Drama or crisis?

28 July 2011 Last updated at 10:44 GMT By Damian Kahya Business reporter, BBC News Some Republicans are firmly against raising the debt ceiling As worries over debts move from Europe to the US, the markets have reacted with only mild panic.

Economic problems in the US could be far more serious for the world economy than anything that could happen in Greece.

But some economists have suggested that an essentially political drama is being mistaken for an economic crisis.

The US government needs the permission of Congress to raise the ceiling on the amount of money it can borrow.

If Congress doesn't grant it - currently the deadline is 2 August - the government will hit the limit and may have difficulties in paying its bills.

But there is a wider economic problem behind the stalemate.

The US - like Greece - is spending far more than it earns through taxes.

The annual budget deficit has reached $1.5tn (?920bn) this year - just over 10% of GDP - and the country has amassed a national debt of around $14.3tn.

Continue reading the main story

The interests of voters and the interests of the markets are completely at odds”

End Quote Dr Pippa Malmgren Principalis Asset Management President Barack Obama and the Republican controlled House of Representatives both agree the US needs to borrow less in the future - they just disagree on how.

It's that argument which is delaying progress on lifting the current borrowing limit.

As a result, ratings agencies have suggested that they may downgrade US debt from its benchmark top-rated AAA status - unless the two sides agree on radical action to lift the limit and cut the deficit.

Default

The immediate worry for investors is that, if no deal is agreed by the 2 August, the US may find itself at risk of a so called technical default.

"The interests of voters and the interests of the markets are completely at odds," says Dr Pippa Malmgren from Principalis Asset Management.

Some members of Congress were elected promising not to allow the government to run a deficit.

"The market keeps being surprised when it shouldn't be. You will win votes if you shut the government down," she says.

President Clinton shut down some government services in 1995 after parties failed to agree a budget

But a failure to reach a deal by the deadline may not provoke panic.

"The 2 August deadline is not an absolute deadline, because tax revenues are pretty good so far," says James Knightley from ING.

Potential impact

If it does run out of money the government may stop paying wages and social security checks - a so-called 'shut down'.

Government last shut down under Bill Clinton in 1995 when non-essential government services stopped after similar failed negotiations over the budget.

That would hurt the fragile economic recovery - but many economists find it hard to believe the US would ever default and fail to pay its debts.

"I think the risk of that is almost zero," says Josh Feinman, global chief economist for DB Advisors.

"They'll keep paying the bond holders but they'll stop paying someone else." he added.

Not everyone agrees with Mr Feinman though.

The US needs to re-finance $1.7tn, or 12% of its total debt this year - that would be hard to do if it can't borrow fresh funds.

Fidelity, one of the largest private sector holders of US bonds, say they have been preparing for a possible default.

"We have re-positioned our portfolios to respond to [the threat of default] and that means we have raised our liquidity [cash] and adjusted our portfolio maturities past the early part of August," says Robert Brown, head of Fidelity's money-market business.

That means funds - which lend money to banks and businesses - are already holding more cash to prepare for a possible default.

This limits the amount they can invest - potentially driving up the cost of lending to businesses.

The cost will stay high until investors believe the crisis is solved on a long term basis.

With so much at stake some warn that, unless it is resolved soon, the political stand-off may undermine wider business confidence.

"We've got a melodrama here and we're going to have a panic for no good reason," warns Professor Peter Morici from the University of Maryland.

"If they do something at the eleventh hour they might not avoid panic. Companies are starting to hoard cash and delay hiring, that is the beginning of a crisis."

The economy could slow as companies panic over the uncertainties created by seemingly endless negotiations in Washington.

Downgrade

Even if the borrowing limit is raised, the US may have its top AAA credit rating downgraded.

Ratings agency Standard and Poor's has cut its outlook on the US's credit rating to negative.

Economists say agencies want a comprehensive deal to limit the US deficit over the long term.

"Agencies have said if we don't get the debt ceiling raised soon, coupled with an agreement in both houses of Congress to stop the debt ballooning, then we are going to downgrade the US," says Phillip Shaw from Investec.

Lowering the credit rating may make it harder for the government and companies to borrow money in the long term.

