders report, which is collected at the close on Tuesday.

  • EUR net short 84K vs 67K prior
  • JPY net short 30K vs 40K prior
  • GBP net long 8K vs 19K prior
  • AUD net long 68K vs 60K prior
  • CAD net long 66K vs 75K prior
  • NZD unchanged at net long 19K

I can tell you that there were 10,000 long USD/JPY contracts that someone regrets selling.  Cable traders continue to be indecisive. Commodity currencies are vulnerable. And specs love to short the euro.

Miller Q&A: In No One’s Interest to Allow Fiscal Cliff To Happen

Posted: 16 Nov 2012 12:40 PM PST

By Suzanne Cosgrove

CHICAGO (MNI) – U.S. Treasury Undersecretary for Domestic Finance
Mary Miller Friday said it was “not in anyone’s interest to allow the
fiscal cliff to happen.”

“I think you know that would have a very negative outcome,” Miller
told a group of international bankers and academics at a Chicago Federal
Reserve Bank conference.

In response to a question about Fannie Mae and Freddie Mac, Miller
was fairly upbeat about the housing market outlook, saying the recovery
in housing will provide a better platform for housing finance reform.

In her prepared speech, Miller said she expected the Consumer
Financial Protection Bureau to finalize the qualified mortgage rule,
known as ‘QM’ in the coming weeks.

“Once the QM rule is complete, it will be important to finalize the
asset-backed securities risk retention rule, another rule in Dodd-Frank,
that affects mortgages and includes the qualified residential mortgage
definition,” Miller said.

Once final, these rules will enhance lender clarity at the point of
origination and improve investor confidence in loans purchased in the
secondary market, she added.

Miller noted that although Fannie and Freddie are in
conservatorship, they remain “pretty important for the housing market.”
A plan to gradually lessen that dependence on these government-sponsored
enterprises is needed, and will be put out for discussion, she said.

Miller also advocated greater oversight of rating agencies, but
acknowledged the discussion reducing reliance on rating agencies was
“one of the difficult parts of Dodd-Frank” as the market and regulators
look for alternatives.

In her prepared remarks, Miller said pressing ahead with financial
reform by finalizing mortgage finance rules, derivatives regulations and
the Basel capital rules – as well as protecting short-term funding
markets – was critical.

She said U.S. banking regulators “should be mindful of divergences
with their international peers, which may lead to international
regulatory arbitrage and uncertainty on the part of firms trying to
manage capital resources.”

Miller told the audience that she is seeing more “cooperation and
corroboration” among global regulators recently, far more than a few
years ago. “More are now seeing the benefits of a global trade
repository,” she said.

–email: scosgrove@mni-news.com

** MNI Chicago **

[TOPICS: M$U$$$,MGU$$$,MK$$$$,M$$AG$,MFU$$$]

Mr. Market speaketh

Posted: 16 Nov 2012 12:38 PM PST

And he’s saying he likes the happy talk the Congressional leadership put out earlier today just outside the West Wing of the White House.

We’re getting a late-day equity rally and EUR/USD trades at afternoon highs of 1.2736 and AUD/USD is at 1.0342.

USD/JPY longs take some beer money for the weekend

Posted: 16 Nov 2012 11:46 AM PST

USD/JPY made a valiant effort to take out yesterday’s high but the combination technical resistance (61.8% of the March-Sept decline) and an option defense at 81.50 capped the pair.

The stock market has sunk back to unchanged, which is a sad development given the pounding it has taken this week.

Greece: Where it is easy for money to leave and unattractive for it to stay

Posted: 16 Nov 2012 11:42 AM PST

If the Greek government would make it more attractive for money to stay put, it wouldn’t have to worry about capital flight.

Cyprus: Troika ups final spending cut position by EUR 225 mln

Posted: 16 Nov 2012 11:10 AM PST

  • Final proposal has troika asking for EUR 1.2 bln in cuts, up from EUR 975 mln.

That’s change between the cushions of the ECB’s couch compared to the money flowing to the PIGS.

Italy: No date set for national elections yet

Posted: 16 Nov 2012 10:56 AM PST

Reuters reports the president of Italy has not yet set the date for Italian elections, saying parliament still has important legislation to pass.

Elections need to take place no later than next April. PM Monti has said he will not stand for election after heading up a technocratic government.

