Finance and Economic

Rising corporate debt delinquencies and the first sovereign credit default in two years are kindling investor concerns that more emerging market borrowers could fail to repay their debt.

As the global credit crunch trundles past its first anniversary, some firms and governments are faltering on rising refinancing costs and heightened investor risk aversion.

Seychelles failed to service a privately placed 55 million euro note last month and now teeters on a default of its $230 million global bond due this October.

The tiny island-nation’s debt woes have emerged as sovereign default risk premiums for Argentina, Ecuador and Pakistan soar.

“With the deteriorating global growth environment, you have to believe some countries may get into trouble,” Angus Halkett, Deutsche Bank emerging markets strategist.

The level of distressed emerging sovereign debt — defined as bonds trading at spreads over U.S bad credit payday loans. Treasuries of above 1,000 basis points — remains relatively low.

By mid-August, it amounted to $3.3 billion or 2.1 percent of outstanding sovereign bonds versus 1.6 percent in June 2007 before the onset of the liquidity crunch.

Investors say sovereign debt default risks remain low. 

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Malaysian Premier Abdullah Ahmad Badawi cut taxes, promised free electricity for the poor and raised food subsidies in a budget designed to fight inflation and prevent the opposition from seizing power.

Announcing a 5.1 percent increase in next year's spending, Abdullah today pledged bonuses to civil servants, lowered duty on home purchases and doubled the number of households on state welfare. Higher spending in 2008 will reverse five years of shrinking budget deficits and create Malaysia's biggest overspend since 2003.

Abdullah, 68, is facing renewed calls from his own ruling National Front coalition to resign after leading the government in March to its worst election performance in half a century. Today's handouts may soften the impact of the fastest inflation in 26 years and stall a campaign by opposition leader Anwar Ibrahim to oust the government.

“These are populist measures,'' said Singapore-based Kelvin Miranda, an investment strategist at Blufire Asset Management Sdn., which manages $110 million in assets. “He's trying to buy time.''

The government will reduce the top personal tax rate to 27 percent in 2009 from 28 percent, Abdullah said in a speech to parliament. About 1.1 million lower-income households will be eligible for free electricity, while the premier allocated an extra 3.6 billion ringgit for food subsidies this year.

Suffering Poor

The handouts are “not commensurate with the vast increase in inflation and high costs,'' Anwar said after Abdullah's speech. “What is given does not actually alleviate the problems and sufferings of the poor.''

The government's 2008 budget shortfall will reach 34.5 billion ringgit, or 4.8 percent of gross domestic product, the Ministry of Finance said today. The deficit last grew in 2002.

Abdullah increased by 20 percent the tax on cigarettes sold by companies including British American Tobacco (Malaysia) Bhd. to help offset the widening gap between spending and revenue.

Voter anger over rising prices contributed to opposition gains in the March vote that deprived Abdullah's coalition of its two-thirds majority in parliament. Malaysia's inflation accelerated to 8.5 percent last month after the government raised fuel prices to lower subsidies as crude surged.

Malaysian stocks jumped the most in more than five months on speculation that the first cut to the personal income tax rate in seven years will spur consumer spending. Abdullah proposed a range of tax exemptions for employers, from medical costs to maternity expenses faxless payday loans.

Economic Growth

Abdullah needs Malaysians to spend more as exports slow to the U.S., Malaysia's largest trading partner. The Asian nation's economy expanded at the slowest pace in a year in the second quarter as manufacturing eased amid a global slowdown and faster inflation hurt consumer spending.

Southeast Asia's third-largest economy grew 6.3 percent in the three months ended June from a year earlier, down from a 7.1 percent gain in the first quarter, the central bank said today. Economic growth is forecast to ease to 5.7 percent this year and 5.4 percent in 2009, the weakest pace since 2005.

Anwar, who won a parliamentary by-election this week, has said he plans to lure enough lawmakers from the ruling coalition to form a new government next month. The former deputy premier has promised to reduce fuel prices should he seize power.

“The government is responsive to the concerns of the people and has taken measures to lighten the burden of all Malaysians,'' Abdullah said in his speech. “Efforts by certain parties to destabilize the country by attempting to seize power through illegitimate means, and without the mandate of the people, must be rejected.''