"You might see some impact outside of treasuries," warns Mr Feinman.

Markets have so far failed to panic over debt talks

US debt would be less safe, so investors holding it would have less freedom to lend to other, riskier, companies.

"If you downgrade the US then they might have to sell some lower-rated stuff in order to keep the average credit quality."

But he doesn't think a downgrade makes any sense.

The US, he says, is not like Greece - it controls its own currency and can print as much as it likes to pay back debts.

"A credit rating is based on the chances [lenders] are going to get paid back. When you control your own monetary policy what does a rating even mean?" argues Mr Feinman.

Figures collated by ING show that 45% of US debt is held by the US government - which is unlikely to be unduly perturbed by a downgrade.

Even money-market funds such as Fidelity would not have to sell their debt, as US law makes government debt exempt from rules about diversification of risk.

Over the long term though the US may find it very hard to recover it's credit rating - should it need to.

"In my 16 years at Fidelity and at other firms, I've never seen an upgrade to AAA. We are the bellwether for safety and there are a lot of advantages that go with that," says Mr Brown.

Distraction

Some argue the episode is a distraction.

"The slowdown we are seeing in emerging and developed markets, together with the ongoing European crisis, is foremost in my thinking," says Rick Patel, portfolio manager at Fidelity International in the UK.

He sees the current uncertainty as investment opportunity.

"I've been investing in US treasuries largely because of the weakening growth outlook [in the US] which leads me to think treasuries are the way to go."

For others, the focus will soon return to Europe, where governments can't simply print money to get out of debt.

"Once the US story is complete and that is past we are going to revert to the eurozone story again," says Mr Knightley.

View the original article here

Pakistan's energy crisis

15 July 2011 Last updated at 02:20 GMT By Shahzeb Jillani BBC News, Karachi The BBC's Shahzeb Jillani looks at the impact of power cuts in the country's industrial hub Karachi

Pakistan has a serious electricity problem. Ask Mohammed Yasin, who sells sugarcane juice from a small, rented shop in Karachi's Neelum Colony.

For months, his business has been suffering because of unplanned power outages, often lasting eight to ten hours.

"I got fed up and finally had to buy this run-down diesel generator," he says pointing to the noisy equipment that is helping turn the wheel of his cane-crushing machine.

"The costs of a diesel generator are a major dent in my earnings, but what else can I do?" he asks.

Mohammed is only one of millions who have been affected in Pakistan; a country where power cuts have become a national frustration, often overshadowing concerns about Pakistan's security situation.

Spontaneous protests by citizens fed up with power blackouts have become an almost daily occurrence in cities and towns across the country.

Television channels regularly show pictures of people setting tyres on fire and shouting slogans to vent their anger at the authorities.

Earlier this month, a demonstration in front of a nuclear power plant in the city of Mianwali, Punjab, turned into a riot.

Industry leaders say power cuts are slowing Pakistan's already struggling economy even further, forcing factory closures and putting thousands out of work.

Supply vs demand The main reason given for Pakistan's problems is simple; energy supplies have struggled to keep pace with economic growth.

Fawad Khan, an energy analyst with a leading investment firm in Karachi, says that in 2008 Pakistan used to cut power for an average of three hours a day to regulate supply.

However, by 2010 that downtime had grown to six hours on average.

Now, unless drastic action is taken, many fear the blackouts will just get longer and longer.

Analysts say another factor adding to the problems is Pakistan's reliance on oil-based electricity. This has grown from 16% of total output in 2005 to 38% in 2010.

Critics say Pakistan has so far lagged behind in developing cleaner sources of energy as an alternative to the more expensive imported fuel and its own limited gas reserves.

"Most countries in the region like India, Nepal, Bangladesh are facing energy shortages, but our problem is probably the worst," says Aziz Memon, a leading textile industrialist.

Mr Memon says a lack of planning and investment in new power generation has deepened the crisis.

"We have problems of infrastructure, inefficiency and decades of mismanagement," he says.

Internal issues

Karachi, a city of 18 million people and Pakistan's main economic hub, used to be known as "the city of lights".

Today, large parts of it are regularly plunged into darkness.

