Mish's Global Economic Trend Analysis

Moody's Cuts Chicago Bond Rating to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth
Senate Democrats Throw Obama Under the Bus: Fast Track Trade Bill Stalls; Right For Wrong Reasons
Greece Empties IMF Reserve Account to Pay IMF; Liquidity "Terribly Urgent" Says Finance Minister
Household Spending Growth Expectations Plunge; Recession Already Started?

Moody's Cuts Chicago Bond Rating to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth

Posted: 12 May 2015 03:59 PM PDT

The shockingly bad fiscal health of Chicago just got a lot worse. Not only were Chicago Teachers "Insulted by a 7% Pay Cut Offer", the Illinois Supreme Court ruled Illinois' 2013 pension reform is unconstitutional.

Moody's Cuts Chicago Bond Rating to Junk

As a result of the Supreme Court ruling, Illinois' already horrendously underfunded pension plans are even more underfunded.

In a decision today, citing pension analysis, Chicago Rating Cut to Junk by Moody's.

Chicago had its credit rating cut to junk by Moody's Investors Service after the Illinois Supreme Court's rejection of a state pension-overhaul plan reduced the city's options for fixing its own underfunded system.

The two-level downgrade to Ba1 affects $8.1 billion of general obligations, which were already the lowest-rated among the 90 biggest U.S. cities, excluding Detroit. The outlook is still negative. Moody's has dropped the city seven levels since July 2013.

The reduction to the highest level of junk "incorporates expected growth in the city's highly elevated unfunded pension liabilities," Moody's said Tuesday. After the May 8 court ruling, "we believe that the city's options for curbing growth in its own unfunded pension liabilities have narrowed considerably."

The deterioration in the credit standing of the third-most-populous U.S. city underscores how pension promises are squeezing the finances of states and localities nationwide. Moody's downgrade compounds Chicago's fiscal struggles: its counterparties can immediately demand as much as $2.2 billion in accelerated principal, accrued interest and termination fees, New York-based Moody's said in the report.

The company's decision may raise borrowing costs in the $3.6 trillion municipal market: The city of 2.7 million was planning to issue about $383 million of bonds as soon as next week, data compiled by Bloomberg show. Some investors had already deemed its bonds speculative grade.

"While Chicago's financial crisis is very real and at our doorsteps, today's irresponsible decision by Moody's to downgrade the city's credit by two steps goes far beyond that reality," Mayor Rahm Emanuel said in a statement.

Irresponsible to Tell the Truth

Apparently it's irresponsible to tell the truth: Chicago is broke and its pension system is insolvent.

The Chicago Board of Education (CBOE) is already on the hook for $600 million in various termination fees when the CBOE debt was downgraded. Now the city itself is junk, and rightfully so.

If Emanuel disagrees, then what are his ideas to fix the problem?

Oh, I remember, Emanuel wants the state to bail out the CBOE.

Here's a question I keep asking: How is a state that has a $9 Billion Budget Deficit Hole going to bail out a single school district that is $1.5 billion in the hole?

Want another Emanuel idea? If so I have one: Emanuel hopeful Chicago pension reforms will survive even though state's didn't.

The "handwriting is on the wall" for Chicago's plan to save two of four city employee pension funds, but Mayor Rahm Emanuel didn't want to see it Friday.

Hours after the Illinois Supreme Court unanimously overturned state pension reforms, Emanuel argued that his plan to raise employee contributions by 29 percent and sharply reduce cost-of-living benefits to save the Municipal Employees and Laborers pension funds stands a better chance of survival.

He refused to discuss the "catastrophic outcome" that awaits Chicago if he's wrong.

"Options for saving the defined benefit plans are now clearly limited. But a constitutional amendment to clarify what future benefits can be changed is definitely in order, as is taxing retirement income and other changes to benefit state and local government," said Civic Federation President Laurence Msall.

At the earliest, the Illinois General Assembly could put a constitutional amendment on the ballot in November 2016. But even if it passes, it would affect only future retirees.

In the meantime, Msall said Emanuel should get to work with the new City Council on a cost-cutting and revenue-raising plan to fund pensions without jeopardizing essential services.

The combined, $30 billion pension crisis at the city and public schools has already dropped the city's bond rating to just two levels above junk status.

Emanuel's Backup Plan?

Emanuel does not have a backup plan. I do.

On May 8, and in regards to the Illinois Supreme Court ruling, I stated "Today's ruling more than ever shows the need to pass a bankruptcy law."

And the state as a whole needs a constitutional amendment to allow pension cuts even if that only affects decisions going forward.