Gasoline Prices

Governments across Asia are spending more on subsidies to help the poor cope with higher oil and food costs. Inflation that the Asian Development Bank estimates may reach the highest in a decade in 2008 has stoked voter unrest in the region.

In response to public discontent over costlier fuel, Abdullah last week cut gasoline prices by 5.6 percent and lowered diesel costs by 3.1 percent, saying he wants to ease the burden of consumers and reduce inflationary pressure. The government will also spend 5 billion ringgit on cash rebates to car owners this year, is subsidizing gasoline for taxis and has allocated 2.5 billion ringgit for food security.

Malaysia's government subsidies on bread, cooking oil, fuel and programs to enhance food security will jump to 34.1 billion ringgit this year and total 33.8 billion ringgit in 2009, according to the finance ministry. Still, the ministry expects the budget deficit to narrow to 3.6 percent of GDP next year.

Inflation in Malaysia will remain high until early 2009 before “moderating towards mid-year,'' according to today's report by the Finance Ministry. The government will introduce new measures to boost its social assistance program, it said.

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Sales of previously owned U.S. homes fell in June to the lowest level in a decade as tumbling real- estate prices and consumer confidence signaled no end in sight to a housing recession now in its third year.

Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said today in Washington. The median home price dropped 6.1 percent from June 2007.

The housing slump may deepen further after mortgage rates climbed to the highest in a year this month and turmoil engulfed Fannie Mae and Freddie Mac, which account for more than two- thirds of new home-loan financing. A record 18.6 million houses, apartments and condominiums stood empty in the last three months as the industry's recession reverberated through communities, separate figures showed today.

The NAR report “is, unfortunately, not telling us about an end'' to the slide, said David Resler, chief economist at Nomura Securities International Inc. in New York. “Housing is going to be a non-contributor, if not a drag, on the overall economy.''

The Standard & Poor's Supercomposite Homebuilding Index dropped 7.2 percent to 273.96 at 11:49 a.m. in New York. By comparison, the Standard & Poor's 500 Stock Index lost 1.1 percent, to 1,267.74.

Economists forecast home resales would fall to a 4.94 million pace, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from a 4.79 million pace to 5.1 million rate.

Jobless Claims

The Labor Department earlier today reported that first-time claims for unemployment benefits rose last week to the highest in almost four months, a sign the slowing economy is weakening the labor market. Applications increased by 34,000 to 406,000 in the week ended July 19.

Compared with a year earlier, existing home sales were down 16 percent in June. Purchases are down by about a third from a record of 7.25 million reached in September 2005.

The number of previously owned unsold homes on the market at the end of June rose to 4.49 million from 4.482 million in May. The total represented 11.1 months' supply at the current sales pace. The agents' group has said that a five-to-six month's supply reflects a balanced market.

“The biggest problem is that we've not yet seen inventories come down,'' Paul Puryear, managing director of Raymond James & Associates Inc. in St. Petersburg, Florida, said in an interview with Bloomberg Radio yesterday. The housing market isn't likely to recover until at least 2009 or 2010, he said.

Property Types

Sales of existing single-family homes declined 3.2 percent to an annual rate of 4.27 million. Purchases of condos and co- ops increased 1.7 percent to a 590,000 pace.

The median sales price fell to $215,100 from $229,000 in June 2007 http://abc-cashadvance.com. The median cost of a single-family home decreased 6.7 percent to $213,800, while that of condominiums and co-ops fell 2.2 percent to $224,200.

Purchases decreased in three of four regions, led by a 6.6 percent decline in the Northeast. Sales rose 1 percent in the West, which also showed a 17 percent drop in the median price, the biggest of any region.

The glut of homes may be even greater because not all foreclosed properties are counted by the Realtors group. The group only includes foreclosures that have been listed on the multiple listings service.

Vacant Properties

The number of vacant houses hit an all-time high in the second quarter as more properties were pushed into foreclosure. A total of 18.6 million U.S. houses, apartments and condominiums stood empty, more than at any time in history, as lenders seized a record number of properties. The figure was 6.9 percent higher than a year earlier, the U.S. Census Bureau said in a report today.