As well as the perennial problems of creaking infrastructure and a lack of investment, other factors are also conspiring to pull the plug on supplies.

Over the past few months, the city's main electricity provider, the Karachi Electric Supply Corporation (KESC), has been locked in a nasty industrial dispute with the unions over job cuts.

The corporation is trying to lay off 4,500 of workers in an attempt to cut costs and improve efficiency. The employees are fighting back by camping outside the company's head offices as part of an indefinite strike.

As the stand-off drags on, millions of Karachi residents are turning to less regulated ways of getting energy, not least because when they can get power they are often having to pay more for it.

With electricity costs on the rise, pushed up by higher global commodity prices and internal inflation, a growing number of people are stealing the power they need by rigging ad-hoc wires and power meters.

The KESC says it is working on generating and supplying more electricity, but admits it has not had much success in trying to curb distribution losses.

"Despite improvements in some areas, one problem still remains," says Ghufran Atta Khan, a spokesman for KESC. "And that is, we haven't been able to stop about 30% of our electricity from being stolen through illegal connections."

Back at the juice shop there is still no power and the expensive diesel generator is chugging along.

Mohammed Yasin is honest about the stark business choices he faces.

And while he says he will resist the temptation to steal electricity, many others seem unwilling to wait for Pakistan's energy revolution to arrive.

View the original article here

Greek crisis

21 June 2011 Last updated at 16:42 GMT By Robert Plummer and Laurence Peter BBC News Street politics and strikes are putting the Greek government under pressure The impact of Greece's financial woes is being felt ever more keenly in European financial markets as fears grow that some kind of debt default may be inevitable.

Experts say a default could have a dire impact on other weak economies in the 17-nation eurozone and fuel doubts about the single currency's viability.

The Greek crisis raises big questions about the euro.

Above all, can you have monetary union without full-scale co-ordination of economic policy?

So what are the possible scenarios? Can Greece find a solution, or is it just forestalling disaster?

The Greek government is racing against time to fulfil the demands of international lenders and qualify for a new lifeline to avoid default.

The immediate priority is to secure a 12bn-euro (?10.6bn; $17bn) loan instalment by 3 July - part of the 110bn-euro loan package granted by the EU and International Monetary Fund in May 2010.

But even if the Greek parliament adopts the new austerity measures - tax rises, spending cuts and privatisation - necessary to get that 12bn euros, it will only bring temporary relief.

Jittery markets may calm down if the EU agrees on a new rescue package for Greece worth about 120bn euros, which would give Greece time to restructure its economy, boost much-needed tax revenue and eventually return to commercial lenders.

The new package is deemed necessary because the ratings agencies have downgraded Greece's sovereign bonds so much that it cannot afford to borrow from commercial lenders.

European leaders have staked their credibility on the euro succeeding as a political project, so they are reluctantly preparing the new rescue package as a last resort to prevent the eurozone's first sovereign default.

That rescue could buy enough time to restore confidence in the euro and reduce Greece's debt mountain.

But it is a big if.

Germany - a key contributor to any rescue package - is arguing with France and the European Central Bank over the extent to which private investors should buy new Greek bonds and share the risk burden.

Prime Minister George Papandreou is scrambling to shore up support in his ruling Pasok (Socialist) party, but the programme of cuts and tax increases has made him unpopular.

He appointed a new finance minister on 17 June - Evangelos Venizelos - to help quell dissent in the Pasok ranks. Pasok now has 155 seats in the 300-seat chamber.

The opposition New Democracy party objects to certain aspects of the Pasok austerity programme. If parliament fails to adopt that programme in late June, Mr Papandreou could lose more support inside Pasok and his government could fall.

The political uncertainty would have dire consequences. It would make a default look inevitable.

In that scenario, the IMF and EU would probably freeze any further lending to Greece.

New Democracy could rescue a weak Pasok minority government by forming a "national unity" coalition with it - probably demanding key cabinet posts in a last-ditch deal to appease the international lenders and markets.

But a snap election would be more likely.

It would be quite unpredictable, as Greece is seeing daily mass protests and strikes against the austerity measures. Such an election could quickly become a referendum on the international bail-out and Greece's future in the eurozone.