Apparently Moody's agrees.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Senate Democrats Throw Obama Under the Bus: Fast Track Trade Bill Stalls; Right For Wrong Reasons

Posted: 12 May 2015 03:21 PM PDT

Democrats Throw Obama Under the Bus

In rare political reverse alignment, Senate republicans voted for Obama's Fast Track proposal while Sen. Tom Carper, D-Del., was the only Democrat to vote with Republicans.

To proceed, the bill needed a super-majority of 60 votes. In a vote likely to shock president Obama, Fast Track Failed 52-45

Senate Republicans have been working with the Obama administration to reauthorize fast track negotiating authority aimed at assisting Obama in finalizing a trade pact with 11 Asia-Pacific nations. Fast track authority authorizes the president to submit to Congress negotiated trade deals that can only be approved or rejected, not amended, on an expedited basis.

The Senate Finance Committee approved the bill, 20-6, in a bipartisan vote last month. Chairman Orrin Hatch, R-Utah, and Senate GOP leaders believed they had reached an agreement with the panel's top Democrat, Sen. Ron Wyden, D-Ore., to begin debate this week on the fast track legislation, with assurances that it would move in tandem with a trade adjustment assistance package to aid American workers negatively affected by trade deals.

However, Democrats en masse demanded Tuesday that Republicans include in the deal two additional, committee-approved bills: a non-controversial measure supporting African economies and a customs enforcement measure that includes controversial language aimed at cracking down on China for currency manipulation.

Wyden announced Democrats could not move forward unless there was assurances that "all four of the measures I've described are actually enacted."

Republicans balked. "What I'm not going to put up with is the minority trying to craft a bill before we even get on it. That's just simply unacceptable," said Senate Majority Leader Mitch McConnell, R-Ky.

Democrats' maneuvering also puts them at odds with the White House, which opposes the currency manipulation language because it says it could threaten the underlying Trans-Pacific Partnership the administration is trying to finalize. The White House has also raised concerns that the measure would fray diplomatic relations with China and potentially undermine the Federal Reserve.

"If it were part of (trade promotion authority), we all know it would kill it," McConnell said.

"What the Democrats are doing today by trying to block us from even getting on this legislation is throwing their own president under the bus," added Sen. John Thune, R-S.D.

Democrats Gang Up on Obama

Also consider Senate Democrats gang up to delay fast-track trade bill.

"What we just saw here is pretty shocking," said Senate Majority Leader Mitch McConnell, a Republican, after the Senate voted 52-45 - short of the 60 votes needed - to pave the way for debate on "fast-track" trade authority for Obama.

The vote marked a victory for Senate Democratic leader Harry Reid, an outspoken opponent of fast-track, after weeks of speculation that the toughest fight would be in the House of Representatives and not the Senate.

Under fast track, Congress can either approve or reject trade deals negotiated by the administration but not amend deals like the TPP, a potential legacy-defining achievement for Obama.

The failure to garner the necessary votes came after pro-trade Democrats, including Senator Ron Wyden of Oregon, insisted that fast track be bundled together with three other trade bills, including one that would impose import duties on countries that manipulate their currencies for unfair trade advantage.

Wyden said the four bills together were a package that would "throw out the 1990s NAFTA playbook on trade" and provided an opportunity to create jobs.

As Democratic support for the measure melted away, Senate Finance Committee Chairman Orrin Hatch, a Republican who was a major force for fast track, declared to reporters that the measure "may be dead."

But following the vote, Democrats predicted it would come back.

Negotiations on the TPP are nearly complete, but trading partners have said they want to see fast-track legislation enacted before finalizing the pact, which will stretch from Japan to Chile.

The TPP would create a free trade zone covering 40 percent of the world economy - making it the biggest trade deal since the North American Free Trade Agreement liberalized trade between the United States, Canada and Mexico.

Democrats Right For Wrong Reasons

Currency manipulation charges at this point are rather silly. The Wall Street Journal reported on May 3, the IMF close to declaring the Yuan fairly valued for the first time in a decade.

More importantly, whether or not the yuan is fairly valued is moot. The trade imbalance problem is not the yuan or pegs, the problem is the trashing of the gold standard by Nixon. For discussion, please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited.

TPP Not a Free Trade Agreement

My big objection to this mess is that the Trans-Pacific Partnership (TPP) has little to do with free trade. Only 5 of 29 chapters in the bill discuss trade. The rest is global warming nonsense and other items. And we do not even know what is in the proposal because negotiations were secret for 5 years.

Moreover, the New York Times says Trans-Pacific Partnership Seen as Door for Foreign Suits Against U.S..

