On Jan. 6th, Tim Geithner sent a letter to Congress asking to raise the ceiling on the national debt. The Republican House is refusing to approve the new debt until they see a $50 billion spending cut. The treasury’s current ceiling is $14.3 trillion, and should be breached sometime between March 31st and May 16th. This is after borrowing an additional $327 billion and drawing down $200 billion in deposits at the Fed. Additional funds could be freed up by redeeming debt issued to civil service pension plans and selling mortgage-backed securities and privately originated student loans acquired during the crisis. These measures should extend the Treasury’s runway until autumn. Afterwards, it may have to default on something. The Treasury is able to service the interest on its existing debt through tax revenues, but other obligations may be postponed such as civil service salaries, tax refunds, Medicare/Medicaid payments, or Social Security.
Strong performance in the Latin America region has resulted in an influx of foreign capital. With it has come an appreciation of the regional currencies against the USD, creating difficulties for exporters. The rise reflects the region’s sound financial footing and link to the commodity boom, but it is quickly becoming too much of a good thing. In the past two years the Brazilian Real has appreciated by 38% against the USD. As a result, inflation and loss of manufacturing jobs have increased. Governments are now taking measures to curb the value of their respective currencies. Chile this month announced it would by $12 billion of foreign reserves in 2011, and Brazil has required all banks to cover 60% of their bets against the USD with deposits at the Central Bank. Other countries such as Peru, Mexico and Colombia are following suit. Tweaking policy is however a tricky feat: raising interest rates to combat inflation may boost the currency further, and lowering the value of the currency through buying reserves may stoke inflation. Another method employed has been encouraging investment abroad through the private sector, pension fund investments, or sovereign wealth funds.
In the past several months, Chinese leaders have visited a number of European countries in an effort to show support for the EU, the Euro, and willingness to buy bonds to help struggling peripheral states. It is a testament to how quickly China has risen and Europe as fallen behind, clinging to a country with an economy one-third the size of its own for help. China has many reasons to help: the EU is its biggest export market and an important source of technological knowledge. Shoring up the Euro helps keep Chinese exports cheap while protecting the country’s Euro denominated assets. Lastly, strengthening the Euro helps China to diversify its reserves away from the USD. Despite these measures, China has not bought itself much goodwill from the EU in terms of policy and trade. Issues such as the value of the Yuan, exports of rare earths, and intellectual property rights have taken on a sharp tone, and the EU has started to make protectionist remarks about China. On a higher level, the rise of China is quickly exacerbating the decline of Europe, threatening everything from the low-end manufacturing of shoes and textiles to higher-end cars, trains and planes. Although the Chinese still love their BMW’s and Gucci bags, it remains to be seen whether Europe can survive on its luxury brands alone (“Switzerland on a continental scale”).
On January 12th, Portugal had its first bond auction of the year, meeting its target of EUR 1.25 billion by selling bonds maturing in 2014 and 2020. About 80% of the bonds were purchased by foreign investors. The yields paid for the bonds were quite steep, and remain unsustainable for a country whose public debt is high and rising. Portugal insists that it does not share the same weaknesses of its neighboring peripheral countries Ireland and Greece because it was not caught up in a property boom or fiscal laxity. Instead, Portugal suffered from a stead loss of wage competitiveness which began in the 1990s. During the 1990 world trade talks, tariffs on cheap textiles from Asia were lowered, hurting Portugal (AKA “the EU’s sweatshop”). China entering the WTO in 2001 added further pressure. Feeble GDP growth combined with cheap borrowing overseas has resulted in an inability to keep public finances on track. Progress needs to come from a reorganized export market with flexible rules on hiring and firing as well as lower labor costs.
On January 10th, 84-year-old founder Hugh Hefner bought out the 30% of Playboy Enterprises he did not already own, rejecting an offer from Friendfinder (owner of Penthouse Magazine). Hefner’s offer of $6.15 per share values the company at $207MM, down from approximately $1billion in its prime. Television is currently the company’s largest revenue source (40%), and a new push will be made into online gaming with “Playboy-caliber women”. Lastly, the company is expanding its presence in Asia with a club in Macau, and a Playboy Mansion scheduled to open in 2012.
On January 17th, Morgan Stanley and JP Morgan announced that they were given permission to enter China’s domestic securities market. These are the first for an American bank since 2003. Last year, China produced $5.6 billion in investment banking revenue, over double Japan’s. More than 700 companies issued securities worth over $186 billion and thousands await approval for public offerings. China has a lucrative market due to its large pool of savings that are currently stuck in low yielding cash or a speculative property market. Companies are looking to IPO in order to gain international legitimacy as well as incentivize employees with long-term loyalty. The new approval allows JP Morgan and Morgan Stanley to take one-third stakes in joint ventures with two of China’s smaller securities firms. In addition to being forced to swim with small fish, the government has imposed further limits. For the next 5 years, both companies will be able to underwrite but not trade any securities. In essence, it is the type of joint venture the two firms would never consider in any other country.