By Dan Hart
June 29 (Bloomberg) -- About 3 million U.S. homeowners are headed toward defaulting on their mortgages as federal legislation that might help is delayed, the New York Times reported, citing Mark Zandi, chief economist of Moody's Economy.com.
U.S. lawmakers aren't expected to complete work on a bill until after the July 4 recess, the newspaper said. The package would help some borrowers refinance into more stable 30-year fixed-rate loans backed by the government, the newspaper said.
The Congressional Budget Office estimates the legislation would help about 400,000 borrowers, the Times said. President George W. Bush has indicated he would be willing to sign the bill, minus some provisions, according to the newspaper.
About 9 million Americans who own homes owe more than the value of their dwellings and may face hard choices if their mortgage payments rise or they lose their jobs, the Times said.
To contact the reporter on this story: Dan Hart in Washington at dahart@bloomberg.net.
FRANKFURT: Today's rising prices may not compare to the stiff inflation that gripped most of the world in the 1970s. But they have scrambled the reliable calculations that comforted investors over much of the past decade.
Inflation is on the march, and it is making once-safe bets, like investments in blue chip stocks, look risky.
Wall Street flirted Friday with bear market territory - a drop of 20 percent or more - and the rest of the world seems to agree.
Benchmark indexes in Europe and Asia are also off sharply as investors digest the possibility that central banks will squelch growth with higher interest rates in the hope of containing inflation.
In fact, the European Central Bank on Thursday is expected to become the first big central bank to move decisively against inflation since the credit crisis began nearly a year ago.
"The recent downturn in equities is essentially about investors worrying that central banks are going to be tougher than anyone had expected," said Erik Nielsen, chief Europe economist at Goldman Sachs.
The world's top central bankers, at a meeting Sunday in Basel, Switzerland, were considering approaches that would calm nerves about inflation while avoiding a shock to economic growth, which is soft in the United States and increasingly shaky in Europe.
Oil prices, which recorded a new high of nearly $143 per barrel Friday, are only part of the calculation.
A more generalized inflation, feeding through to consumer prices and prompting demands for higher pay, also deprives businesses of the confidence that they had until recently about how to make decisions on building new factories, hiring new employees or developing new products.
"The longer inflation remains high, the more damaging it will be for longer-term economic growth prospects," Morgan Stanley wrote in a recent report. "High inflation rates usually go hand-in-hand with a higher variability of inflation, which raises uncertainty and can thus reduce investment spending."
Stock market volatility caused by inflation worries has also complicated the pressing task of recapitalizing banks whose funds have been depleted from the credit crisis, above all in the United States but also in Europe.
As equity markets crumble, much-need recapitalizations "become more and more difficult" because investor appetite for new share sales declines, Mario Draghi, the Italian central bank chief, who heads global efforts to overhaul financial regulation, said last week.
Efforts to overcome the credit crunch, in other words, have become hostage to the economic slowdown that the crunch helped create.
"Banks can't escape the weaker real economy, especially in the U.S., with house prices falling, oil prices increasing and the stock market falling," Draghi said.
American and European central banks are trying to help, but must also confront the ticklish tradeoff between short-term economic growth and inflation which is partly imported from emerging economies, above all China.
On Thursday, the ECB is expected to raise its benchmark interest rate by a quarter of a percentage point, to 4.25 percent, hoping to cut off an incipient psychology of inflation.
Prices in the 15-nation euro area rose by 3.7 percent in the year through May, nearly double the bank's informal goal of just below 2 percent.
The U.S. Federal Reserve might be so inclined itself, but it faces near-recessionary conditions in the world's largest economy, with unemployment rising and consumer spending, long the engine of growth, stalling. Under the circumstances, the fight against inflation, 4.2 percent in the year to May, has takes a back seat.
"Europe tends to paint this in black and white," said Ethan Harris, chief U.S. economist at Lehman Brothers in new York. "In the U.S. the balancing act is going on."
China once drove down worldwide inflation by flooding the world with inexpensive goods, a trend that is now reversing itself with a vengeance as the costs of labor and materials rise. That means the Chinese price, once a metaphor for cheap, now causes higher inflation - in the form of rising import prices - to Western economies.