I discussed the above and more in Obama's Trans-Pacific Partnership Fiasco vs. Mish's Proposed Free Trade Alternative; How Will TPP Function in Practice?

An Excellent Free Trade Agreement in One Sentence

I am in favor of free trade. An excellent free trade agreement would consist of precisely one line of text. I propose the following agreement:

"All tariffs and all government subsidies on all goods and services will be eliminated effective June 1, 2015."

For still more on the foolishness of TPP please see

Democrats want to add to the bloated agreement with still more nonsensical madness.

Ironically, that's a good thing. The best hope now is Democrats succeed in adding so much garbage to the bill that even Republicans won't vote for it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Greece Empties IMF Reserve Account to Pay IMF; Liquidity "Terribly Urgent" Says Finance Minister

Posted: 12 May 2015 11:11 AM PDT

Greece said it would make its payment to the IMF on time and it did, one day early in fact. How? Greece Taps IMF Reserve Account.

Greece emptied an IMF holding account to repay 750 million euros ($840 million) due to the fund, a Greek central bank official said, avoiding default but underscoring the dire state of the country's finances.

Greece, like all other International Monetary Fund members, holds reserves from the IMF that are denominated in Special Drawing Rights (SDR), a basket of international currencies. The reserves must be kept at a certain level or the country must pay interest if its holdings fall below its "allocation" of SDRs from the IMF.

A government official told Reuters that Athens used about 650 million euros from the SDR holdings account and 100 million euros from its cash reserves to make the payment on Monday.

The Greek central bank official confirmed the account had been tapped after government officials met the central bank chief last week to figure out how to make the payment.

As of the end of March, Greece had about 554 million SDRs, equivalent to 695 million euros, according to IMF data.

The last time Greece made a significant withdrawal from its SDR holdings was in November 2011.

Made a day early, the IMF payment calmed immediate fears of a Greek default, but Finance Minister Yanis Varoufakis said on Monday the liquidity situation was "terribly urgent" and a deal to release further funds was needed in the next couple of weeks.

"The central bank governor put forth the idea to tap the 650 million euros in the holding account, which needed IMF approval," the official said, declining to be named.

"Governor Stournaras made the arrangement with the IMF and on Saturday we got their okay and the account was unlocked."

Going, Going, Gone

Here are a few additional details from the Financial Times.

Asked whether Greece's decision to tap its IMF funds was a cause for alarm, Valdis Dombrovskis, the European Commission vice-president in charge of eurozone policy, said: "It's for the experts to look into the issue before I can comment."

Like every IMF member, Greece is allocated a stock of the IMF's own notional currency — known as Special Drawing Rights — but they are rarely tapped. Greece's allocation of SDRs is normally worth about €985m, but the account stood at €700m at the end of March, the most recent data publicly available.

Although IMF members are allowed to use the account at their own discretion, it is highly unusual to use the funds to repay the IMF itself.

Yanis Varoufakis, the finance minister, said after a meeting of eurozone finance ministers in Brussels on Tuesday: "The liquidity issue is a terribly urgent issue . . . From the perspective [of timing], we are talking about the next couple of weeks."

"It's marginal at the moment whether the government will be able to cover the public sector payroll at the end of May even if it delays most other payments," said one Athens official with knowledge of the government's cash position.

Greece is supposed to refill those reserves over the next "several weeks". How is that supposed to happen?

Add repayment of IMF reserves to the amount of the next "bailout" that Greece needs.

This charade is beyond ridiculous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Household Spending Growth Expectations Plunge; Recession Already Started?

Posted: 12 May 2015 02:47 AM PDT

Every month the Fed does a Survey of Consumer Expectations for inflation, earnings growth, income growth, and consumer spending growth.

In the microeconomic data overview, the Fed provided charts for the first three sets of expectations. I downloaded the data and created my own chart of spending expectations.

First let's consider some details from the report. Emphasis mine.

The results from the April 2015 Survey of Consumer Expectations indicate that one-year ahead inflation expectations fell while three-year ahead inflation expectation increased. The median one-year and three-year ahead expected rates of inflation now stand at 2.7% and 3.0%, respectively. While earnings and household income growth expectations were largely unchanged, median household spending growth expectations retreated significantly from the last month.

Inflation Expectations

Earnings Expectations

Income Expectations

Household Spending Expectations

click on chart for sharper image

Spending Analysis

In spite of rising earnings and income estimates, "median household spending growth expectations retreated significantly from the last month" in the Fed's words.

In general, I do not place much faith in these estimates, especially inflation expectations. That said, the spending estimates do ring true with weak economic data that we have seen for six months.

Should these spending projections prove to be correct, a US recession that few if any economists see coming, has already started.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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