More Americans are walking away from their homes as property values slump and borrowing costs on adjustable-rate mortgages reset higher. Bank seizures increased a record 171 percent in June from a year ago and foreclosure filings rose 53 percent, RealtyTrac Inc., a seller of default data, reported this month.

Home prices nationwide have fallen 18 percent on average from their July 2006 peak, according to the S&P/Case-Shiller index of 20 metropolitan areas. The drop in values may be giving those buyers still able to get financing reason to hesitate.

Consumer sentiment dropped in June to the lowest level in 28 years, according to the Reuters/University of Michigan survey, and the economy lost jobs for a sixth straight month, adding to reasons home buyers are sidelined.

Fannie, Freddie

Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to survive the meltdown in subprime lending has heightened the credit crisis and may further curtail access to loans.

There is “no sign of a recovery in housing'' this year, Caterpillar Inc., the world's largest maker of earthmoving equipment, said in a statement this week. The company said second-quarter profit climbed 34 percent, exceeding analysts' estimates, on demand for backhoes and mining tools in China and the Middle East.

Caterpillar's Chief Executive Officer Jim Owens said he expects the U.S. economy, including the housing market, to begin recovering next year.

“We will get this problem behind us,'' Owens said in a July 22 interview with Bloomberg Television. “It will probably take another six months to a year, but it will come back.''

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The Washington Post has named Marcus Brauchli, the former top editor of The Wall Street Journal, as its new executive editor, The Washington Post Co said on Monday.

Brauchli, 47, will oversee the operations of the Post and washingtonpost.com, a sign that the newspaper may be assuming more control over the website, which has been separately run. James Brady, executive editor of washingtonpost.com, will report to Brauchli, the Post said in a statement.

Brady was on vacation and not available for comment.

The newspaper, one of the largest dailies in the United States, has traditionally favored insiders who came up through the editorial ranks for its top editorial positions.

“Marcus has the ability to think strategically about our newsroom, about how to realign our resources in a way that is consistent with what readers want and expect and maintain the Post’s first-rate journalism,” Washington Post Publisher Katharine Weymouth, 42, said in the statement.

Weymouth took over as publisher in February and is a likely successor to her uncle, Post company Chairman Donald Graham cash advance today. Picking Brauchli is a clear sign that Weymouth is putting her own imprint on the Post as it strives to meet the needs of readers who are increasingly getting free news online.

Brauchli was managing editor of The Wall Street Journal until he resigned earlier this year to make way for new owner Rupert Murdoch’s candidate. Murdoch’s News Corp bought the Journal and parent company Dow Jones & Co last year.

In the past month, Post and Journal employees said that Brauchli was up for consideration as the Post’s executive editor once Leonard Downie, Jr., the current executive editor at The Washington Post, retired. 

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The European Central Bank’s interest rate rise sends a signal that it is serious about combating inflation, policymakers said as they staged a public relations offensive to justify Thursday’s increase.

A day after raising rates to a seven-year high of 4.25 percent, policymakers around the 15-nation region denied that the increase would choke economic growth and said soaring inflation was a bigger danger to consumers.

Luxembourg’s Yves Mersch said the ECB could do little to influence soaring international commodity prices but it could take steps to head off euro zone wage pressures. “We are sending a signal today which shows that we are determined to act against home-made inflation,” he told the Luxemburger Wort newspaper.

Inflation rose to a record 4 percent in June and policymakers have vowed to prevent these high rates from pushing up inflation expectations, prompting workers to demand big pay rises and firms to jack up their prices faxless cash advance.

Expectations calculated from yields on some inflation-linked bonds are at record highs and ECB Executive Board member Jose Manuel Gonzalez-Paramo said it was vital to keep these in check.

“If these expectations become permanent in the system, we are lost,” he told a seminar in San Sebastian, Spain.

The ECB raised rates by 25 basis points but President Jean-Claude Trichet said the Governing Council had no bias in favor of further rate moves, damping bets on another increase soon.

Other policymakers including Italy’s Mario Draghi, Germany’s Axel Weber, Cyprus’s Athanasios Orphanides and Austria’s Klaus Liebscher, gave little away about the future path of rates, but backed Trichet’s message of rising inflation worries. 

