– The author is a Reuters Breakingviews columnist. The opinions expressed are her own –
By Agnes T. Crane
NEW YORK (Reuters Breakingviews) – Investors desperate for yield and protection against a sagging dollar are flocking to bonds denominated in emerging market currencies. Some appear to be overlooking one important aspect amid the frenzy. If things go bad, local sheriffs playing by different rules will lay down the law.
The wrangling over AIG’s Asian insurance unit AIA clarifies what Prudential’s board should have known all along: AIG is beholden to the U.S. taxpayer. While accepting a lower price might have been a rational business decision, it also would have further opened AIG to charges of shortchanging its owners — this time to help Pru.
Prudential Chief Executive Tidjane Thiam may be fighting for his job. His shareholders couldn’t get past sticker shock on the $35.5 billion deal to buy the pan-Asian insurer. That forced him to try to renegotiate at a lower price.
Are the largest U.S. banks too big to downgrade? Laws to tackle the too-big-to-fail problem are supposed to force Bank of America, Citigroup and other financial firms to stand on their own feet.
But at least for a while, U.S. bank credit ratings will continue to factor in government backing.
By Agnes Crane and Christopher Swann
Haven status in a market storm sounds good for the United States — but could make it less safe. Sure, it bolsters the dollar’s standing and delivers the perk of cheap financing. But for a nation that desperately needs to kick its borrowing habit, the weak euro could be a bad influence.
Global financial markets have been rattled for weeks as euro zone leaders have clumsily tried to contain the Greek contagion. A nearly $1 trillion rescue package has done little to stop the carnage. The euro has been hammered, though recovered some lost ground in the last two days. Stock markets around the world took another beating Thursday as investors feared a global economic slump. The S&P 500 index fell 3.9 percent.
The bailout of America’s failed housing finance giants is taking on Greek proportions. On Wednesday, Freddie Mac said it would tap the Treasury for another $10.6 billion after first-quarter losses. Together, Freddie and its cousin Fannie Mae have drawn $136.5 billion from Treasury’s unlimited equity line since they were seized in September 2008. The European and International Monetary Fund rescue package for Greece – one that was supposed to shock and awe international markets – comes in at the same kind of figure, around $139.7 billion.
The tragedy, as far as U.S. taxpayers are concerned, is that Fannie and Freddie will most likely need much more capital in coming years. High unemployment and the shaky housing market all but ensure more losses for the two agencies responsible for guaranteeing the majority of mortgages.
The United States is a great distance from Greece and its economy is moving in a better direction. But the subprime crisis showed how fast and how far local financial problems can spread. If the euro zone gets into real trouble, the United States may be a safe-ish haven, but can’t hope to escape unscathed.
American investors got a sampling this week of what further deterioration in the euro zone could taste like. On the good side, investors rushed into perceived harbors – the dollar and Uncle Sam’s own debt. On the bad side, the swoon in prices of American shares and corporate debt indicated the long reach of a foreign crisis.
A super-sized 110 billion euro bailout was supposed to calm markets, but investors seemed as frantic as ever. Their logic: Greece still has to go through wrenching cuts, and may end up restructuring its debt, which could force current bondholders to take a haircut. And they fear the euro zone won’t have enough money and willpower to keep the crisis from spreading.
Investors ran for cover in the supposedly safe U.S. Treasuries and dollar, pulling the euro down to a fresh 1-year low. Greek bonds were hammered and the cost of protecting Spain, Portugal and Ireland’s debt went higher. Shares of Banco Santander, seen as a proxy for Spain, fell 7 percent.
Big U.S. banks are getting separation anxiety. They don’t want to spin off their lucrative derivatives desks, even into subsidiaries. The idea, which is part of the financial reform legislation being debated in the U.S. Senate, has merit. It would rid the derivatives market of perceived taxpayer support and discourage risky speculation. But international cooperation will be critical.
Some $30 billion of revenue is at stake, so the concern from Wall Street isn’t surprising. The proposal may not survive Senate horse-trading, and even if it does, it’s not clear whether it would require completely severing the derivatives apron strings, or only a loosening by way of separately capitalized derivatives subsidiaries.
The lackluster reception for Thursday’s slew of U.S. initial public offerings may be a downer for companies contemplating a public listing on U.S. exchanges, but it shouldn’t be discouraging for everyone else. It suggests investors are still being sensibly choosy even though financial markets are awash with easy money.
There has been plenty of talk of bubble trouble. Rock bottom interest rates around the developed world and the return of infectious confidence have raised fears that the rapid recovery in stocks and bonds over the past year is unsustainable. Yet investor exuberance doesn’t look completely irrational just yet.
Greek debt suppliants are playing to thin houses in the United States. The target for a dollar-denominated bond sale by the euro zone’s problem child once stood at $5-10 billion. That now looks like wishful thinking. A Greek official speaking to Dow Jones Newswires said $1-4 billion is more likely. Investors’ wariness reflects the unsentimental reality of Greece’s predicament.
One blow to a bigger bond sale came from Pacific Investment Management, the giant U.S. bond fund firm. PIMCO told Reuters earlier this week that it would sit the bond sale out. With roughly $1 trillion of assets under management, the group’s vote carries serious weight.