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.
A looming wall of debt can be a scary thing. Nearly $830 billion of risky dollar-denominated corporate debt comes due between 2012 and 2014, according to JPMorgan. At first sight that casts a long shadow over credit markets. But borrowers like Cablevision <CVC.N> are already tweaking their obligations. By the time 2012 comes around, the wall will be much smaller.
In fact half the debt in question doesn’t mature until 2014. That means companies and their lenders have some time to pull their bricks out of the wall early — with the help, for the moment, of investors eager to buy new debt.
Lenders do not seem to be good learners. To judge from the credit market, the 2008-9 crisis might never have happened. Perhaps this is the healthy fading of traumatic memories, but the current buying frenzy looks more like a return to an old bad habit.
It’s hard to find debt that investors don’t like. They are snapping up paper from solidly rated companies such as Wal-Mart and Anheuser-Busch InBev, and from still bankrupt Lyondell Chemical. The enthusiasm has reduced the spread on bonds dramatically.
By Agnes Crane and Antony Currie
Investors seem remarkably relaxed about the end of the U.S. Federal Reserve’s $1.25 trillion program to buy mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac.
Just a few months ago many worried that, without the central bank’s continued intervention, home loans could become expensive enough to scare off prospective buyers and send the market into a renewed slump. Now they’re regarding the Fed’s exit as little more than a minor blip. But that could be a sign that complacency is seeping back into the financial system.
The buyout buzz is back. A growing number of publicly listed companies have become the subject of private equity stalking rumors. Harley-Davidson, RadioShack and Supervalu have all had the treatment recently. But bigger examples are likely to remain scarce for now.
The stunning recovery in credit markets accounts for a big part of the momentum. Leveraged loans have come along for the ride, surging from their troughs of around 70 cents on the dollar to trade above par on the Markit benchmark index.
Home ownership in the United States ranks up there with apple pie and motherhood. The government has championed it for decades, through tax breaks, mortgage guarantees and most recently the Herculean task of keeping Americans in their homes after the housing market collapse. But government subsidies of the American Dream also have a darker side: when things head south, taxpayers end up on the hook.
Government-run mortgage agencies Fannie Mae and Freddie Mac owned more than 131,000 properties between them at the end of 2009, according to recent annual filings. That’s roughly the equivalent of San Francisco’s owner-occupied housing stock — and it’s up substantially from 2008, despite the two giant companies’ efforts last year offloading nearly 200,000 units that they ended up with after their previous owners defaulted.