Financial life in a big town

Global stocks sank Monday after a leading credit ratings agency warned of a deteriorating U.S. financial position and investors fretted over a debt default by bailed-out Greece.

Though Standard & Poor’s reaffirmed its triple A rating on the U.S., it downgraded its credit outlook to negative from stable, citing a “material risk” that policymakers won’t be able to agree on a plan to deal with the “very large” budget deficit.

“While it has been widely recognized that the U.S. credit rating may have been at some risk of a downgrade for years, S&P’s action still comes as a major wake-up call for policymakers, and investors,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “This may well prompt more forceful action on the deficit in the next two years, which in turn will act as a more forceful drag on the economic recovery.”

The markets were certainly shocked by the announcement and stocks fell sharply.

In Europe, the FTSE 100 index of leading British shares closed down 2.1 percent to 5,870.08 while Germany’s DAX slid 2.1 percent to 7,026.85. The CAC-40 in France ended 2.4 percent lower at 3,881.24.

On Wall Street, the Dow Jones industrial average was down 1.7 percent at 12,132 around midday New York time while the broader Standard & Poor’s 500 index fell 1.5 percent to 1,299.59.

Stocks in Europe had already been trading lower amid mounting concerns over a possible Greek debt default. In addition, huge election gains for a nationalist euroskeptic party in Finland added to the tensions over Europe’s debt crisis. Portugal also began discussions on a financial bailout and Spain had to pay much higher interest rates to borrow in the markets.

The renewed focus on Greece’s debts came after suggestions the country would be better off looking for a way to renegotiate its debts

A restructuring would reduce Greece’s debt pile and possibly bring a quicker end to the painful austerity measures, but it would entail huge costs to Greece’s future ability to borrow money. It also would risk a massive blow to the country’s banks, which are big holders of Greek bonds, and hurt many German and French banks too.

There’s also fear that a Greek default would motivate Ireland and Portugal to seek a similar way out from their debt stranglehold.

As Greek officials continued to deny that restructuring was an option, Portugal began its quest for its own financial assistance Monday, with the finance minister meeting delegations from the European Commission, the European Central Bank and the International Monetary Fund. A key topic will center on the interest rate charged for Portugal’s expected euro80 billion ($114 billion) bailout.

Investors’ debt concerns swelled following the news that a euroskeptic party in Finland had made big gains in Sunday’s election.

“The victory of the True Finns party in yesterday’s general election in Finland will make further bailouts much more difficult to achieve,” said Gabriel Stein, an analyst at Lombard Street Research. “Conversely, it makes sovereign defaults far more likely.”

The raft of debt crisis news hit the euro hard, though the S&P warning _ perhaps counterintuitively _ helped the dollar post gains. The U.S. currency is often considered a safe haven in times of uncertainty.

By late afternoon London time, the euro was down 1.4 percent at $1.4215, a little above its earlier low of $1.4157.

Earlier in Asia, the main focus was on China’s latest monetary tightening in response to figures Friday showing inflation running at a 32-month high in March. On Sunday, the People’s Bank of China announced that the deposit reserve ratio for most banks would be raised _ the fourth reserve increase this year.

Beijing’s failure to cool prices and growth have frustrated communist leaders who also face mounting foreign pressure to allow China’s yuan to rise in value and narrow its swollen trade surplus. Premier Wen Jiabao last week called for authorities to step up the anti-inflation fight.

China’s weekend moves weighed on markets across the region.

Japan’s Nikkei 225 index fell 0.4 percent to close at 9,556.65, while Hong Kong’s Hang Seng dropped 0.7 percent to 23,830.31, and South Korea’s Kospi slipped 0.1 percent to 2,137.72.

However, mainland China’s Composite Index rose _ 0.2 percent to 3,057.33, its highest close in five months. The smaller Shenzhen Composite Index was up marginally to 1,281.99.

Benchmark crude for May delivery was down $2.80 to $106.87 a barrel in electronic trading on the New York Mercantile Exchange.

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Prime Minister Stephen Harper targeted his first campaign pledge at Canadian families with children, as he seeks to boost support in a bid to form a majority government.

