Tuesday, August 18, 2009

US Economic Crisis Update: CIT Gains Breathing Space to Restructure Debt; No Recovery Without Consumer Spending

CIT gains breathing space to restructure debt

By Saskia Scholtes in New York
August 17 2009 23:39

CIT Group on Monday revealed it had won more time to restructure and avert a near-term bankruptcy filing, saying a tender offer for $1bn of the troubled US small business lender’s debt succeeded by a small margin.

The success of the tender offer came as CIT reported a $1.6bn loss for the second quarter, its ninth consecutive loss.

CIT now has about two weeks to file plans with the Federal Reserve Bank of New York on how it intends to maintain its capital requirements, and must provide the regulator with more detailed restructuring plans by early October.

CIT has around $8bn of debt maturing before the end of June next year, and must extend its debt maturities or sell assets to meet its funding needs, the company said in a securities filing on Monday.

CIT must also provide restructuring plans to a consortium of bondholders that last month agreed to give the lender $3bn of rescue financing after it failed to secure a second government bail-out. The rescue funds were contingent on the success of CIT’s tender offer for $1bn of its bonds maturing on Monday.

CIT said 59.81 per cent of its notes were tendered in the offer, a fraction above the offer’s 58 per cent minimum requirement. CIT’s shares were down 3.55 per cent on Monday.

Some bondholders that had previously tendered withdrew participation even as CIT sweetened its offer from $825 to $875 for each $1,000 in principal amount of notes tendered. In raising its purchase price two weeks ago, the company also lowered its minimum requirement for tendering the notes to 58 per cent.

Bondholder participation at the time was at 64.97 per cent of the $1bn of notes, but fell short of the 90 per cent CIT needed under its original offer. CIT said last month it did not have the liquidity to meet its August debt maturity and might file for bankruptcy protection if it failed to reach 90 per cent participation.

CIT on Thursday agreed to give the Fed detailed oversight of its restructuring and veto power over dividend payments and other shareholder-friendly activity. The Fed will also be able to impose restrictions on the lender’s corporate governance, capital and liquidity, while CIT cannot incur any debt without the Fed’s permission.

CIT, which caters to small businesses, has struggled to meet short-term liquidity requirements amid rising loan losses and a freeze in wholesale funding markets.


IMF warns on ending fiscal stimulus

By Tom Braithwaite in Washington
August 18 2009 18:32

The International Monetary Fund’s chief economist described a “nascent” global recovery on Tuesday, but warned that US policymakers walked a tightrope in timing the end of the fiscal stimulus.

Olivier Blanchard wrote that a rebound in US consumer confidence and increased US exports to surplus countries in Asia were needed to replace higher public spending.

But in a cautionary IMF paper, he said “it is clear” that the rebalancing may not take place, “at least not on the scale needed”.

Without a pick-up in external demand to the US – “central to any world recovery” – the stimulus could be maintained too long, adding an undesirable amount to the country’s debt burden, or choked off too soon, putting the recovery at risk.

If fiscal deficits were maintained for too long, he wrote, there could be “worries about US government bonds and the dollar… causing large capital flows from the United States. Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty, which could itself derail the recovery.”

Japan, Germany and France returned to growth in the second quarter, according to economic data published in the last few days, while most economists think the US recession has ended or is coming to an end.

Germany’s prospects for future growth brightened on Tuesday with the publication of confidence data from the ZEW institute, showing the highest level in more than three years.

”The turnaround will not be simple,” said Mr Blanchard. ”The crisis has left deep scars, which will affect both supply and demand for many years to come.” His paper is due to be published on Wednesday on the IMF website.

He noted that the recovery would be too slow to check the rise in the unemployment rate in many countries, which is at 9.4 per cent the US and above 10 per cent in parts of Europe.


History’s lesson: No recovery without consumer spending

Since the 1930s, consumers have been key to lifting America out of a downturn.

By Mark Trumbull
Christain Science Monitor Staff writer/ August 17, 2009 edition

If the past is any guide, the US economy will depend on home-grown momentum to rise out of recession.

The history of upturns from economic slumps in America since the 1930s is straightforward: Consumers shoulder most of the burden. Often a big boost also comes from business investment, including home construction.

That lesson is part of what’s weighing on Wall Street, with stock indexes Monday posting their worst day since early July. Investors are wondering whether US consumers will have the oomph to lift the economy, and corporate profits, in the year ahead.

The Dow Jones Industrial Average fell 2 percent Monday to close at 9,135.34. The fresh doubts about the vigor of a consumer-led recovery also tempered commodity prices. Oil dropped below $67 a barrel as traders focused more on weak demand than on tropical storms that threatened oil production sites.