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There is little debate about whether the U.S. economy is in a recession. The question is how painful and long the downturn will be.

There is a growing fear among some economists that the recession will be particularly bad.

"We just can’t believe it’s going to be short. The question is how bad can it get? The situation is moving more towards severe than towards mild," said Allen Sinai, chief global economist for Decision Economics.

According to the National Bureau of Economic Research, the firm that officially determines when recessions begin and end, the last two recessions (2001 and 1990-1991) each lasted 8 months.

But Sinai and other economists cited numerous economic headwinds, including tight credit, falling home prices and mounting losses for banks, as reasons why this downturn could last longer and be more painful than seen in those last two recessions, with more job losses and a sharper drop in economic activity.

In addition to the drag on the economy from rising job losses, they also pointed to record high commodity prices and plunging confidence as factors that could cut into consumer spending.

Since consumer spending makes up nearly three-quarters of the nation’s economic activity, any decline in spending can create a downward spiral for the whole economy.

"We have a deadly combination of commodity price inflation and credit contraction," said University of Maryland economics professor Peter Morici. "It’s tough to imagine a worse combination. In a worst case scenario, the recession could last several years."

The Federal Reserve is still projecting modest growth for the U.S. economy in the second half of this year though, as are many economists. This is based on the belief that the economic stimulus package passed by Congress in February and a series of interest rate cuts by the Fed should lead to higher spending by consumers and businesses in the coming months.

But even Fed policymakers voiced worries of a worse downturn according to the minutes of their March 18 meeting released last week.

Many of the problems facing the economy will come into focus this week as many top bank and Wall Street firms report results and the government will give its latest update on inflation and housing starts.

Citibank (C, Fortune 500), Washington Mutual (WM, Fortune 500) and Merrill Lynch (MER, Fortune 500) are expected to announce additional losses.

Meanwhile, the Consumer Price Index and Producer Price Index, two of the government’s key inflation readings, are likely to show big jumps in March compared to February.

But it’s the crisis in housing that is of particular concern check cash advance.

Economists forecast that the Census Bureau will report building permits hit a 17-year low in March and that housing starts were anemic.

And during a conference call with investors Monday, Don Truslow, chief risk officer of banking giant Wachovia (WB, Fortune 500), said home prices should fall through 2008 before finally hitting bottom in the middle of 2009. (Wachovia, the No. 4 U.S. bank by assets, reported an unexpected loss Monday.)

Sinai argues that until housing prices turn around, there isn’t much hope for a pick-up in the economy because housing woes will continue be a drag on consumer spending and the credit markets.

"So much borrowing and lending was leveraged to [housing], that as long as values keep going down, the exposure of consumers, of financial institutions and of investors remains extremely high," he said.

Bill Hampel, chief economist for the Credit Union National Association, said the run-up in home prices in the middle of this decade led consumers to take on much higher levels of debt than in the past.

As long as home prices continued to rise, homeowners were able to tap into home equity lines of credit. But with home prices falling and credit suddenly tight, many households have lost this extra source of income. That could create a significant and long-lasting decline in consumer spending.

"What happened in the short space of the last five years was pretty scary — household debt rose to about 125% of income. It hadn’t ever been 100% before that. It took consumers a long time to get into these conditions; it’s going to take a long time to get that fixed," Hampel said.

At the same time, consumers are also facing rising prices at the grocery store and gas station. The Fed’s rate cuts have cut into the value of the dollar, further increasing the costs of commodities, which impacts the price of food and oil. This may only get worse if the dollar keeps falling.

"It seems to me the big wild card for the economy would be a sharp decline in the dollar, which in turn would cause U.S. inflation to spike up," said Paul Kasriel, chief economist with Northern Trust.

That would be a problem since it would force the Fed to start raising interest rates again in order to make sure inflation does not get out of hand, Kasriel said.

And rate hikes at a time when the economy is trying to rebound from this slowdown could kill any chances of a quick recovery.  

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Clear Channel Communications Inc. and the private equity firms seeking to close a $19.5 billion purchase of the company on Wednesday sued the banks backing the deal.