Harper said yesterday his Conservative Party would let families with children under 18 split up to C$50,000 ($51,250) of their income for tax purposes, which would lower the combined burden for 1.8 million families in a country of 34 million people.

Harper won Canada’s last two elections after promising tax reductions aimed at families, including tax credits tied to the cost of public-transit passes and children’s sports fees, rather than broad-based reductions in income tax rates favored by previous governments. In the budget that opposition parties rejected last week, which preceded the government’s defeat, the Conservatives announced tax credits for children’s arts programs.

“Harper tends to pick the policies that have a clear and obvious benefit,” Jonathan Malloy, associate professor of political science at Carleton University in Ottawa, said in a telephone interview. Allowing couples to split income “could certainly swing some votes, particularly in key suburban areas” and among women, he said.

The Conservatives won 38 percent of the vote in 2008 elections, which gave them 143 seats in the 308-member House of Commons.

After Deficit Eliminated

Income splitting wouldn’t take effect until after the country eliminates its budget deficit, expected by 2015. The measure would cost about C$2.5 billion in foregone revenue a year, Harper said.

“Since coming to office in 2006, our government has placed lower taxes on families among its highest priorities,” Harper said in the backyard of a suburban house near Victoria, British Columbia. He mentioned other initiatives his party has taken, including a monthly C$100 benefit for all children under the age of six, and a C$2,000 tax credit for each child younger than 18 years of age. They also cut the rate of the federal value-added tax, the Goods and Service Tax, from seven percent to five percent.

Liberal leader Michael Ignatieff told reporters the promise can’t be counted on because it wouldn’t occur for five years, adding that the Conservatives are planning to continue tax relief for companies next year.

“It’s like he’s saying to middle-class families: ‘Take a number,’” Ignatieff said yesterday in Toronto. “That’s the policies that you get if you put banks, insurance companies and oil companies first and leave Canadian families at the back of the line.” He did not say whether the Liberals would adopt a similar policy.

‘Cynical Move’

New Democratic Party Leader Jack Layton yesterday said the delay in the tax measure wouldn’t help families dealing with rising bills today.

“This is exactly the sort of cynical move Stephen Harper used to denounce,” Layton said in a statement.

Opposition parties joined together March 25 to topple Harper’s government by passing a no-confidence motion. They rejected Finance Minister Jim Flaherty’s budget last week and said Harper’s government was in “contempt” of Parliament by withholding the cost of some of its legislation, including plans to buy new fighter jets and build prisons. Harper said the election was unnecessary.

Flaherty presented a fiscal plan last week that forecast the government may eliminate the deficit as early as 2014 if it manages to generate savings from a review of program spending that begins this year. The review will aim to save at least C$4 billion annually, according to the March 22 budget document.

‘Wasteful Spending’

Ignatieff said yesterday a Liberal government would halt Harper’s “wasteful” spending on new fighter jets and prisons that will squeeze out money needed in the future to pay for programs such as health care. He said he will present a platform in the next week that will be paid for in part by rolling back past corporate tax cuts.

“We have a great contrast to make between the fiscal responsibility which has been the brand of the Liberal Party, and the wastefulness of the Conservative government,” Ignatieff said.

Today, Ignatieff will be in Oakville, Ontario, about 25 miles southwest of Toronto, then fly to British Columbia. Harper will begin campaigning in Regina, Saskatchewan.

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The nuclear plant disaster in Japan has focused the spotlight on Ontario’s nuclear program in recent days, as it should.

It’s easy for nuclear regulators and operators in this country to grow complacent and start believing their own arrogant assurances that it could never happen here

Every parent likely has a shoebox or dresser drawer stuffed with gymnastics registrations, daycare receipts and a leaky mug or two lovingly crafted at pottery class. It

BHP Billiton said Tuesday it agreed to buy a stake in a substantial shale field in the United States for $4.75 billion _ the first move by the world’s biggest miner into the U.S. shale gas business.

The shale assets form all of Chesapeake Energy Corp.’s interest in the Fayetteville shale field, in Arkansas, including the field’s midstream pipeline system.