Time for a Friday song

Posted: 16 Nov 2012 10:45 AM PST

It’s been a while since we’ve been tuneful.

Let’s hope this isn’t black Friday…

From the classic 1975 album Katy Lied…

Analysis: -0.4% US Oct Industrial Prod May Not Be Final Word

Posted: 16 Nov 2012 10:30 AM PST

-October Data Could See Big Revision in Coming Months

By Joseph Plocek

WASHINGTON (MNI) – Could the Fed be overstating the storm-affected drop in
October industrial production?

First the facts. There is no doubt October factory data were weak.
Industrial production fell 0.4% after a revised 0.2% gain in September and 1.1%
drop in August. That is no ball of fire for the three month growth pace.

The Fed report explained that the storm had a big impact: “Hurricane Sandy,
which held down production in the Northeast region at the end of October, is
estimated to have reduced the rate of change in total output by nearly 1
percentage point. The largest estimated storm-related effects included
reductions in the output of utilities, of chemicals, of food, of transportation
equipment, and of computers and electronic products.”

The implication is that without Sandy, IP would have been closer to a 0.6%
increase.

The composition of the report suggests some strength. Manufacturing fell
0.9%, but was estimated at unchanged excluding the storm effects. Utilities
slipped 0.1% which also showed the storm effect. But mining jumped 1.5% after a
large dip in August also related to precautionary closings for tropical storms.

Production is now up 1.7% over the year, a modest pace but still growth. In
the past revisions in production of 0.2 point per month have not been unusual.

October was only the first estimate of IP and according to economist
Michael Feroli at J.P. Morgan, “only about one-quarter of the report is
estimated using physical product data, so the estimate of output and the storm
effect may change” ahead as hard data become available.

MNI understands Fed officials estimated the storm’s effects using
information provided by the Federal Emergency Management Agency on the effects
in hard-hit regions such as New York and New Jersey. Recent Bureau of Economic
Analysis data show the Mideast region (one of the eight areas BEA uses to divide
the country) lagged national growth in 2011 but accounted for an outsized 18% of
real GDP.

This region consists of New York, New Jersey and Pennsylvania, as well as
Maryland, Delaware and the District of Columbia where the storm impact was more
limited. New York and New Jersey alone accounted for about 11% of GDP. At 11%
times 1/52, it is easy to see how every week of work stoppage after a disaster
might cut about 0.2 point from GDP.

But GDP consists of far more than factory and heavy output. Services and
nonproduction middlemen account for more than 80% of output and possibly did not
depend on electricity for sales. Schools and government reopened within a week
in the Northeast, and other businesses rebounded faster.

Perhaps in the aftermath of the storm the economists at the Fed simply have
to readjust their algorithms, at least for a month, so that utilities inputs are
not the driver of production.

So the October data might be revised significantly next month with
November’s report as more information comes in on actual physical production.
Moreover, the Fed gets another chance to revise weakness away in the March 2013
production benchmark.

A bottom line is that IP weakness probably should not be extrapolated to
other data or even considered the final word on output.

** MNI Washington Bureau (202) 371-2121 **

–email: jplocek@mni-news.com

[TOPICS: MAUDS$,MMUFE$,M$U$$$]

Was that it?

Posted: 16 Nov 2012 10:08 AM PST

Is the happy talk risk rally underway since Congressional leaders left the White House late this morning done?

Yeah, probably at least for the next few hours.

Sometime after 3 pm in New York we will get an idea of whether there is additional short-covering to be done in risk.

Look for 1.2700/30 for the next few hours, if we’re lucky.

Obama,Hill Leaders Call First Budget Talks ‘Constructive’

Posted: 16 Nov 2012 10:00 AM PST

-President Obama: Hope For A ‘Fruitful Process’ That Leads To Deal
-House, Senate Leaders Say First Talks Were Productive
-House Speaker Boehner: New Revs On Table If Entitlement Reforms
-Senate Majority Reid: ‘We’ve Got To Do It Now’

By John Shaw

WASHINGTON (MNI) – Congressional leaders left their first talks
Friday with President Obama expressing optimism that a plan can be
reached to avert the fiscal cliff and put in place a long-term deficit
reduction package.

Obama hosted House Speaker John Boehner, Senate Majority Leader
Harry Reid, Senate Minority Leader Mitch McConnell, and House Minority
Leader Nancy Pelosi for more than an hour in the White House.