If history lays a big burden on consumers, it also may offer some comfort to edgy Wall Street traders: Consumer spending tends to rise once the worst of a downturn has passed. That was true in the 1930s, even with a tide of home-loan defaults and with the stock market way down from its 1929 peak. It was true in the early 1980s despite high unemployment.

But the track record also shows that if consumers get off to a weak start, the economic recovery itself can be tepid. The latest example: For five straight quarters starting in 2002, consumer spending rose at annual rates below 2 percent. With business investment also slow, that period became a so-called “jobless recovery.”

Another sobering history lesson is that there aren’t many examples of exports or government stimulus (aside from war spending) lifting the economy. Perhaps President Obama’s record $787 stimulus will be an exception. Typically, trade and government are forces at the margins, modestly tugging the gross domestic product up or down.

Maybe this time will be different on the trade front, if strong demand from China and other developing nations boosts demand for US exports. But many economists expect to see a trend already visible in recent months: both exports and imports recovering together.

“The United States is likely to lead rather than lag the global recovery, and we therefore expect imports to move up earlier and more sharply than exports,” Nigel Gault, an economist at IHS Global Insight in Lexington, Mass., wrote last month.

Consumer spending in the US should rise next year, but by a tepid 1.7 percent, predict economists at Northern Trust Co. in Chicago. In a recent analysis, the company’s Paul Kasriel and Asha Bangalore argue that home construction will stop its contraction by the end of this year. Yet they don’t expect much momentum to come from business investment or home construction next year.

“There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession,” the two economists say. “Anything is possible, but that does not necessarily make it highly probable. In the post-World War II era, once the U.S. economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.”


Behind stock-market jitters: Housing market?

The decline in Americans' household wealth has led to uncertainty about how strong the economic recovery will be. The uncertainty is visible in the Dow's fluctuations – such as a drop of nearly 200 points Monday morning.

By Mark Trumbull
Staff writer/ August 17, 2009 edition

When will US consumers be ready to spend again?

That’s the central issue hanging over the economy, and the stock market sagged Monday as investors focused more closely on the hurdles that consumers face even when a recession ends.

The factor that commonly lingers after recessions is worry about possible job losses. But this time, Americans are also grappling with fallout from the unusually steep decline in home prices.

That has caused about one-fourth of America’s household wealth to disappear in the past two years. Despite signs of some stabilization in the housing market lately, by one new estimate one-third of all US mortgage borrowers have “negative equity,” with loan balances bigger than their home’s market value. The magnitude varies a lot by region, but it’s not just a California and Florida thing.

“Consumers have had an attitude adjustment,” says Charles McMillion, chief economist at MBG Information Services in Washington. “The decline in consumer spending is likely behind us. [But] I don’t think that the consumer is going to be the engine to drive a strong recovery.”

The decline in household asset values – mainly homes but also the stock market – is “far beyond anything we’ve seen before” in the era after World War II, Mr. McMillion says.

This doesn’t necessarily mean that the economic recovery will be weak. But it adds a high element of uncertainty, and what lies ahead will be a period of only tepid growth, many economists say, rather than the strong rebound that has often followed deep recessions.

The uncertainty is visible in the stock market. Although share prices have generally been rising since the spring, when fears of a severe credit crisis began to fade, on Monday the Dow Jones Industrial Average began the day with a nearly 200-point drop.

Corporate profits have been rising in recent months, but investors are keenly aware that much of the gain stems from companies paring their costs rather than from rising sales.

Still, the good news is that economists and investors aren’t generally expecting a continued decline in consumer spending. The doubt, rather, is mainly about the strength of a recovery.

A few forecasters call for a fairly solid rebound, as credit markets improve and as workers gain confidence that the worst layoffs are over. Others say that, even with help from tax breaks and other government stimulus programs, consumers will at best return to tepid spending growth of about 2 percent – not enough to kick the economy into high gear. McMillion, for his part, sees a tepid recovery, with a 50 percent chance of lapsing back into recession late next year.

How can consumer spending expand when Americans are trying to save more of their income? This can happen if the increase in saving is spread out over time and if incomes continue rising in the meantime, economists say.

Many households are saving more of their income because of the decline in net worth. According to data tracked by First American CoreLogic, 15.2 million mortgage loans were in a negative equity position as of June. The problem is biggest in Florida, Nevada, Arizona, California, and Michigan. Still, in many states — including Idaho, Missouri, Utah, and Georgia – one-fourth or more of all home loans are in this “upside-down” position.

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