Shale deposits were previously considered uneconomic to extract gas from but innovations in technology and higher energy prices over the past several years have seen drillers tapping the vast amounts of natural gas in such deposits. More recently they have learned to adapt the new technology to also produce oil.

BHP said in a statement that it would fund the acquisition from its cash reserves. The company’s shares rose 1.6 percent in Sydney to Australian dollars 46.58 ($46.63).

“This transaction marks BHP Billiton’s entry into the U.S. shale gas business,” BHP Billiton Petroleum chief executive Michael Yeager said. The deal will immediately make BHP Billiton a major North American shale gas producer, he said.

BHP Billiton will become the operator of Chesapeake’s current production activities from the field, which covers 487,000 acres (197,086 hectares). The company described it as the second-largest position in one of the world’s largest gas fields.

The field currently produces more than 400 million cubic feet (11 million cubic meters) of gas a day and includes development options that would substantially increase output over its estimated 40-year life.

Chesapeake said earlier this month that it would sell the assets as part of a plan to reduce debt and focus on more profitable regions.

Chesapeake says it hopes to bring in more than $5 billion, before taxes, from asset sales. The Oklahoma City-based company is aiming to reduce its debt by 25 percent by 2012.

The move will allow Chesapeake to focus more on higher-margin oil assets as oil prices spike and natural gas prices remain low. The Fayetteville shale is not as profitable as several other major U.S. natural gas fields.

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As the deficit debate in Washington grows increasingly noisy, a research group said Monday that a tax on financial "speculation" could help resolve some of the nation’s thorniest fiscal problems.

The Center for Economic and Policy Research, a left leaning group, said that a tax on trades of stocks, options, futures and other financial instruments could generate $150 billion this year, or over 1% of U.S. gross domestic product.

While the idea of taxing financial transactions is not new, it has gained some traction overseas in the wake of the global financial crisis.

French President Nicolas Sarkozy, in comments Monday, said a financial transaction tax is one of his top priorities as leader of the Group of 20 nations this year, according to press reports.

The CEPR study looks at a 0.25% tax on stock trades in the United Kingdom and estimates that an equivalent tax in the United States could raise $40 billion a year for the Treasury.

"This is not hypothetical," said Dean Baker, co-director at CEPR and author of the report, in a statement. "The UK has used an FST to collect large amounts of revenue," he said, adding that the International Monetary fund "is currently advocating the tax in recognition of the enormous amount of waste and rents in the financial sector."

Baker argues that taxing speculation will put more of the burden on more sophisticated investors such as hedge funds, and will not hurt individual investors, who will simply make fewer trades.

He says the money generated from the tax could be used to cover the cost of extending benefits for the unemployed, the projected Social Security shortfall and provide much needed aid for cash-strapped U.S. states.

The CEPR also argues that big institutional investors, which use trading algorithms to gain an advantage in the market, do not contribute any "obvious benefit to the economy."

The financial services industry, of course, disagrees.

Scott Talbott, spokesman for the Financial Services Roundtable, said taxing stock trades would hurt individual investors by driving up fees on their 401(k), college fund or pension plans.

"The fund managers would simply pass the tax down to the average Americans who are trying to save," he said.

Kent Smetters, a professor at the University of Pennsylvania’s Wharton School of Business, said he understands why some are calling for the tax.

Some think big investment funds that use sophisticated trading software are middlemen gaming a flawed system. But others argue that a tax would be unfair because traders provide a benefit in the form of efficient pricing and liquidity in the market.

Smetters added that a "small tax" would probably not hurt individual investors, though he said 0.25% "seems steep."

The proposal is one of many being discussed in Washington as the nation’s swelling deficit and growing demand for social services from a rapidly aging population loom large.

Republicans in Congress have been calling for drastic spending cuts across a range of government programs. President Obama is widely expected to emphasize "investments" in key areas when he delivers the State of the Union address Tuesday. 

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WASHINGTON

Chemical maker DuPont Co. will pay $70 million and fund long-term medical monitoring for residents of a West Virginia town who sued over pollution from a zinc smelter and its 100-foot-tall pile of waste.

A state judge approved the settlement Tuesday that ends years of court battles by residents of Spelter against Wilmington, Del.-based DuPont. The zinc smelter closed in 2001 after operating for 90 years.

