Global finance blog - news, jokes, life…

U.S. Treasury Secretary Timothy Geithner said the global economy probably will suffer setbacks during its recovery as nations adapt to a loss of wealth and a surge in public debt.

“This crisis has been brutal in the extent and severity of damage to economies around the world,” Geithner said in the prepared text of a speech in Jeddah, Saudi Arabia. “Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.”

Economies will need to start growing again before jobs can be created, he said. He also said credit conditions will remain “unusually tight,” even though markets have opened up somewhat in response to government actions.

The U.S. yesterday reported a $1.1 trillion budget deficit for the fiscal year that began Oct. 1. Geithner’s visit to Saudi Arabia and the United Arab Emirates, two of the oil-exporting countries that are the fourth-largest holders of Treasury debt, comes as the U.S. braces for a projected 2009 budget deficit of $1.8 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

“The U.S. needs to raise a lot of debt over the coming months and at a time when there’s talk about the dollar’s status as a reserve currency, they need to convince people that hold the debt that the U.S. is committed to fiscal responsibility in the medium term,” said Eric Swats, Dubai-based head of asset management at Rasmala Investments, which has about $1.2 billion under management, in an interview ahead of Geithner’s visit.

U.S. Borrowing

The U.S. Treasury chief sought to address both concerns in his prepared remarks. He pledged that the U.S. would take steps to rein in its borrowing while also attempting to address health care, financial regulation and other long-term issues.

“The United States was on an unsustainable fiscal path before this crisis, and we will not succeed in establishing sustainable recovery without a credible commitment to address our long term deficits,” Geithner said.

At the same time, the U.S. understands it has responsibilities as a leader of the global economy, he said.

“Given the dollar’s role in the international financial system and the significant impact of the U cash advance.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play,” Geithner said.

Global Response

Around the world, governments have taken steps to combat the financial crisis that have “substantially reduced the risk of much deeper and more prolonged global recession,” Geithner said. He said he sees several indications of stabilization and improving confidence in the U.S., along with “initial signs” of global progress.

European economies are shrinking more slowly and there are similar signs in Japan, Geithner said. He also said China is helping other Asian economies after successfully using government policy to increase demand. Growth prospects also are improving in Brazil and other parts of Latin America, he said.

Geithner praised Saudi Arabia’s efforts to diversify its economy away from energy-related businesses. Later today, he is scheduled to visit the city of Yanbu to attend an economic development event with King Abdullah, the U.S. Treasury said.

“The world has yet to fully appreciate the scale of ambition and investment we are seeing in the Kingdom and the Gulf region to lay the foundation for future growth,” Geithner said. “You are diversifying your economies to build a future less dependent on oil and natural gas.”

Iran Sanctions

Geithner’s first visit to the Mideast as Treasury chief is aimed at explaining to allies and trading partners the state of the U.S. economy and shoring up their support for efforts to stop Iran’s nuclear program, stabilize Iraq and quell violence in Afghanistan, U.S. officials, who declined to be identified, said in a briefing last week.

Geithner is visiting the U.K., Saudi Arabia, the United Arab Emirates and France this week. In addition to possible new sanctions on Iran, he’ll also discuss the global economy, the upcoming Group of 20 summit in Pittsburgh, Pennsylvania, and efforts to prevent terrorism financing, the Treasury officials said in a briefing with reporters in Washington. In Abu Dhabi tomorrow, he’s also scheduled to meet with officials from two sovereign wealth funds.

Source

The Bank of England’s emergency bond-buying program may end next month as Britain’s worst recession in a generation eases, economists say.

Officials decided yesterday not to expand the 125 billion- pound ($203 billion) spending plan and said they will pause purchases of government bonds at the end of July. That suggests they may be preparing to wrap up the policy, said Credit Suisse Group AG, Citigroup Inc. and Fortis Bank Nederland Holding NV.

“We’re at a turning point,” said Nick Kounis, an economist at Fortis in Amsterdam and a former U.K. Treasury official. “We know the economy has probably stabilized. Even though they can’t see the effects of what they’re doing, they may be starting to worry about overkill.”