Chinese officials have been reluctant to tighten monetary policy sharply or to let China's currency, the yuan, appreciate against the dollar, two moves that would slow domestic inflation but would slow growth as well.
In a country where the Communist regime's legitimacy rests in large part on its ability to deliver rising living standards, that seems a distant prospect.
The absence of a unified global strategy for calming inflation has not been lost on investors who are searching for an anchor of stability, and coming up short.
"When you have central banks around the world doing different things - following a different road map - that can be problematic," said Quincy Krosby, the chief investment strategist at The Hartford, a financial services firm.
Then there are the politics.
The ECB's decision to get out front is not uncontroversial in Europe, where growth is cooling under the pressure of oil prices, the strong euro, and fading demand in the United States. The bank's primary mandate is to keep inflation low, but that does not stop European politicians from worrying about growth.
French officials have long criticized the ECB's course for both strengthening the euro and curbing growth, a perspective that Spanish politicians, facing a rapidly deflating housing bubble, have come to share.
Germany has long been reluctant to criticize the ECB, but over the weekend the German finance minister, Peer Steinbrück, joined the chorus.
"The ECB has to consider that they could possibly send the wrong signal with an interest rate increase because it could have a pro-cyclical impact at a point when the economy is slowing down," Steinbrück told the German magazine Der Spiegel.
Michael M. Grynbaum contributed reporting from New York.
Newsday.com
Reeling economy forces more into credit card debt
BY RANDI F. MARSHALL
7:38 PM EDT, June 29, 2008
Where will the money come from?
Gas and food prices are rising, mortgage interest rates are adjusting higher, loans are harder to find and unemployment is ticking up.
There's only one place left to turn, many consumers think: credit cards.
Now, instead of using credit cards for large items such as a plasma television or new furniture, many area residents are charging gasoline, milk, food and even, in some cases, other bills, experts said. And many of them are only making the minimum payment on each card -- if they can afford even that.
"A lot of typical Long Islanders seem to be overwhelmed by credit card debt," said Craig D. Robins, a Westbury bankruptcy attorney who said his clients have balances from $12,000 to $80,000 and interest rates of up to 30 percent on their cards. "Just one little financial calamity causes them to dig into their credit cards just to be able to make ends meet and pay day-to-day living expenses."
Adding to the mix, it's now far more difficult for many consumers to find a way out of debt, since other options, such as home equity lines of credit, aren't as readily available and it's not as easy to refinance a home or take out a loan with a lower interest rate, experts said. And there's evidence that the overall tightening of credit is spreading to credit cards, too, potentially reducing the availability of new credit and already starting to lower credit limits -- moves that could impact consumer spending and overall economic growth.
Nationwide, revolving debt -- almost all of which comes from credit cards -- reached a record $957 billion in April, up from approximately $800 billion four years ago. Total credit card debt grew by just 0.4 percent in April, according to the Federal Reserve, an indication, some said, that banks are beginning to offer less credit and, possibly, borrowers are beginning to put the brakes on spending.
But consumers are already in plenty of trouble. And the moment they're late on a payment, all bets are off, debt counselors said.
"A lot of these people are now maxing out these credit cards and are at a point where they can't put anything more on them," said personal finance counselor Colin Nupp, with Debt Counseling Corp. in Hauppauge. "Then the minimum payment is only going towards the finance charges and a lot of people feel like they're spinning their wheels."
Uncollectable accounts
That ripples beyond the consumer, affecting credit card companies and other financial firms, which are seeing more and more accounts go bad. Moody's Investor Service reported that the charge-off rate -- which measures those credit card accounts that are considered uncollectable as an annual percentage of all outstanding loans -- reached 6.27 percent in April, its highest level since December 2005.
"Credit quality in the credit card world has deteriorated as of late, but it's not as bad from a historical perspective as conditions in the mortgage world," said Scott Hoyt, senior director of consumer economics for Moody's Economy.com. "And conditions are going to continue to deteriorate because credit quality in the credit card world tends to be driven by labor market conditions," which are weakening.
The Moody's Investor Services report showed that it's now more difficult for borrowers to become current once they fall behind. Port Washington resident Dina Brand knows that all too well.