So what happens if Greece cannot meet its debt obligations?

Well, in that case, it will have to come clean and tell its creditors that they won't be getting all the money they were owed. They will get most of it, but later than they had expected.

This process is euphemistically known as "debt restructuring".

For it to work, holders of Greek government bonds would have to accept less than they were worth - or in the jargon of the markets, "take a haircut".

According to analysts, the size of that haircut could be anything between 20% and 50%.

If the settlement were negotiated in an orderly fashion, it could form part of an acceptable solution - although it would make investors reluctant to buy more Greek bonds in the future.

Another problem for Greece is that the ratings agencies would probably treat a debt restructuring as a default anyway.

In their view, it would just be postponing the day of reckoning that they believe Greece must face.

It would also raise interest rates for bonds issued by other troubled eurozone "periphery" economies - especially the Irish Republic and Portugal - and depress the value of the euro.

Being in the eurozone, Greece is unable to restore its economic competitiveness by devaluing its currency.

Some commentators have entertained the notion that Greece could give up the euro, but not for good.

Instead, it could take a "eurozone holiday," temporarily sloughing off the obligations of the single currency and returning when the time was right.

In this scenario, Greece would return to the drachma at a new exchange rate: one euro would equal one drachma.

It would then devalue by nearly a quarter and return to the eurozone after a few years had passed at, say, 1.3 drachmas to the euro.

Such a measure would certainly cut labour costs and boost exports.

However, it would increase the size of Greece's debt mountain.

But if you're contemplating a stealth default in Greece, what about an outright default? How bad could it be?

Well, it would be big.

Bigger than Russia's 1998 default and Argentina's 2001 default put together, in fact.

And the consequences would be felt mainly by the big EU economies that have lent to Greece.

German and French financial institutions are thought to hold up to 70% of Greek debt and would be severely hit.

The credibility of the ECB would suffer, and that could hurt international investment in the eurozone.

A default could bankrupt Greek banks, which together are reckoned to hold about a quarter of the Greek sovereign debt.

The fear is of contagion - the weaker eurozone countries would find it more expensive to borrow in commercial markets. The Irish Republic and Portugal might need a further EU-IMF bail-out.

For reasons of self-interest, therefore, the EU is likely to go to any lengths to stop Greece defaulting.

View the original article here

Kabul Bank crisis threatens aid

20 June 2011 Last updated at 17:28 GMT Kabul Bank was taken over by the Afghan central bank in September 2010 The Afghan finance minister has said he is "running out of patience" with the International Monetary Fund (IMF) after it rejected a plan to deal with the troubled lender Kabul Bank.

Kabul Bank nearly collapsed last year after it emerged it had made unsecured loans of hundreds of millions of dollars to the Afghan elite.

The IMF is blocking the release of $70m (?43m) in aid because of its concerns.

Unless a deal is agreed, Afghanistan may struggle to pay its civil servants.

The government uses Kabul Bank to pay salaries, including those of teachers, police and the army.

Diplomats told the Reuters news agency the Afghan government could face a "cash crunch" as soon as next month.

Kabul relies on aid for about 40% of its operating budget and for all of its multi-billion dollar reconstruction and development projects.

Finance Minister Omar Zakhilwal said further talks with the IMF would be "a waste of [his] time".

Concerns about abuses

Mr Zakhilwal said the IMF had asked the Afghan parliament to inject $73m into Kabul Bank in a supplementary budget. When parliament refused to do so, the IMF withheld its own release of $70m to the government.

"We are now negotiating with a partner who is not a willing partner to actually conclude this," the minister told a news conference in Kabul.

The ministry of finance sent two proposals to the IMF last week, but diplomats said these were not sufficient to guard against future abuses.

The Afghan parliament has now begun its 45-day summer break, and Mr Zakhilwal says it will not be recalled to deal with the crisis.

The IMF suspended its support programme last September when the Kabul Bank scandal came to light. Without the IMF's seal of approval, donors are unlikely to contribute funds.

Afghans rushed to withdraw their savings when it emerged that the bank had been lending money to government officials and their friends and relations.