In lawsuits filed in Texas and New York, Clear Channel (CCU, Fortune 500) and the buyers group, led by Bain Capital and Thomas H. Lee Partners LLC, claimed the six banks that promised to finance the deal were reneging on the agreement to provide long-term financing, looking to offer little more than a short-term bridge loan.

"The lenders agreed to provide long-term financing," said Alex Stanton, a Bain spokesman. "They now have lenders’ remorse because the credit markets have been difficult."

The lenders, which include Citigroup Inc (C, Fortune 500)., Morgan Stanley (MS, Fortune 500), Credit Suisse Group (CS), The Royal Bank of Scotland (RBS), Deutsche Bank AG (DB) and Wachovia Corp (WB, Fortune 500)., signed commitments when the deal was inked 18 months ago saying they would bear all the risk in changes to the debt market.

In that time, it has become more difficult for the banks to resell the loans so — instead of sticking with the minimum six years of financing — the lenders had sought to provide only a short-term loan, the equity firms and Clear Channel complained.

The firms contend the banks are trying to kill the deal by putting unreasonable terms on the loan.

"The behavior of these banks is irresponsible, unprofessional and unjustified. The defendants have made clear that they are determined, by any means possible, to destroy the merger and thus avoid their obligation to fund, as they are required legally to do," said Clear Channel CEO Mark Mays in a statement.

The banks issued a statement denying they failed to make good on their earlier commitment.

"The bank group presented the sponsors with credit agreements fully consistent and compliant with the commitment letter," said the statement issued by Citigroup on behalf of the lending consortium. "We believe the suits are without merit and will contest them vigorously."

Clear Channel shares have been volatile for months. Shares fell $5.64, or more than 17 percent, to $26.92 Wednesday, the day after reports surfaced that the deal was on the brink of collapse. Following the lawsuits, the share price climbed $2.43, or 9 percent, to $29.35 in after-hours trading.

But the share price remains anemic compared with the $39.20 the equity firms agreed to pay for the company. The equity firms say they remain committed to closing the deal http://fcrwizard.com. If they don’t, they face an estimated $500 million to $600 million in breakup fees.

The deal was scheduled to close by Monday. Failure to close on time opens the parties up to fees and other potential problems.

SMH Capital analyst David Miller said banks that were gladly loaning money for ever bigger leveraged buyouts just a year ago are now concerned about whether the company can generate enough free cash flow to cover the interest payments in a miserly credit market.

The banks are looking at a $3 billion to $4 billion write-down on the loan, so there’s obvious incentive for lenders to seek a way to renegotiate or pull out.

Clear Channel has had success before in forcing a deal through legal action. The $1.1 billion sale of its television group closed after the company lowered the price by $100 million and sued Providence Equity Partners, which had been having difficulty getting Wachovia to make good on its earlier financing commitment.

Clear Channel is the nation’s largest operator of radio stations, a business that has been stagnant for years as digital music players and satellite radio have siphoned off listeners and advertising dollars.

The company now generates more than half of its revenue from its billboard business, consisting of roughly 800,000 signs worldwide, and that business has been growing as advertisers have shifted spending away from other avenues to billboards, which are harder for consumers to bypass.

Clear Channel Communications Inc. and the private equity firms seeking to close a $19.5 billion buyout of the company have sued their lenders.

The radio and billboard giant filed suit Wednesday in Texas, claiming the five banks who promised to finance the deal are reneging. The private buyers, led by Bain Capital and Thomas H. Lee Partners, also sued.

The banks signed letters backing the deal, but in the 18 months since it was first made, the credit market has gotten much tighter and Clear Channel’s stock is now trading well below the $39.20 that the buyers committed to pay.

The private equity firms face an estimated $500 million to $600 million in breakup fees if the deal does not go through.

Shares of Clear Channel (CCU, Fortune 500) closed down 17% to $26.92 on Wednesday as shareholders grew pessimistic about whether the deal would go through.

The buyout was supposed to be completed by Monday. 

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Gas stations on China’s booming east coast were rationing diesel, pump attendants said on Tuesday, despite Beijing’s insistence that its refiners will ensure supplies at unprofitable state-set prices.

