James Saft

We are all junior investors now

Feb 23, 2012 16:29 UTC

By James Saft

(Reuters) – If the Greek bailout has proved one thing it is this: we are now all creatures of government.

The rescue itself is only of passing interest – it won’t be the last and Greece’s virtual default will become real one of these days. Instead, it is the way in which the interests of private investors have been officially subordinated to public claims that will have a lasting impact.

Under the terms of the deal the European Central Bank and national central banks will be excused from taking any losses on their holdings of Greek debt. Private investors, in contrast, will take a loss of about 75 percent and are expected to be made subject to collective action clauses now wending their way through legislation in Greece. Those CACs will force investors to tender their bonds and take a hit, all while central banks skate serenely away. The ECB and national central banks will remit their profits on Greek bonds to the Greek government, a helpful gesture, but one which is cold comfort to an investor who now finds their interests subordinated.

“Of course, it is not in the politicians’ interests for the central banks to bear any losses as a result of lending to Greece and of course it is the politicians that set the legal and regulatory framework. Not only can politicians change the goalposts, they can change the ball you are playing with. Politicians, and the authorities, are exercising their imbedded power,” writes Richard Woolnough, a portfolio manager at British fund manager M&G Investments. here%C2%A0/#comments

Woolnough objects to the deal on the grounds that, besides sparing official creditors, it rewards the ‘locusts’ who bet against Greek debt but disproportionately punishes investors. The European Stability Mechanism, a sort of permanent bailout fund, is expected to also be awarded status senior to private investors.

Italy needs miracle, not just Monti

Feb 14, 2012 20:58 UTC

By James Saft

(Reuters) – Italy is going to need considerably more – in luck, growth and cohesion – than is likely to be delivered by premier Mario Monti’s technocratic charms.

Monti, unelected and a former European Commissioner, is so much more reliable and authoritative than the opera buffa figure of Silvio Berlusconi that it is tempting to think that Italy, now enjoying the qualified backing of the ECB and financial markets, is past the worst. And in truth, progress in a few short months has been impressive; Monti makes the right noises on structural reforms and has been rewarded by a sharp fall in Italian interest rates.

And yet the country still faces enormous risks and uncertainties with multiple paths for the uncertainties to magnify the risks. Italy is only in the very early stages of a recession that could last for years, it is hostage to outside shocks from other weak euro zone members and there is no guarantee that the political consensus for reform will survive the effects of the resulting austerity.

Watch out for the policy drag: James Saft

Feb 9, 2012 19:04 UTC

By James Saft

(Reuters) – A strengthening U.S. jobs picture is the best news in months, carrying within it confirmation of the fruits of a pleasant rebound in American manufacturing.

That said, of the three sources of power for a recovery – private activity, public activity and monetary policy – only one will be a source of strength in the coming months, while the others may well prove a drag.

First, the good news; January’s payrolls data was strong, exceeded expectations, included positive revisions to previous months and, best of all, established something approaching a positive trend. Hours worked are growing more quickly than employment, hinting at hiring to come if employers gain confidence. It is just about possible to put together a thesis that those Americans with jobs are feeling a bit more secure and are finally going ahead with long-deferred purchases of big ticket items like autos.

The beauty school economy: James Saft

Feb 9, 2012 19:03 UTC

By James Saft

(Reuters) – Can Americans build a sustainable recovery based on borrowing money to buy cars to drive to debt-financed cosmetology classes?

Perhaps not, but they appear to be trying, driving a surprising mini-recovery in the economy and, in the process, fueling a heck of a financial rally.

Consumer borrowing in the U.S. surged for the second month running in December, rising by $19.3 billion, a 9.3 percent rise on a seasonally adjusted basis. That makes a two-month increase of almost $40 billion, something not seen in more than 10 years. The data, which doesn’t include credit secured against real estate, includes a modest rise in revolving credit, such as credit cards.

Bernanke and 87-year-olds with mortgages

Dec 15, 2011 15:45 UTC

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

A financial advisor who counsels 57-year-olds to lock themselves into large loan payments until they are approaching 90 probably ought to be looking for another line of work.