Kabul Bank was bailed out by the central bank as part of efforts to prevent it from collapsing after former executives granted themselves off-the-books loans worth a reported $900m (?555m). In April, it was split into a "good" and "bad" bank.

The bank has almost $1bn (?600m) in outstanding loans at a time when many foreign governments and donors are warning that they will not make more aid payments until the bank's problems are dealt with by the IMF.

The World Bank says 97% of Afghanistan's gross domestic product (GDP) is linked to spending by the international military and donor community.

The fallout is all the more damaging as the country prepares for 2014, when the number of foreign troops is due to be substantially reduced.

Between now and then the government is hoping to finance a $820m (?506m) bail-out of the bank - with the ministry of finance announcing that it will ramp up its tax collection efforts to pay for it.

Public confidence in the banking system - never strong under the Taliban - has now been almost completely destroyed, correspondents say, with thousands of safes being sold over the last year to people wanting to hoard cash at home.

No payments have been made by donors into the Afghanistan Reconstruction Trust Fund (ARTF), the main vehicle for international aid to Afghanistan, for the past three months.

Payments to the ARTF have been stopped because of the continued lack of an IMF support programme, a seal of approval required by most donors before they pledge aid.

Kabul Bank was founded in 2004 by Sherkhan Farnood, a leading international poker player. Other co-owners included Mahmood Karzai, a brother of President Hamid Karzai.

View the original article here

Southern Cross in crisis meeting

15 June 2011 Last updated at 09:34 GMT The firm's landlords say they have made "significant financial concessions" to avoid closing any homes Landlords at troubled care home provider Southern Cross have pledged to do all they can to help it avoid bankruptcy, the BBC understands.

Southern Cross is to hold a crisis meeting with landlords, lenders and the Department of Health later.

Of central importance is how to ensure continuity of care for the 31,000 people at the firm's 751 care homes.

The care home provider says it cannot afford to pay the full rent on its homes.

Landlords will agree to a compromise in order to allow the care home provider to remain solvent, the BBC's business editor, Robert Peston, has learned.

The restructuring may leave the Darlington-based firm with just 250 to 400 homes, with the others being taken over by different care providers.

But the biggest landlord, NHP, which owns 249 of the homes, is expected to stick with Southern Cross.

The government has been putting intense pressure on landlords not to abandon Southern Cross altogether, according to Robert Peston.

Quid pro quo

Southern Cross said last month it planned to stop paying about a third of its rental bill.

The company's landlords met on Monday, and are expected to table their own proposal for the firm's future at the meeting on Wednesday.

"The landlords have agreed in principle that they will make significant financial concessions in order to achieve a sustainable solution," said Daniel Smith, who chaired their meeting on Monday.

Continue reading the main story

Under pressure from the Department of Health, they [the landlords] have agreed to do all they can to help Southern Cross avoid bankruptcy”

End Quote Robert Peston Business editor, BBC News "Our overriding concern at this time remains minimising disruption and concern for residents and their families."

In return, it is expected that the government and lenders will also agree to write off some of the money Southern Cross owes them.

Under their joint proposal, individual landlords would reportedly be given various options, including:

taking back homes and running them themselvestaking back homes and bringing in a new operatorsticking with Southern Cross, who would bring in new management.

Southern Cross is the UK's largest care home operator, employing 44,000 staff, of which the company has already said it will cut 3,000.

View the original article here

Cucumber crisis

3 June 2011 Last updated at 02:27 GMT By Sarah Rainsford BBC News, Almeria The conveyer belt normally used for cucumbers is now covered up Everywhere you look in Almeria there are greenhouses. Plastic sheeting stretches for miles in every direction covering vast crops of fruit and vegetables cultivated to supply the rest of Europe all year round.

But ever since German health officials linked cucumbers from Almeria to a deadly outbreak of E. coli, business here has been in free-fall.

All tests for the rare E. coli strain have now come back negative, but the reputation of Spanish producers has already been shattered.

Fear spreads far faster than facts.

"Our vegetable sales have stopped, 100%, to all countries. First Germany, then everyone cancelled their orders - and fruit sales are down by 70%," explains Javier Diaz, commercial manager at AgroIris farmers' cooperative, which supplies many major European supermarkets.

