The Star Online: Business
The Star Online: Business |
- Moody's slashes Italy credit rating
- Economists see new recession increasingly likely
- Billionaire Buffett not worried by BofA share fall
| Moody's slashes Italy credit rating Posted: 04 Oct 2011 05:54 PM PDT NEW YORK/ROME (Reuters) - Moody's lowered its rating on Italy's bonds by three notches on Tuesday, saying it saw a "material increase" in funding risks for euro zone countries with high levels of debt and warning that further downgrades were possible. The agency downgraded Italy to A2 from Aa2, a lower rating than it holds on Estonia and on a par with Malta and kept a negative outlook on the rating. The euro pared gains against the dollar and Japanese yen immediately following the announcement which comes after Moody's rival Standard and Poor's cut its rating on Italy by one notch to A/A-1 on September 19. The cuts underline growing investor concern about the euro zone's third largest economy, which is now firmly at the center of the debt crisis and dependent on help from the European Central Bank to keep its borrowing costs under control. "The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," Moody's said in a statement. "The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets," it said. It added that Italy's rating could "transition to substantially lower rating levels" if there were long term uncertainty over the availability of external sources of liquidity support. Italy's mix of chronically low growth, a public debt mountain amounting to 120 percent of gross domestic product and a struggling government coalition has caused mounting alarm in financial markets. Moody's decision came as little surprise after the agency said on September 17 that it would finish a review for possible downgrade of its rating on Italy within a month. But it highlights the growing vulnerability of the euro zone, which is already struggling to contain the crisis in the far smaller Greek economy and which would be overwhelmed by a crisis of a similar scale in Italy. "It's not that unexpected but it doesn't help the situation at all," said Robbert Van Batenburg, Head of Equity Research at Louis Capital in New York. "They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italian policymakers to embark on more austerity programs. It will put another fiscal strait-jacket on them." VULNERABILITY Moody's said the likelihood of a default by Italy was "remote" but it said the overall shift in sentiment on the euro area funding market implied a greater vulnerability to a loss of market access at affordable rates. Italy's relatively modest budget deficit, conservative financial system and high level of private savings had kept it on the sidelines of the euro zone crisis while countries like Greece and Ireland were sucked down. "Italy is being punished not because its finances suddenly deteriorated, but because investors have become more sensitive to its long-standing weaknesses," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. He said markets appeared to be focusing on the weakened center-right government's lack of progress in stimulating the stagnant economy, which many analysts expect to stall or even slip into recession next year. "The bond markets are more concerned about Italy's ability to grow than its commitment to reducing a fiscal deficit that is already one of the smallest in the euro zone," he said. Prime Minister Silvio Berlusconi shrugged off the downgrade immediately, saying the Moody's announcement had been expected and the government was committed to its public finance target, which sees the budget being balanced by 2013. The government last month pushed through a 60 billion euro austerity package -- bringing forward its original balanced budget target by one year -- in return for support for its battered government bonds from the ECB. Berlusconi's center-right coalition has been deeply divided over policy and personal issues and further distracted by an array of scandals surrounding the prime minister. Opposition leaders have called repeatedly for the government to resign over its handling of the economy and there is widespread speculation that Berlusconi could be forced out of office before his term expires in 2013. Italy's borrowing costs have soared over the past three months and have only been kept under control by the ECB support but in recent weeks they have begin to climb back to potentially dangerous levels. An auction of long term bonds last month saw yields on 10 year BTPs rise to 5.86 percent, their highest level since the introduction of the euro more than a decade ago. The center-right government has been under heavy pressure over its handling of the escalating crisis and recently cut its growth forecasts through 2013. It is now expecting the economy to expand by just 0.6 percent next year, down from a previous projection of 1.3 percent. Italy's Prime Minister Silvio Berlusconi said Tuesday that Moody's decision to cut Italy's bond ratings by three notches was expected and reiterated that the government was committed to its budget goals. "Moody's choice was expected," Berlusconi said in a statement shortly after the ratings agency downgraded Italy's ratings to A2 with a negative outlook from Aa2. "The Italian government is working with the maximum commitment to achieve its budget objectives," he said adding that its plans, including a target to balance the budget by 2013, had been welcomed and approved by the European Commission. |
| Economists see new recession increasingly likely Posted: 04 Oct 2011 05:52 PM PDT WASHINGTON (Reuters) - The chances of a new U.S. recession are rising rapidly as employment and housing remain depressed and Europe's debt crisis threatens to spill over, according to a number of prominent economists. Federal Reserve Chairman Ben Bernanke on Tuesday described the recovery as "close to faltering," economists at Goldman Sachs said the United States is on "the edge" of recession, and forecasters at the Economic Cycle Research Institute said the country's economy was "tipping" into another downturn. Bernanke delivered the warning in testimony to the Joint Economic Committee of Congress, saying the Fed -- the U.S. central bank -- is prepared to do more to support the recovery. Economists at Goldman Sachs lowered their forecast for U.S. economic growth in the first quarter of next year to a paltry 0.5 percent, citing Europe's ongoing debt crisis as a possible catalyst for a U.S. slump. "The European crisis threatens U.S. economic growth via tighter financial conditions, reduced credit availability and weaker growth of U.S. exports to the region," said Andrew Tilton, economist at Goldman Sachs. "This impact is likely to slow the U.S. economy to the edge of recession by early 2012." On Friday, the Economic Cycle Research Institute, a business cycle forecasting firm, argued that the economy was already past the point of no return, as was the ability of policymakers to help. "The most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not 'soft landings'," the group said in a report. For many Americans, the economy never felt as if it had recovered at all. Incomes have remained stagnant while a slump in housing that began more than five years ago shows no sign of letting up. Growth in the U.S. economy, the world's largest, averaged less than 1 percent in the first half of the year, and the country's unemployment rate has hovered just above 9 percent for several months. Long-term joblessness is at a record, despite unprecedented monetary easing by the Federal Reserve. The Conference Board, an industry group, recently argued the chances of recession, while still below 50-50, have risen in recent months. "There is a growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession," said Ken Goldstein, an economist at the firm. |
| Billionaire Buffett not worried by BofA share fall Posted: 04 Oct 2011 05:50 PM PDT LAGUNA NIGUEL, California (Reuters) - Billionaire investor Warren Buffett is not concerned by the sharp drop in Bank of America Corp shares in the last couple of days, despite his $5 billion investment in the company last month, he told Reuters on Tuesday. "We agreed to hold it for at least five years, so what I'm thinking about is where Bank of America will be in five years, and nothing in the last 24 hours or 48 hours has changed my views on that," the Berkshire Hathaway Inc chief executive told Reuters on the sidelines of Fortune magazine's Most Powerful Women Summit. Buffett made his bet on Bank of America's survival in late August (though it closed in early September). The deal gave him preferred shares with a hefty dividend and warrants that represent 6.5 percent of Bank of America stock. Bank of America shares fell 5.2 percent to $5.24 in late-afternoon trading. The stock rose 33 percent in the five days after Buffett's investment was announced but since that peak has now fallen 37 percent. Earlier on Tuesday, Buffett told the Fortune summit that many of Berkshire Hathaway's businesses would post record profits this year, including railroad unit Burlington Northern and energy business MidAmerican. But he was much less optimistic about the company's housing-related businesses, including Shaw Carpet and Acme Brick. Buffett told his long-time friend Carol Loomis, who interviewed him in front of an audience of America's most important female executives, that the performance of the housing-related units was as bad as it has ever been. Berkshire's widely traded Class B shares rose 0.2 percent in late trading, one of the few gainers on a weak day in the broader market. |
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