The Great Debate

At least U.S. has Japan to fall back on

(James Saft is a Reuters columnist. The opinions expressed are his own)

The bad news for holders of U.S. debt, in case you missed it, is that China has sold so many Treasuries that it is no longer America’s leading lender.

The worse news is that there is a new creditor-in-chief, and it is Japan, an aging country with its own government debt bubble to contend with.

China sold about $34 billion of Treasuries in December, taking its holdings to $755 billion, while Japan increased its purchases and now is in the top spot of the Treasury Department’s scroll of merit, with $768 billion. China’s holdings peaked in April, since when the trend has been gently downward.

From a demographic point of view, though, the United States making a long term borrowing plan based on access to Japanese funding is a bit like my daughter making a retirement plan that has me continuing to work when she stops at its centre.

Japan is a wonderful country with many strengths, but one salient feature of Japan is that it is aging, or should that be aging, deeply in debt and dependent upon very low rates to continue to make those debts manageable.

Greece an ideal Goldman client; profitable, culpable

Goldman Sachs has a lot to be thankful for – huge bonuses, massive taxpayer subsidies, unrivalled political influence – but in Greece they have finally found nirvana: a highly profitable business partner who can also credibly serve as the villain in the piece.

Goldman is widely reported to have arranged a swap transaction for Greece early in the last decade structured in such a way as to provide the country with $1 billion upfront in exchange for higher payments much later.

That later bit is key – it helped to mask over-borrowing by Greece from the euro zone’s budget watchdogs in Brussels, not to mention from Greek taxpayers and the buyers of Greek debt, all of whom have a right to fully understand the risks of a country incurring liabilities which perhaps it may struggle to repay.

Housing’s Humpty Dumpty moment

(James Saft is a Reuters columnist. The opinions expressed are his own)

All the King’s horses and all the King’s men have been busy propping up the housing market but sometime this year, perhaps soon, it will face a Humpty Dumpty moment.

While it gets a lot less attention than the banking bailout, the official forces targeted at supporting house prices are truly vast; a generous tax break for buyers and a mortgage market that has essentially been nationalized.

That’s bought a recovery of sorts — Standard & Poor’s/Case-Shiller home-price index released on Tuesday showed that in 20 major cities home prices rose 0.2 percent on a seasonally adjusted basis between October and November, despite a national unemployment rate of 10 percent and a slow-motion cascade of foreclosures.

Fed’s wondrous printing press profits


– James Saft is a Reuters columnist. The opinions expressed are is own. –

Now finally we see what it takes to be a profitable bank with no capital worries and secure funding: own a printing press.

Sadly, since it is the Federal Reserve showing record $46 billion profits last year we have to conclude that, though it is a fool-proof plan, it’s not really scalable.

Icelandic, Greek sagas show sovereign risks

– James Saft is a Reuters columnist. The opinions expressed are his own. –

Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.

Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.

Bernanke’s fearful asymmetry

saft2.jpg – James Saft is a Reuters columnist. The opinions expressed are his own —

Ben Bernanke may minimize the role of monetary policy in the housing debacle, but he minimizes two key factors: the effect of low rates and the Fed’s policy of cleaning up after but not popping bubbles had on risk-taking.

In what amounts to a defense of his own and Alan Greenspan’s legacy, Bernanke maintains that low interest rates didn’t cause the bubble, which he says required a regulatory rather than monetary solution.

China tightening could undo risk markets

saft2.jpgThe key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.

After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.

“We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool,” Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.