"Consumers are frightened. It's going to take time to rebuild their confidence and the supermarkets' faith in our produce," he believes, even with the official all-clear from the laboratories.

Knock-down prices Only small amounts of fruit and vegetables are being packaged for the domestic market

The cooperative works with around 500 farms, but for the past week its cavernous packing house in El Ejido has been almost empty.

Only 10% of staff are in, operating a couple of conveyor belts, sorting tomatoes and melons for the domestic market at knock-down prices.

Export orders have evaporated and in the packing area for cucumbers all the machinery has been covered over with plastic. At this stage in the season, staff here would normally handle up to 100,000kg of cucumbers a day.

Germany is the biggest market.

There are no official figures, but producers' associations estimate that losses are running at around 200m euros ($290m; ?180m) a week, nationwide.

'Really demoralising'

Down a long road flanked with giant hot-houses, Juan Lopez is one of many Spanish farmers struggling to stay afloat.

"It's really demoralising. Sometimes you wonder if it's even worth going on working," he admits, explaining that he's lost more than 20,000 euros already and had to destroy 60,000kg of his cucumber crop.

"Things are very bad," he says.

Juan Lopez still has his staff picking the ripest produce from the neat rows of plants under plastic, but not for market.

The crates of dark green cucumbers they pile up are all taken to be weighed and recorded by a notary before they go to be pulped: future proof of how much has been lost, in case there's compensation.

Continue reading the main story

I think people want to know where the real problem is. They will remain suspicious of Spain until then”

End Quote Juan Lopez Farmer Juan's hope is that confidence in Spanish produce will recover by the time the smaller fruit is ripe for picking. But with perishable goods, time is critical and Juan can't afford to wait indefinitely.

"We use 400,000 litres of water a day on the cucumbers, and there's the fertilizer too. It's very expensive," the farmer explains. "But they've already cost me a lot so I have to try to keep them going for another week, and hope things improve. It will be hard though."

Like many farmers, Juan Lopez has already had to make several employees redundant; the fate of others depends on future orders.

"If I don't work, I don't eat," frets Juan, a farm labourer snipping big, ripe cucumbers from towering plants. Agriculture is the mainstay of the economy in Almeria and the prime source of jobs.

"I don't understand why Germany had to point the finger at us if there was no proof. It destroyed our reputation in an instant," he complains.

Farm staff point out that none of them has fallen sick. To prove their point, one plucks a cucumber from the vine and bites into it.

Costa de Almeria is one of the firms officials in Hamburg first named as a possible source of contamination. All tests - German and Spanish - have now come back E. coli free, but the company calculates it has already lost a million euros in destroyed stock and there's no sign of any let-up.

More of its lorries full of fresh produce were turned back to Spain on Thursday and orders cancelled.

'It's horrendous'

In the back yard of the packing house, men empty crates full of cucumbers into skips for dumping. Inside, other teams unpack cardboard boxes full of harmless aubergines, courgettes, peppers and melons marked "withdrawn" into giant waste bins.

Affected farmers will be pressing for compensation for their wasted crops

"We're filling container upon container with produce to throw away," the firm's deputy finance manager Noelia Perez says. "It's horrendous."

"I'm very angry because we have been falsely accused of being guilty and all our clients had wrong information. The only one guilty is the German government," Ms Perez argues.

She supports a pledge by Spain's Prime Minister to push for "explanations and adequate compensation" for the damage caused.

"I think Spain will look into this. I think it's not legal to accuse people before you know where the focus of the infection is."

There is now some concern that competition and protectionism may be encouraging countries like Russia to impose import bans, rather than considerations of public health.

But most Spaniards agree that finding that real source of the E. coli outbreak in Germany is crucial to starting to lift the stigma of contamination from Spanish produce.

"What the Germans have said so far is not enough," says Juan Lopez, who says the situation has been handled very badly. "I think people want to know where the real problem is. They will remain suspicious of Spain until then."

In the meantime, farmers are being forced to watch in dismay and disbelief as thousands of kilograms of produce - crops they invested so much time and money in - are picked and pulped for fertiliser.

View the original article here