Brand, 36, had credit card debt as a teenager and eventually paid it off. But when she gave birth to her son, who is now 6 and has special needs, Brand stopped working and signed up for credit cards again. At the time, in 2002, credit was easy to get. The cards were in her name and she began to use them for day-to- day needs.
Soon Brand racked up debt on 10 credit cards. She'd use up the limit on one and begin on the next. But she could not work full time due to her son's needs and had trouble making the cards' minimum payments. So she missed a payment here and there. And then the fees and higher interest rates began to hit.
Soon each card had a 29-percent interest rate, and Brand, who was divorced in 2006 and now lives with her mother, had accumulated $22,000 in credit card debt.
"The one time you miss, you get so far behind," Brand said, noting that in some cases credit cards with a $500 limit would have $780 in charges because of fees and interest.
Hoping for a fresh start
Brand filed for Chapter 7 bankruptcy with Robins' help just a couple of months ago. She's hoping that will wipe her slate clean once again.
"I want a fresh start," said Brand, who now has no credit cards and uses just a debit card. "I'm now making a life I want for my son and for me."
Brand's story is far from unusual, credit counselors said.
"To bridge the gap between expenses and income, they're supplementing with credit," said Christian Moriarty, president of American Debt Resources, a credit counseling firm in East Northport. "We all know that all it takes is one missed payment, and before you know it, your interest rates are at 30 percent."
Small-business owners, too, are relying on credit cards more and more, said Marianne Garvin, who heads the Community Development Corporation of Long Island. They have the same problem as consumers, Garvin said, adding: "Whatever discretionary money they may have had to pay down their credit card debt is now being sucked up to pay their utilities and gas."
Making matters worse, there are fewer ways out. Consumers used to use the equity in their homes to consolidate debt and utilize lower interest rates. With the credit crunch, this door is closing.
"Right now, you don't have the relief valve," said Brian Riley, research director for TowerGroup, a research and advisory firm based in Massachusetts.
Riley noted that credit card issuers could be the next corporate victims of the credit crunch as their risks rise. "It used to be in this business that bigger is better. Now, it's safer is better," he said.
The bigger problem, said Riley, is that everything -- from higher unemployment and gas prices to tighter credit and lower home prices -- is hitting at once.
"It's not a pretty world right now," he said.
Small US banks feel the pinch
When Southern California's oldest bank, PFF Bancorp (NYSE:PFB) , was sold for the fire-sale price of $30.5m this month, it was buckling under the weight of soured loans to real estate developers and its stock had plunged more than 95 per cent from its 2006 peak.
Like many small regional and community banks, PFF increased its loan portfolio over the past decade - doubling it to more than $4bn - in large part by financing commercial and residential developers and homebuilders during the house price boom. Now, as these companies struggle through the housing slump, lenders such as PFF are feeling the pinch.
Banks' first-quarter losses on such real estate loans were more than 15 times the amount of the same quarter last year, according to the Federal Deposit Insurance Corporation.
Regulators are growing increasingly concerned that many small banks have high concentrations of such loans on their books at a time when inflated house prices are collapsing and land values are falling further still.
Worryingly, more than half of those institutions with assets worth between $1bn and $10bn have commercial real estate loan portfolios that exceed 300 per cent of their capital, according to recent FDIC data.
Similarly, almost 30 per cent of US community banks have construction and development loans exceeding 100 per cent of capital.
Sam Golden, head of financial advisory services at turnround and restructuring group Alvarez & Marsal and a former senior regulator at the Office of the Comptroller of the Currency, says concerns about these small banks in the US are compounded by the fact that banks have wide latitude on how they recognise losses on these portfolios.
"Regulators have started banging the drum to force banks to honestly risk-grade their credit exposures, recognise realistic values for these loans and to start raising capital if they need it," says Mr Golden.
"Some community banks really put too many of their eggs in the same basket, so there are serious concerns about exposure at some banks, particularly those in the more difficult markets such as California, Florida, Michigan, Nevada and Arizona," he says.
Los Angeles-based Security Pacific Bancorp, for example, has written off millions in construction loans and is under an FDIC order to diversify its operations.