“The line outside our station is at least one kilometer long,” said one station manager in coastal Fujian province, who declined to be named because fuel supplies are a sensitive issue.

Other stations said they had sold out of the day’s supply by noon and did not know if a delivery would arrive on Wednesday.

Down the coast in Guangzhou province, China’s manufacturing hub, diesel was rationed to 300 yuan ($42.56) for cash sales — enough to fill up a family car but just a small portion of a truck tank — and there were queues of up to 20 minutes.

The government said late on Monday that fuel supplies were adequate and that reports of rationing reflected only sporadic problems caused by demand from farmers planting their spring crops and the lingering impact of unusually severe winter weather http://pay-day-home.com.

“Supply tightness, even queues and rationing, in southern China was partly due to rising needs in the spring season as well as more demand after the harsh winter weather,” the National Development and Reform Commission said in a statement.

Hoarding in expectation of price rises may have exacerbated shortages, but overall supplies were good as domestic oil product stocks had risen 28 percent from the start of the year, and the country’s oil majors would ensure supplies, the commission added.

But as rationing and queues spread inland and to the country’s financial centre, Shanghai, there were echoes of last October’s supply crisis, China’s worst in four years. 

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IAC/InterActiveCorp (IACI.O: Quote, Profile, Research) chief Barry Diller told a Delaware court on Thursday he had rejected “many, many times” the proposals for an asset swap from IAC’s controlling shareholder, Liberty Media Corp, because they did not offer the proper value to IAC investors.

Diller also said he would be interested in a controlling interest in IAC if he could obtain the necessary amount of shares. He dubbed Liberty Chief Executive Greg Maffei an “irresponsible executive” who would not benefit IAC if he took an operating role.

With his role as IAC Chairman and CEO potentially at stake, Diller’s testimony was a key attempt to refute claims made this week by Liberty at trial in Delaware Chancery Court.

IAC and Liberty (LINTA.O: Quote, Profile, Research) (LCAPA.O: Quote, Profile, Research) are suing each other over Diller’s proposal to spin off four of IAC’s largest businesses in a manner that would dilute Liberty’s voting control over the units.

The spin-off plan followed more than a year of inconclusive talks between the sides over swapping one of IAC’s assets in return for Liberty’s stake in IAC.

“We never accepted one of them because we never got to the value that was appropriate for IAC shareholders,” said Diller, who built up the Internet conglomerate over more than a decade with the backing of his long-time friend, Liberty Chairman John Malone.

Asked by Liberty lawyer Kevin Abrams whether he would be interested in trying to seek control of IAC, Diller said, “Yes, if I could.”

“I don’t know how far I would get,” he said no fax payday loans. “I’m not sure the number of shares I would need to acquire I would (actually) obtain,” he told the court. 

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When production lines close in the United States, protectionism tends to rear its head. In China, the opposite is happening.

A volatile mix of inflation, a rising yuan and new labor legislation has corroded profits in the country’s manufacturing heartland. Hundreds, possibly thousands, of factories have been forced to close or leave the Pearl River Delta, which churns out more than a quarter of China’s exports.

Some are moving inland. Others are going to places like Vietnam, where labor is even cheaper.

But analysts say the movement dovetails with — and in no small way results from — state policies designed to propel China’s economy up the value ladder. Guangdong led reforms, and it is leading the reinvention of China’s manufacturing industry.

China, like other rapidly industrializing economies, is learning it cannot compete forever by churning out cheap, simple goods while gobbling up increasingly costly resources such as oil and iron ore cash till payday. Policymakers are keen to promote more efficient industries and higher-value products as a route to more predictable and sustainable economic growth.

“The factories that are closing are really victims of creative destruction,” said consultant Edith Terry, author of a report on the changes in the Delta published in February.

Industry estimates put the number of factories closing in the Pearl River Delta as high as 15,000, although the Guangdong trade bureau has said fewer than 300 were shutting. Most were labor-intensive, small- or medium-sized producers of metal or plastic products, toys, garments and shoes, the government said.

About 90 percent are based in Hong Kong or Taiwan, which explains why industry groups there have been so vocal in calling for relief from the pernicious effects of fast-rising costs. 

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