And yet here we have Ben Bernanke, perhaps the most powerful man in the global economy, following exactly that course. The Federal Reserve Chairman is putting his own assets on the line to walk that reflationary walk in a move that tells you a lot about the theory, practice, risk and rewards of the economic remedies he champions.

Bernanke, who turned 58 this week, refinanced his mortgage in September, less than two years after the last time he refinanced, according to a report in the Wall Street Journal, citing sources and public records.

Europe ignores credit dynamics

Dec 13, 2011 21:01 UTC

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

Europe‘s rule-based approach to fiscal reform will fall short because it effectively ignores the dynamics of credit markets, which laid the tracks along which this train wreck traveled.

Europe moved last week to impose some discipline on its member states’ fiscal houses, choosing a rule-based fudge rather than the fiscal union that a common currency probably ultimately needs. It will thus take discretion away from member states, pre-committing them to austerity measures during tough times, while doing very little to address the malfunctions in the banking system which create destructive credit bubbles in the first place.

Reforming Europe‘s fiscal framework without addressing the financial system which created all of the credit is like having alcoholics take ever more severe pledges of sobriety and penalties but still allowing them to own cocktail lounges.

Don’t fear the death of excess debt

Dec 8, 2011 16:42 UTC

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

How do you save an economy during a debt bust without mass defaults or a lost decade?

From the evidence thus far the answer is: you don’t.

Both Europe and the U.S. have bent over backwards in trying to deal with excess private and public debts without default, hoping to keep the circus floating along for long enough so that they can be rescued by growth and inflation.

In the U.S. that has meant rescuing the banks while using various types of new leverage to try to keep housing and securities prices above the level where banks carry them. In Europe, quixotically, this has included both cutting back on public expenditure while at the same time refusing to recognize a 50 percent writedown on Greek debt. It has also meant keeping banks and countries on life support via loans or debt purchases from the European Central Bank.

Merkozy decrees: no more losses

Dec 6, 2011 18:26 UTC

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

Call it the Merkozy Plan – there shall be no more losses.

German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled on Monday yet another final plan to save the euro, this time calling for new treaty provisions to ensure members maintain fiscal discipline as well as an all-too-predictable move to hold monthly meetings of EU heads, seemingly an attempt to revive Europe by providing business for its caterers.

Perhaps most importantly, the two agreed to scrap a previous agreement to make private sector creditors share in the losses in all future bailouts. Bondholders still face a 50 percent write-down on their holdings of Greek debt, but that’s it, from here on out it’s all going to come out of the hide of taxpayers.

Of course there is the (slim) possibility that future bailouts will include burden sharing by banks and others who hold European government bonds, but given how poorly it was received this time it is best not to hold your breath. The policy U-turn is wise, reckless and deeply depressing all at the same time.

Central bank credit exceeds their grasp

Dec 2, 2011 17:46 UTC

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

To judge by equity markets, central banks have all the credibility in the world, but their reputation just may exceed their actual power.

Markets rallied furiously on Wednesday after six leading central banks acted to give banks access to easy money, a coordinated bid to unblock funding markets which threatened to seize up due to fears over European debts.

The group — the Federal Reserve, the European Central Bank and the central banks of Japan, Britain, Canada and Switzerland — agreed to offer dollar swap lines at a half a percent less interest than previously and pledged to keep these lines in place until early 2013.

Japan and the debt faith crisis

Dec 2, 2011 17:41 UTC

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

Could Japan be the next victim of the crisis of faith in government bonds?

Despite carrying public debt more than twice the size of its economy and suffering from poor growth and an aging population, Japan’s government can still borrow money for 10 years at just over 1 percent.

The big story in global markets, perhaps even in global economics, in 2011 has been the transformation of government debt markets, which are now being driven by the realization that sovereigns can and sometimes do default.

So far that has actually been good for borrowing rates for big economies blessed with their own central banks, such as the U.S., Britain and Japan. There is a growing chance that in 2012 the wolves, having picked off Italy and others in the euro zone, move on to target the hindmost of the rest of the pack, which, given its poor medium-term fundamentals, may well be Japan.