At the start of the meeting, Obama said that all of the leaders are
keenly aware of the coming fiscal cliff deadlines.

“I think we are all aware that we have some urgent business to do,”
Obama said, adding that it’s important to set up a “fruitful process”
that can lead to an agreement.

“Our challenge is to make sure that we are able to cooperate
together, work together, find some common ground, make some tough
compromises, build some consensus to the people’s business,” he said.

After the meeting, White House Press Secretary Jay Carney issued a
statement in which he called the first meeting “constructive” and said
policymakers must do “everything possible” to avert the fiscal cliff.

He said an agreement should be reached “as soon as possible” and
must take a “balanced approach” with new revenues and spending savings.

Speaking outside the White House after the meeting, Boehner said he
offered a “framework” that linked the GOP’s willingness to accept new
revenues with the demand for significant entitlement reforms and
spending savings.

Boehner said Republicans view this as a “fair and balanced
approach”, adding that additional revenues should be accompanied by
“significant spending cuts.”

“We had a very constructive meeting with the president,” Boehner
said.

Reid said the talks were positive and future discussions should
focus on securing a broad agreement soon rather than deferring decisions
until later. He said that congressional and White House staffs will be
working over next week and that congressional leaders will meet again
with the president the week after Thanksgiving.

“We must reach an agreement,” said Pelosi, adding that the talks
should set a deficit reduction goal and seek an agreement before
Christmas.

“A solution may be in sight,” Pelosi said.

She said the talks must be “about cuts, about revenues, about
growth.”

McConnell underscored Boehner’s view that any new revenues must be
tightly linked to entitlement reforms. Any final package should “fix the
real problem”–the growing cost of entitlement programs, McConnell said.

Boehner and Obama are expected to be the central figures in the
budget talks and both will be under acute pressure to ensure that any
compromises are acceptable to their rank-and-file members.

The Speaker is under intense pressure from conservative House
Republicans to resist raising marginal tax rates.

Rank-and-file Democrats are insisting the president not make
concessions that would substantially change key entitlements such as
Medicare, Medicaid and Social Security.

Since the Nov 6. election, both Obama and Boehner have sent
conciliatory signals, but have not tipped their hands about what a final
budget accord may look like.

The president has said that any deficit reduction package be
“balanced” with both spending cuts and revenue increases.

The Speaker has said he is open to new revenues as long as they are
generated by tax reform which spurs economic growth or closing unneeded
tax loopholes. He said that tax reform and entitlement reform are
critical to a long-term deficit reduction agreement that should be
reached next year.

Separately, the House passed legislation Friday on a 365 to 43 vote
that would grant permanent normal trade relations with Russia and
Moldova.

** MNI Washington Bureau: (202) 371-2121 **

–email: jshaw@mni-news.com

[TOPICS: M$U$$$,MC$$$$,MFU$$$,MGU$$$]

US Sov Rating: Will Fitch and Moody’s Follow S&P in 2013?

Posted: 16 Nov 2012 10:00 AM PST

By Yali N’Diaye

WASHINGTON (MNI) – U.S. rating agencies, regardless of their rating
actions or inaction on the U.S. sovereign debt so far, have made it clear that
2013 could be the year of downgrade in the absence of a “credible” long-term
deficit reduction plan.

In the short-term, avoiding the fiscal cliff will be key, and rating
agencies do expect that will be the case, at least in large part.

The political process by itself will also be watched, including how
Congress addresses the next debt ceiling deadline in the first quarter of 2013.
On that front, avoiding a repeat of the 2011 political fiasco will be important.
That is: the government must avoid a last-minute agreement.

Those two events are not even the key challenge, although they will likely
impact the assessment of the ability and willingness of the U.S. government to
reach a longer-term fiscal agreement. The challenge has not changed since
Standard & Poor’s downgraded the U.S. in 2011 — the U.S. must bring back the
fiscal and thus debt trajectory onto a sustainable path. That means finding a
long-term deficit reduction plan which would likely have to tackle entitlements.

The plan implementation can be gradual over time, but what seems to matter
more is the size of the reduction, which should be big enough to convince rating
agencies that the country’s debt trajectory will be rectified as a result.

Standard & Poor’s and Egan-Jones have already downgraded the country’s
sovereign rating to AA+ and AA-, respectively.