Bank of England Governor Mervyn King will assess the plan’s success in August and any decision to finish it would shift the focus of policy to the exit strategy. While some economists are concerned creating too much money to buy the bonds will spark inflation, officials stress they can contain those risks by offloading the debt they have bought and raising interest rates.

In the U.S., the Federal Reserve has already started rolling back measures set up to stave off a deeper recession. The Fed said last month it will let one emergency-lending program expire this year and trim two others.

Bond Drop

Gilts dropped and the pound rose when the Bank of England declined to push its purchase plan to the 150 billion-pound limit authorized by Gordon Brown’s government. The yield on the benchmark 10-year bond jumped the most in three months, climbing 17 basis points yesterday. It advanced a further 7 basis points to 3.85 percent today.

The pound, which advanced 1.6 percent yesterday, slipped 0.5 percent to $1.6261 as of 8:46 a.m. in London. The central bank also left its benchmark interest rate at a record low of 0.5 percent.

“Not extending the program this month makes it more likely they will stop it next month,” said Michael Saunders, chief western European economist at Citigroup in London. “Growth prospects are better and the inflation outlook is higher. This may be cordoning off their scope to keep going.”

The U.K. inflation rate fell less than economists forecast in May and is still above the bank’s 2 percent target. Policy makers predicted in their May 13 forecasts that the rate will drop below target and won’t return to it in two years.

The bank’s concerns about deflation may yet lead them to expand the purchase plan car loan. Philippe-Henri Burlisson, an investor at Groupama Asset Management in Paris, said the inflation outlook will be “key” in policy makers’ thinking.

‘Signs of Stabilization’

“For them to stop would mean that they are convinced the economy is doing better enough,” Burlisson said. “I have a hard time believing this.”

Bank of England Deputy Governor Charles Bean said June 24 that it appeared that “it looks like we may be around the trough” of the slump, and policy maker Andrew Sentance said that “there are signs of stabilization, but it doesn’t tell us how strong the recovery will be.”

Gross domestic product slumped 2.4 percent in the first quarter, the most in 50 years, and data since then have been mixed. House prices dropped 0.5 percent in June after jumping 2.6 percent the previous month, Halifax says. Manufacturing fell in May for the first time in three months.

British Airways Plc, which reported the biggest loss in its history in the quarter ended March 31, may face strikes as the airline pushes unions to accept almost 4,000 job cuts.

Taking Root

The economy’s contraction eased to 0.4 percent in the second quarter, the slowest pace in a year, according to an estimate by the National Institute of Economic and Social Research. The International Monetary Fund this week raised its U.K. forecast for 2010 to predict a return to growth.

If a recovery takes root, the central bank’s “biggest challenge” will be determining the exit strategy from its emergency plan, according to Adam Posen, deputy director at the Peterson Institute for International Economics in Washington, who will become a U.K. policy maker in September.

Economists say rate increases are unlikely this year. Citigroup’s Saunders predicts the bank will lift the rate in the second quarter of 2010. Fortis’s Kounis said policy makers will wait until the second half before raising it “gradually.”

“The economy isn’t strong but the extreme risks quantitative easing was addressing have diminished,” said Robert Barrie, chief U.K. economist at Credit Suisse in London, and a former Treasury official. “It is the beginning of the end for QE.”

Source

Japan’s consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession.

Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year’s record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending.

“Profits fall, then wages come down, then consumers stop shopping,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.”

The yield on Japan’s 20-year bonds fell half a basis point to 2.08 percent at the 11:05 a.m. break in Tokyo. The Nikkei 225 Stock Average rose 0.2 percent. The decline in prices matched the median estimate of economists surveyed by Bloomberg.

Worldwide inflation is easing as energy costs retreat and the worst global recession since the Great Depression forces companies to charge less. Consumer prices failed to rise in the euro area for the first time in at least a decade in May, and in the U.S. they fell 1.3 percent, the most since 1950.

Hard Sell

“With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,” said Azusa Kato, an economist at BNP Paribas in Tokyo.

Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan’s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise.

Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.

Finance Minister Kaoru Yosano said an “extreme” slump in demand and production are causing the drop payday loans. “We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral,” he said.

Jun Saito, chief economist at the Cabinet Office, said in an interview that price declines “will exert a significant amount of downward pressure on the recovery.”

OECD’s Advice

The Organization for Economic Cooperation and Development this week urged the Bank of Japan to keep pumping cash into the economy “until underlying inflation is firmly positive.” Since it cut the key interest rate to 0.1 percent in December, the central bank has been buying corporate debt and increased government bond purchases from lenders to revive growth.

Central bank board member Hidetoshi Kamezaki said this month that receding expectations of price increases “could lead to a deflationary spiral, which is very dangerous.” Some 22 percent of consumers anticipate prices will be lower a year from now, the most since the government began asking the question in 2004.

“The Bank of Japan is clearly worried about the risk of deflation, not inflation, and an exit from its low-rate policy is still far away,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Tokyo Prices

Even when excluding food and energy, consumer prices fell 0.5 percent in May, the fastest pace in 22 months, the statistics bureau said. Core prices in Tokyo, a harbinger of nationwide price trends, fell 0.7 percent in June from a year earlier, the biggest drop in six years.

“The economy’s deterioration will exacerbate downward pressure on prices,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Core price declines will probably exceed 2 percent in the July-September quarter.”

Core prices, the central bank’s key gauge of inflation, will slide 1.5 percent this fiscal year and 1 percent in the next, Governor Shirakawa and his board forecast in April.

Crude oil has lost about half of its value since peaking at $147.27 a barrel in July. Wheat, soybeans and corn costs have dropped after climbing to records last year.

Wholesale prices fell at the fastest pace in 22 years in May and corporate-service prices slid a record 3 percent.

Source

German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession.

Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.1 percent decline in April, according to the median of 10 estimates in a Bloomberg News survey.

“The world is still adjusting to the burst of the credit boom and this kind of hangover won’t be gone in a couple of months,” said Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt. “The global economy is still lackluster.”

German companies from chemical makers to car manufacturers have seen demand fall as the global economy contracts. While Bundesbank President Axel Weber said June 5 that central bank policy has helped to slow the pace of the economic slump, the outlook “remains uncertain.” Volkswagen AG’s Audi division said yesterday it may need to push back a 2015 sales target as customers withhold purchases of luxury vehicles no teletrak payday loan.

German imports dropped 5.8 percent in April from the previous month, when they increased a revised 0.2 percent, the statistics office said. The trade surplus narrowed to 9.4 billion euros ($13.1 billion) from 11.3 billion euros.

The surplus in the current account, the measure of all trade including services, was 5.8 billion euros, down from a revised 11.0 billion euros.

The European Central Bank has cut its key interest rate to a record low of 1 percent and pledged to buy 60 billion euros of covered bonds starting next month in an effort to revive lending. President Jean-Claude Trichet said on June 4 that he expects the slump in the euro-area economy to ease in the current quarter after a “sharp fall in global demand and trade” affected the region in the first quarter.

Source

Australia’s economy unexpectedly grew in the first quarter, skirting the global recession that has swamped the U.S., the U.K. and Japan, as exports and consumer spending increased.

Gross domestic product rose 0.4 percent in the three months to March 31 after it contracted a revised 0.6 percent in the fourth quarter, the Bureau of Statistics said in Sydney today. The median estimate of 18 economists surveyed by Bloomberg was for a 0.2 percent decline.

Stocks rose and the nation’s currency jumped to the highest in eight months as the report confirmed Australia is one of only a few economies including China and India that expanded last quarter. Record interest-rate cuts and more than A$12 billion ($9.9 billion) in government cash handouts to consumers fueled growth even as businesses slashed investment spending.

“Rumors of the death of the Australian economy have been highly exaggerated,” said Craig James, chief equities economist at Commonwealth Bank of Australia in Sydney.

“Much of the credit for Australia’s resilience must be given to the swift actions of the Reserve Bank and government in stimulating our economy.”