While big national banks largely dominated the market for traditional home loans, credit cards and other mass-market consumer lending, smaller banks embraced residential and commercial construction loans in recent years because such projects could generate big fees.
Stiff competition for this business resulted in a relaxation of lending standards.
At PFF, losses on residential construction and land development loans depleted capital to below the regulatory minimum, forcing the bank to agree to a sale.
The fear among regulators and small bank investors, is that other banks in similar situations may not be able to find buyers, could struggle to raise new capital and might ultimately fail.
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Hoarding Nations Drive Food Costs Ever Higher
BANGKOK — At least 29 countries have sharply curbed food exports in recent months, to ensure that their own people have enough to eat, at affordable prices.
When it comes to rice, India, Vietnam, China and 11 other countries have limited or banned exports. Fifteen countries, including Pakistan and Bolivia, have capped or halted wheat exports. More than a dozen have limited corn exports. Kazakhstan has restricted exports of sunflower seeds.
The restrictions are making it harder for impoverished importing countries to afford the food they need. The export limits are forcing some of the most vulnerable people, those who rely on relief agencies, to go hungry.
"It's obvious that these export restrictions fuel the fire of price increases," said Pascal Lamy, the director general of the World Trade Organization.
And by increasing perceptions of shortages, the restrictions have led to hoarding around the world, by farmers, traders and consumers.
"People are in a panic, so they are buying more and more — at least, those who have money are buying," said Conching Vasquez, a 56-year-old rice vendor who sat one recent morning among piles of rice at her large stall in Los Baños, in the Philippines, the world's largest rice importer. Her customers buy 8,000 pounds of rice a day, up from 5,500 pounds a year ago.
The new restrictions are just an acute symptom of a chronic condition. Since 1980, even as trade in services and in manufactured goods has tripled, adjusting for inflation, trade in food has barely increased. Instead, for decades, food has been a convoluted tangle of restrictive rules, in the form of tariffs, quotas and subsidies.
Now, with Australia's farm sector crippled by drought and Argentina suffering a series of strikes and other disruptions, the world is increasingly dependent on a handful of countries like Thailand, Brazil, Canada and the United States that are still exporting large quantities of food.
On a recent morning here in Bangkok, sweaty and heavily tattooed dock workers took turns grabbing 120-pound sacks of rice from a conveyor belt and carrying them on their heads to cranes that whisked the sacks deep into the hold of a freighter bound for the Philippines. Most of the one million tons of rice that leaves the dock here each year follows the same spine-crushing routine.
"I've been here 28 years," said the assistant port manager, Suchart Wuthiwaropas. "This is the busiest ever."
Powerful lobbies in affluent countries across the northern hemisphere, from Japan to Western Europe to the United States, have long protected farmers in ways factory workers in Detroit could only dream of.
The Japanese protect their rice industry by making it nearly impossible for imported rice to compete. The European Union severely limits beef and poultry imports, and Poland goes further, barring soybean imports as well.
Negotiators have been working for years to free trade in farm goods, but today's crisis actually makes that more difficult for them. Food protests in places like Haiti and Indonesia that rely heavily on imported food have convinced many nations that it is more important than ever that they grow, and keep, the food their citizens need.
"Every country must first ensure its own food security," said Kamal Nath, the minister of commerce and industry in India, which has barred exports of vegetable oils and all but the most expensive grades of rice.
But as the United States trade representative, Susan C. Schwab, noted in a telephone interview, "One country's act to promote food security is another country's food insecurity."
International relief groups are trying to help people who can no longer afford food at today's higher prices, but it is not easy. "We're having trouble buying the stocks we need for emergency operations," said Josette Sheeran, executive director of the World Food Program in Rome.
Restrictions have delayed efforts to ramp up feeding programs in Somalia and Afghanistan. The food program had long purchased grain from Pakistani traders or national stocks. When Pakistan imposed a ban on most wheat exports this spring, the food program was forced to find a new supplier, creating months-long delays.
"We had to slow down the scale-up of our operation as a result of having to redesign our supply lines," said Ramiro Lopes da Silva, director of transport and procurement. "That means on the ground there were beneficiaries that went without rations or went without full rations for a portion of time. In the case of Afghanistan, some didn't get into the program."