The question is whether Moody’s and Fitch, which both have a negative
outlook, will follow suit.

While Standard & Poor’s downgrade in August 2011 has hardly penalized the
U.S. in terms of interest paid on the debt, downgrades by two more agencies, and
potentially an additional one by Standard & Poor’s, would undoubtedly impact the
cost of financing the U.S. debt.

“Failure to avoid the fiscal cliff and raise the debt ceiling in a timely
manner as well as securing agreement on credible deficit reduction would likely
result in a rating downgrade in 2013,” Fitch said the day after the election.

“Our assessment of the creditworthiness of the government, and hence the
direction of the sovereign rating and its outlook, depends on the outcome of
budget negotiations during 2013 and the ability of policymakers to reach a
consensus that produces a stabilization and then a downward trend in the ratio
of federal debt to GDP over the medium term,” Moody’s said the same day.

However, it remains unclear whether Moody’s and Fitch will follow through
their warnings, and how tolerant they will be in their assessment of “credible.”

Bank of America Merrill Lynch does “expect some rating agency actions in
2013.” The bank’s analysts pointed out that in a recent U.S. Macro Viewpoint
that in the absence of a medium-term plan, Moody’s has already warned it would
downgrade the U.S. to Aa1.

They also noted that “to prevent an eventual downgrade, S&P would need to
see a reversal in both of these trends,” referring to the worsening in trends on
the political and fiscal fronts.

Marc Joffe, Principal Consultant at Public Sector Credit Solutions, told
MNI that a downgrade of the U.S. sovereign debt is “unlikely,” but not
necessarily because it is not warranted.

In fact, he stressed that any entitlement reform would probably fall short
of what is needed.

“The baby boom generation is already in the process of retiring,” he
pointed out. “If Social Security adjustments are phased in gradually like they
were under the 1983 plan, most boomers will be unaffected by the reform,” he
continued, adding that the same goes with Medicare. “If people over 50 or 55 are
exempt from the reforms, most boomers will receive full benefits,” he said. “The
2020s and 2030s will thus be an era of very large deficits and a potential
sovereign debt crisis in the U.S.”

But the reason Joffe does not see Moody’s or Fitch follow through is more
of a political one.

“After seeing the kind of criticism that S&P took, I would be surprised to
see either Moody’s and Fitch follow,” he commented. So in his view, “As long as
there is some kind of deal, they will have an excuse to avoid downgrading.”

Some experts following rating agencies have raised questions in private
about the timing of the resignation of former Standard & Poor’s president Deven
Sharma. The move was announced only a few weeks after the firm downgraded the
U.S. sovereign rating to AA+ on August 5, 2011.

The other only other registered rating agency to have downgraded the U.S.
is Egan-Jones, which is the subject of an enforcement action by its regulator,
the Securities and Exchange Commission.

Here too, the skepticals argue the timing the SEC’s action is suspicious,
as it came in the same month, April 2012, Egan-Jones downgraded the U.S. to AA
from AA+.

In addition, they point out that the enforcement action was not brought
because of wrongdoing related to the ratings but because of irregularities
surrounding the registration process, and which should have been caught at the
time of the registration instead.

The SEC cited “willful and material misrepresentations and omissions in its
July 2008 application to the Commission to register as an NRSRO for issuers of
ABS and government securities.”

In its summary of rating agencies examinations released Thursday, the SEC
staff said “The Commission’s administrative proceeding is pending, with a
hearing currently scheduled for later in 2012.”

It added, “In June 2012, EJR and Mr. Egan filed a complaint in Federal
District Court seeking to have the Commission’s administrative proceeding
removed to Federal Court,” adding, “The Federal District Court case is also
pending.”

Another player on the government rating field could weigh in the overall
balance. HR Ratings de Mexico was granted registration on November 5, and has
yet to produce its first sovereign rating on the United States.

U.S.
Long-Term Credit Watch
rating Outlook

DBRS* AAA Stable

Moody’s* Aaa Negative

Fitch Ratings* AAA Negative

Standard & Poor’s* AA+ Negative

Egan-Jones* AA- N/A (rating watch developing)

Source: Rating agencies.

* Nationally Recognized Statistical Rating Organizations registered
with the Securities and exchange Commission.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MR$$$$,MGU$$$,MTABLE,MFU$$$]

–email: yndiaye@mni-news.com


at 6:06 PM

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