The Australian dollar rose to 82.40 U.S. cents at 1:07 p.m. in Sydney from 81.91 cents before the report was released.

Stocks Rise

The S&P/ASX 200 stock index increased 1 percent, paced by shares of Australia’s largest telephone company, Telstra Corp., which gained 2.3 percent. Furniture retailer, Harvey Norman Holdings Ltd., rose 5.8 percent.

Consumer spending advanced 0.6 percent in the quarter, adding 0.3 percentage points to GDP, today’s report showed. Government spending rose 0.3 percent and exports increased 2.7 percent.

Still, parts of the economy remain weak. Business investment tumbled 6.1 percent and imports fell 7 percent as companies such as Rio Tinto Group cut spending and fired workers. Car sales dropped 14.9 percent in May from a year earlier, the Federal Chamber of Automotive Industries said today.

“We’re not out of the woods yet,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “Technically we have skirted recession, but the underlying details in the data aren’t painting a great picture.

‘‘We’ve got investment falling and imports tanking, which is symptomatic of weaker investment, and households are being artificially supported by government cash handouts.”

Government Spending

Prime Minister Kevin Rudd, who said in April that the country’s economy is in its first recession since 1991, began distributing cash handouts of as much as A$900 in March to low- and middle-income earners.

“It’s been the right strategy under very difficult global conditions,” Rudd told reporters in Canberra today. Still, “difficulties and obstacles lie ahead.” Unemployment will rise and “there is no guarantee that GDP won’t fall in future Internet Payday loans.”

The jobless rate has climbed to 5.4 percent in April from 3.9 percent in February 2008 as companies such as Qantas Airways Ltd. fired workers.

Among evidence that Australia is weathering the global slump, building approvals jumped twice as much as economists forecast in April, new homes sales gained for a fourth month and the current account deficit narrowed in the first quarter as agricultural exports surged.

Today’s report showed rural exports jumped 18.3 percent in the quarter. Wheat output rose to 21.4 million tons in 2008-2009, the biggest crop in three years, from about 13 million tons a year earlier, according to the Australian Bureau of Resource and Agricultural Economics.

Retail sales rose in the first quarter and again in April.

‘More Resilient’

Woolworths Ltd., Australia’s largest retailer, said last month that sales surged 6.5 percent to A$12.3 billion in the three months ended April 5. Caltex Australia Ltd., the nation’s largest oil refiner, said on April 23 that first-quarter operating profit gained 11 percent.

“It’s good for confidence that we’ve avoided that technical recession,” defined as two consecutive quarters of declining GDP, said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. Today’s GDP figures “indicate Australia is much more resilient than many other economies.”

The economy grew 0.4 percent from a year earlier. Economists forecast a 0.4 percent contraction.

By contrast, Japan’s economy shrank 9.7 percent in the year, the U.K.’s GDP dropped 4.1 percent, the 16-member euro region contracted 4.6 percent and the U.S. slid 2.5 percent. The economy of China, Australia’s largest trading partner, grew 6.1 percent and India expanded 5.8 percent.

Interest Rates

The global turmoil, triggered by last year’s collapse of Lehman Brothers Holdings Inc., prompted Reserve Bank Governor Glenn Stevens to slash the overnight cash rate target between September and April by a record 4.25 percentage points.

Stevens left the rate unchanged at 3 percent yesterday for a second month and signaled that he is prepared to cut borrowing costs from a 49-year low to spur domestic demand “if needed.”

“The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy,” Stevens said.

Investors expect Australia’s overnight cash rate target will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

Traders forecast the benchmark will be 24 basis points higher in 12 months, the index showed at 12:39 p.m. in Sydney. At the start of May, they tipped 37 basis points of cuts. A basis point is 0.01 percentage point.

Source

Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

He said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.

The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

In a wide-ranging interview, the Treasury chief declined to say whether the administration would propose stripping the Securities and Exchange Commission of some of its powers as part of the plan and dismissed suggestions of a rift with Federal Deposit Insurance Corp. Chairman Sheila Bair.