The current dispute over food exports highlights choices that nations have confronted for centuries.
One relates directly to trade: Is it best to specialize in whatever food grows best in a country's soil, and trade it for all other food needs — or even, perhaps, specialize in services or manufacturing, and trade those for food?
Or is it best to seek self-sufficiency in every type of food that will, weather permitting, grow within a country's borders?
The usual answer from economists, and the United States' position for decades, is that the world benefits most if every country specializes in growing (or servicing or making) what it can most efficiently, and trading for the rest.
Rainfall and other limits make it prohibitively difficult for some countries to grow all their own food. "If Egypt had to be self-sufficient in food, there would be no water left in the Nile," Mr. Lamy said in a telephone interview.
"If every country in the world decided it wanted to produce its own food for consumption," Ms. Schwab said, "there would be less food in the world, and more people would be hungry."
But relying on food imports becomes much dicier if other countries are prepared to shut off the tap.
An obscure rule of the World Trade Organization requires members to notify the agency when they restrict food exports. But there are no penalties for ignoring the rule, and not one of the countries that has imposed restrictions in the past year has complied, according to the W.T.O.
Japan and Switzerland are leading a group of food-importing nations so alarmed by restrictions that they are seeking an international agreement preventing countries from unilaterally limiting food exports. The agreement would be part of the current, already-rocky Doha round of trade talks, named for the city in Qatar where negotiations began.
But the proposal ran into a procedural snag right off: food export restrictions are such a new issue that they are only tangentially mentioned as part of the Doha round agenda, which is not easily modified.
In some of the nations concerned about shortages now, past policies have discouraged farming. From Indonesia to West Africa to the Caribbean and Central America, poor countries have frequently cut farm assistance programs and lowered tariffs to balance budgets and avoid charging high prices to urban consumers. But they have found that their farmers cannot compete with imports from rich countries — imports that are heavily subsidized.
As a result, steps that could have taken place decades ago, resulting in more food for the world today, were abandoned. These included changes like irrigation schemes and new crop varieties.
"The subsidies given by developed countries to their farmers have led to lack of investment in agriculture in developing countries" in Africa and elsewhere, Mr. Nath said.
To make matters worse, the World Bank and the International Monetary Fund frequently pressured poor countries in the 1980s and 1990s to lower tariffs and to cut farm support programs, mostly to reduce budget deficits.
Indeed, the World Bank concluded in 2006 that not enough attention had been paid to the negative effects of its policy prescriptions on farmers in developing countries.
The current export restrictions, which mainly help urban consumers in poor countries, are the latest blow to farmers in the developing world.
Arfa Tantaway Mohamed, who grows rice on three-quarters of an acre outside the bustling town of Aga in northern Egypt, is frustrated at Egypt's export ban, which is suppressing rice prices.
"For sure it has a negative impact," said Mr. Mohamed, 50, as he smoked a Cleopatra brand cigarette during a break from working his fields, while 18 members of his extended family labored nearby.
Some countries reject the notion that restricting exports has pushed up prices on the world market, and point instead to higher prices for fertilizer, diesel and other farm expenses. India takes that position, but so does Thailand, in defending sharp markups in prices set by its Rice Exporters Association.
"The main cause of rising rice prices is the rising cost of rice planting," said Surapong Suebwonglee, the finance minister of Thailand, the world's largest rice exporter.
India and other countries, as well as some nonprofit groups, are quick to point out that economic arguments — that countries specialize in the production of whatever they can make most efficiently — are unconvincing, as long as rich countries heavily subsidize their farmers.
In fact, negotiators have a rough framework for a possible compromise on agriculture in the Doha round talks, including deep cuts in farm subsidies.
One possible compromise not being discussed in the Doha round may be for countries to continue relying on trade for most food imports, but hold bigger reserves in case of crises. World rice reserves, for example, have plunged to 9 weeks' worth of consumption, from 19 as recently as 2001.
But United Nations officials are wary.
"I would not object to building up reserves," said Supachai Panitchpakdi, the secretary general of the United Nations Conference on Trade and Development. "But like foreign exchange reserves, some countries go to huge extremes."
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