The settlement was reached last year by DuPont and lawyers representing 8,500 current and former residents payday advance. It would wipe out a $196 million punitive damage award DuPont has been fighting.

A jury in 2007 found DuPont deliberately downplayed and lied about possible health threats.

The $70 million is to cover payments to plaintiffs, legal fees, cleanup costs and other expenses.

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FORT MCMURRAY, ALTA.

Pacific Investment Management Co., which manages the world’s biggest bond fund, is buying Australian notes backed by home loans in the secondary market to profit from higher yields as European investors dump the bonds.

Pimco’s Australian unit, which manages about A$32 billion ($32 billion), this month bought AAA rated residential mortgage- backed securities yielding as much as 165 basis points more than the bank bill swap rate, Robert Mead, Sydney-based head of portfolio management, said in an interview. New bond sales pay about 110 basis points, or 1.1 percentage points, he said.

“We think the cheapest asset across Australian fixed- income is secondary market RMBS,” Mead said. “Distressed areas of Europe are now net sellers of Australian RMBS, which we are benefiting from.”

As much as a quarter of the RMBS sold annually by Australian lenders between 2002 and 2007 was denominated in euros to attract European investors, according to data from Standard & Poor’s. The region is now battling a sovereign debt crisis that’s seen Greece and Ireland accept financial bailouts and forced the European Union to create a 750 billion-euro ($987 billion) emergency fund.

Moody’s Investors Service lowered Ireland’s credit rating five levels to Baa1 from Aa2 on Dec. 17, with further downgrades possible, as the government struggles to contain losses in the country’s banking system. Moody’s said last week it may lower Spain from Aa1 and also placed Greece’s Ba1 rating on review for a possible downgrade.

‘Selling Priorities’

When institutions are undercapitalized and don’t have access to new sources of funding, they “need to sell assets to reduce their balance sheet size,” Mead said. “They often focus on high dollar price, liquid assets as selling priorities.”

Many offshore structured investment vehicles, which made up a “sizeable share of the international investor base” for Australian RMBS before the 2007 credit freeze, were forced to liquidate their portfolios during the crisis and sell the notes on the secondary market, Reserve Bank of Australia Assistant Governor Guy Debelle said in a Nov. 30 speech.

Secondary market RMBS spreads widened to as much as 450 basis points amid the financial crisis, from 20 basis points before the U.S. subprime collapse roiled markets, according to the speech.

Wide Bay Australia Ltd., a non-bank lender, paid 105 basis points more than the bank bill swap rate on A$138 million of AAA rated RMBS, with a weighted average life of 1.5 years, according to an e-mailed statement last week from Australia & New Zealand Banking Group Ltd., which helped manage the sale.

ANZ Bank, Australia’s third-largest bank by market value, paid a 70 basis-point spread to sell A$100 million of three-year bonds last month, according to data compiled by Bloomberg.

House Prices

Pimco bought Australian mortgage bonds denominated in U.S. and local dollars and the euro, Mead said. The bond investor prefers to buy RMBS in the secondary market because home owners who borrowed the underlying mortgages which back the notes have proven they can meet repayments, he said.

“The nice thing about those securities is that house prices have gone up since, so already conservatively structured loan to valuation ratios have become even more conservative,” he said. “Our strong preference is the seasoned secondary market opportunities.”

House prices in Australia have risen 20 percent since the start of 2009, according to the statistics bureau.

Even as Gerard Minack, a Sydney-based developed markets strategist at Morgan Stanley, warned in August that homes are about 40 percent overvalued, the Reserve Bank of Australia said in a June report no rated portions of the nation’s mortgage bonds have suffered a default.

Australian Dollar

Pimco also sees Australian financial bonds as attractive, and maintains an overweight position to the nation’s dollar, Mead said.

The currency has gained 10 percent against the greenback this year, the second-best performer of 16 major currencies tracked by Bloomberg. Financial debt has returned 7.03 percent this year, according to a Bank of America Merrill Lynch index. The benchmark S&P/ASX 200 Index of stocks has returned 1.3 percent including reinvested dividends, according to data compiled by Bloomberg.

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