Geithner, 47, shied away from declaring the financial crisis over, saying that credit is still "tight" and interest rates are still "high" for many business borrowers. He forecast that will improve gradually as companies and consumers reduce their debt levels to sustainable levels.

Recovery Process

“That’s going to make the process of recovery somewhat slower than it would otherwise be,” he added.

The Treasury chief said it was a “real concern” that some banks that received money from the government will rush to pay it back, impinging on their ability to increase lending. To discourage that from happening, banks that want to repay must show they have more capital than regulatory guidelines call for, and are able to raise money from the private sector “on a substantial scale” without government help, he said.

Geithner told lawmakers earlier this week that every $1 of capital at banks can generate more than $8 of lending. Still, he said in the interview that the Treasury won’t require that banks commit to specific increases in their lending as a precondition for paying the government back.

‘Deep Trouble’

“Lots of countries have got themselves in deep trouble with policies that force their banks to lend,” he said. “That’s likely to lead to a weaker, less efficient banking system, a less efficient economy.”

The government has distributed almost $300 billion in capital to about 600 U.S. banks and financial firms under the $700 billion financial rescue package approved by Congress last year. A number of lenders, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, have applied to repay the government funds.

Geithner is under pressure to institute a new set of rules this year for the financial-services industry.

“No one bails out little grocery stores,” U health insurance.S. Representative Jose Serrano, a Democrat from New York, told the Treasury chief at a hearing in Washington yesterday.

As part of its efforts to combat the crisis, the Treasury is putting together a Public-Private Investment Program to purchase as much as $1 trillion in distressed mortgage-backed securities and other assets from the banks. The partnerships would use $75 billion to $100 billion of government funds.

Bank Pressure

Geithner signaled he wouldn’t be concerned if the program doesn’t reach hundreds of billions of dollars within a few months. He declined to say whether banks should be pressured to participate, as Bair has suggested.

“We want to get these programs in place and see how they work,” he said. “They can be helpful and valuable in putting a floor under things, even if they don’t see a lot of early participation.”

Geithner said the credit crisis reflected “systematic failures” in financial oversight that would require “pretty significant changes across the board.” Among the changes the administration is considering is the establishment of an independent agency tasked with consumer protection.

The SEC may be stripped of some of its powers under the regulatory restructuring plan being put together by Geithner and National Economic Council Director Lawrence Summers, people familiar with the matter have said. In one scenario, the agency would lose its oversight of mutual funds to a new agency for policing consumer-finance products.

SEC Resources

Geithner praised SEC Chairman Mary Schapiro and said he would support giving her agency more resources where needed. He declined to say whether he thought the SEC should lose oversight of mutual funds as part of the overhaul.

He also said the administration is working with top lawmakers to craft a new regulator that would police risk across the financial system. He said no judgments have been made yet about who would fill that task, or what the roles of the Federal Reserve and Treasury will be. A “white paper” on the subject is due in several weeks, he said.

The Treasury chief brushed off suggestions that he and Summers were at odds with the FDIC’s Bair and that the two didn’t consider her a team player. He called Bair “very creative” and said that he had worked "very closely" with her.

“One of her great strengths is she’s a strong advocate for her agency and strong advocate of her points of view,” Geithner said. “That’s the kind of thing that everybody wants around the table, including Larry Summers.”

The Treasury chief belittled charges by former House of Representatives Speaker Newt Gingrich and other Republican leaders that President Barack Obama was adopting a "socialist" agenda. While markets can’t solve all America’s problems, the administration recognizes their importance, he said.

“It’s the least plausible charge anybody could say,” Geithner said. “The president understands how important markets and businesses are to the future prosperity of the U.S.”

Source

Australian Prime Minister Kevin Rudd’s bid to ensure his housing market avoids the global property slump may push a generation of buyers into a debt crisis.

Grants of as much as A$21,000 ($16,142) to first-time buyers and the lowest interest rates in 49 years have emboldened more than 40,000 young Australians to take out home loans since October, stoking demand for properties that cost less than A$500,000.