Dubai not a canary but another miner needing oxygen

cr_lrg_108_jamessaft1.jpg- James Saft is a Reuters columnist. The opinions expressed are his own -
Taken all in all, Dubai’s debt crisis is the most significant financial development of 2007. Here in late 2009 it amounts to far less.
Back in the day it would have been a newsflash that apartments ultimately require occupants, that investment needs to be ratified by cash flows, and that debt, Sharia-compliant or garden variety, someday must be repaid.
Dubai’s difficulties are being sold as the commercial real estate debacle somehow morphing into a sovereign debt crisis and it is true that the effective borrowing rates of the more raddled national borrowers such as Ireland have been driven up in recent days.
Dubai’s government said on Monday that it is not responsible for the borrowings of Dubai World, a state-controlled development conglomerate saddled with huge debts amid a property market where the going rate has halved.
Dubai last week applied for, or imposed depending on your point of view, a six-month repayment freeze for Dubai World and its property developer Nakheel.
“Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct,” said Abdulrahman Saleh, director general of Dubai’s department of finance.
Quite, and hopes that credit extended to Dubai World would be made good by the state of Dubai or by the richer emirate of Abu Dhabi seem to be foundering. This is bad news for those creditors, with the worst potential losses traceable to banks in Britain and Europe, but its probably just not that big of a deal.
For one thing, the amount potentially at issue, even if you allow for an extra 50 percent off balance sheet taking it to circa $125 billion, is simply not big enough in the scale of things to tip significant players over the edge.
And it tells us very little about the state of the world or the likely outlook for real estate. It is very hard to call something a canary in the coal mine when you are already cleaning up after a mining disaster.
For a time the magical thinking behind Dubai, “build it and they will come”, worked and despite it being remote, having an inhospitable climate and little inherent commercial reason for existing, the city boomed. It’s a bit like having a feast so the harvest will be good rather than when it actually is, but it was effective for a time as prices rose and investment was attracted.
The nub of the meme in financial markets is that this is about sovereign exposure and that creditors will be shocked if the state support they thought they had coming never arises.
But is it terribly bad news for the rest of us? Probably not. Investors should have seen it coming – there have been quite a few headlines recently about the real estate crash-  and should not have conflated “implicit” with “explicit”.
Dubai has made clear in its own bond prospectuses that it might lend support but that it was under no obligation to do so. Teaching investors the difference between “quasi-state” and “state” is a good thing.
So why then did the cost of borrowing for Greece and Ireland, as expressed in insurance contracts against default, go up?
Nothing about Dubai’s predicament will have much of an impact on Irish or Greek tax revenues clearly, and the banks and the pool of lendable capital has not been diminished by much.
Nor is it easy to draw a new connection between Dubai and the emerging European countries which represent a muchmore substantial and potentially grave threat to banks in Europe.
Perhaps this is ultimately about moral hazard – risk taking under the belief that you are “insured” -  as are all stories involving the words “quasi,” “government,” and “debt.”
Fannie Mae and Freddie Mac’s quasi-government status fed moral-hazard driven risk taking, as did Dubai World’s, as is most certainly the case where government insurance allows for cheap borrowing.
Markets went down on Dubai because they have become addicted to moral hazard and anything that doesn’t conform with the idea that all shall be bailed out is scary.
It is apparently terrifying that a government should say “hard luck” to anyone anywhere, no matter how difficult the government’s situation is or how ill-founded the investors claim to relief.
None of this is to say that the commercial real estate crash isn’t terrifying, or that countries like Ireland and Greece don’t face difficult times and huge risks, but only that Dubai tells us little new about those things.
There is definitely a moral hazard trade out there, but Dubai is not the event which will cause it to unwind.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Email: jamessaft@jamessaft.)

Fed audit push gives impetus to gold rally

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

Auditing the Federal Reserve may or may not be a good idea, but one thing seems pretty sure: just discussing it seriously will tend to drive the price of gold higher.

The U.S. House of Representatives Financial Services Committee last week voted to approve an amendment that would bring about an audit of the Fed, its monetary policy and lending programs, since when gold has gone its merry way higher, hitting an all-time high of $1,174 per ounce on Monday.

The amendment, a provision to a broader financial services reform bill that is still under consideration, was co-sponsored by Republican Representative Ron Paul, author of the book “End the Fed,” and the man least likely to be found chairing a panel at Jackson Hole or Davos.

A rising tide of capital controls

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

Easy money in the United States, a falling dollar and growing flows of funds seeking better returns in emerging markets are touching off a new round of capital controls in hot emerging markets, a trend that could accelerate and will at the very least increase market volatility.

It shouldn’t be a surprise, really; loose money in the developed world is helping to spur investment into emerging markets, driving currencies up and making local exports less competitive for countries which, unlike China, aren’t hitching a free ride as the dollar declines.

Inflation may be a threat for many of these, but with the global economy still struggling, it certainly won’t feel that way to policy makers.