These buyers may be vulnerable when interest rates begin rising, potentially triggering a jump in foreclosures that will drive down property prices, cut profits at banks and damp household spending, which accounts for half the economy. A surge in defaults in America was a key trigger for the financial crisis that pushed the global economy into its worst recession since World War II.

“We’re mirroring what happened to the U.S. three years ago, when people who shouldn’t have been in the market bought houses,” said Martin North, managing director of Fujitsu Australia, a Sydney-based property-consulting company. “It’s a strategy set for an unfortunate outcome.”

As Australia slides into its first recession since 1991, Rudd’s payments have been criticized by economists and newspapers for fueling a property boom that may burst once the grants are reduced, possibly as soon as July 1.

No Subprime Crisis

While the central bank says Australia doesn’t have a subprime crisis because banks have tightened lending standards, recent reports show first-time buyers are driving a residential construction industry that employs 5 percent of the workforce. New home sales have surged 22 percent this year, and building approvals climbed 12 percent in February and March.

“March was the busiest month I’ve ever had,” said Peita Jackson, a real-estate agent at Bradfield & Prichard, who specializes in selling homes in Sydney’s eastern suburbs. “I sold six properties, and four were to first-time buyers.”

Former Prime Minister John Howard introduced the grants in 2000 to boost a slumping housing market. Last year Rudd tripled the payments for new homes to A$21,000 and doubled handouts for existing houses to A$14,000 to support the economy.

The increases coincided with record interest-rate cuts by Reserve Bank Governor Glenn Stevens, who has reduced the overnight cash rate target by 4.25 percentage points since September to a 49-year low of 3 percent.

Tax-Free Boost

The rate cuts have lowered payments on an average A$250,000 mortgage to A$1,470 from A$2,120. The Reserve Bank says that equals an 8 percent tax-free boost to family incomes. About 90 percent of Australians hold variable-rate loans that are adjusted when the central bank changes its benchmark rate.

“All these things have increased the demand side of property and not the supply side, which always results in increased prices,” said John Lindeman, head of research at property-information company Residex Pty in Sydney cash advance.

The 10 suburbs with the biggest prices gains in Sydney during the six months through March were all in locations where homes cost less than the city’s median price of A$564,500, according to Lindeman. The biggest jump was in Greenfield Park, 36 kilometers (22 miles) west of the city center, where the median price rose by A$23,700 to A$420,000.

“We’re setting up a whole generation of people for grief,” Lindeman said. “Interest rates will go up, and that’s when they will feel the pain.”

Prospective Owners

The government grants and interest-rate cuts have prompted first-time buyers, who accounted for a record 27 percent of dwellings financed in February, to borrow more than other prospective home owners. Lending to these consumers surged 6.1 percent between October and February to an average of A$280,600, the Statistics Bureau said. By contrast, home loans to all borrowers fell 1.1 percent to A$253,200.

“For many buyers, the grant was critical,” said Fujitsu’s North. “Over 30 percent had loan-to-valuation ratios on their properties of 95 percent or higher.”

This may eventually leave some new buyers with so-called upside-down loans, as they owe more on their mortgage than the market price of their home. That threat will be heightened if unemployment climbs above 7 percent from the current rate of 5.4 percent, as forecast by the government.

Rudd, Stevens and the International Monetary Fund have all said Australia is in a recession as companies such as BHP Billiton Ltd. and Qantas Airways Ltd. fire workers. Gross domestic product declined 0.5 percent in the quarter ended December 2008 from the previous three months.

Disappearing Jobs

While supporters of the grants say they have created 20,000 construction jobs, many of these jobs may disappear later this year. Rudd signaled last month that the increased handouts may not be extended beyond June 30, reverting to A$7,000 for new and existing homes.

“All good things must come to an end,” Rudd said April 23. The government will announce any changes to the grants when it releases its budget tomorrow.

Some prospective home buyers hope the grants will be cut.

Ludmila Soboleva, a 40-year-old drugs researcher, has been looking for an apartment in Sydney’s eastern suburbs since November, without success.

“Everyone told me this is the best time to buy something but for properties I can afford, it’s a nightmare,” she said. “I wish they would cut this grant so maybe there will be fewer people” trying to buy.

Source

The Post-Dispatch and columnist David Nicklaus have received recognition from a national journalism group for business coverage in 2008. The "Best in Business" awards from the Society of American Business Editors and Writers picks the best entries submitted by newspapers, wire services, business weeklies and business websites throughout the country.

The Post-Dispatch won in the breaking news category for large newspapers for its package of business and metro stories on Anheuser-Busch’s July 13 decision to accept InBev’s takeover bid.

The coverage, led by business reporter Jeremiah McWilliams, "conveyed the historical complexity of the deal in a readable style. Stories by the business and metro desks covered the impact on the entire brewing process, from farmers to workers, from distributors to bartenders and customers cheap payday loans. … The newspaper’s preparation for the historic story and deadline execution made it one of the best in a year of big breaking business stories," the judges wrote.

Meanwhile, Nicklaus garnered recognition for a selection of columns. "Here’s a columnist who consistently goes beyond the obvious," the judges wrote. "If you believe that a local business columnist should actually write about local business and do so with insight and verve, you can’t do much better than Nicklaus."

Source

For real estate appraisers, determining what a house is worth has become increasingly difficult, which is making it even harder for buyers to purchase homes or for homeowners to refinance.

The main tool in the appraiser’s kit is the sale prices of homes in the area. If they can find similar houses nearby in similar condition that sold recently for, say, $300,000, they can assume that the home they are appraising is worth a comparable amount.

But with sales volume falling, there are fewer homes with which to compare. In fact, sales of new homes crashed in January to the lowest level in 45 years, and existing home sales fell to a 12-year low.

And even when there are recent sales figures, they often don’t hold up as a reliable baseline. Appraisals are estimates of market value at a given time, and with prices in free fall, values "age" quickly.

"We just don’t have a flow of transactions to be able to come up with credible values," said Jonathan Miller, president of Miller Samuel, a noted New York appraisal firm. "Closed sales are now largely irrelevant because they’re so far behind the market."

In fact, Marc Savitt, president of the National Association of Mortgage Brokers, recently had a bank underwriter object that none of the appraiser’s comparable homes were near enough.

"They told him they wanted comps within a mile," said Savitt. "But, the market the way it is, there haven’t been many sales and there were no recent comps within a mile."

Other options

So in lieu of good sales figures, appraisers often consider contract prices, the ones first agreed to between buyers and sellers. But those are not much better because many sales don’t close.

And listing prices are "hit or miss," Miller said, because most sellers overestimate the value of their homes. Columbia business professor Eric Johnson calls that the "endowment effect," which causes people to place higher values on properties once they own them.

Sellers set their listing prices far too high, as a result, and that leads to a big chasm between list and sale price. In the New York region, for example, there’s a 16% gap, on average.

During the boom, pressure was put on appraisers to inflate values so that sales would go through. Sellers, buyers, real estate agents, loan officers and mortgage brokers all had a vested interest in getting the sale completed. So if appraisers weren’t cooperative and raise their values, they often got frozen out of deals.

Now, there’s pressure on appraisers to be too conservative, so many homeowners are finding themselves unable to purchase a new home or refinance their existing mortgage.

"Lenders want the appraisal at the lower end of the range," said Joni Herndon, a Tampa, Fla free credit report.-based appraiser. "The lender may want it at $100,000 and the appraiser thinks it’s worth closer to the high end of his or her range, say $115,000."

If the lender does reject the appraisal, one of three things usually happens. "Lenders can order a second appraisal, the seller can lower the price on the house or the buyer can come up with more cash," according to Jim Amorin, president of the Appraisal Institute, the industry’s professional standards organization. "In some cases, none of those happens and the loan doesn’t go through."

Making adjustments

One way appraisers are addressing stale comps is by using a "negative time adjustment." If a comparable property sold for $200,000 three months ago in a market where prices are falling at a 12% annualized pace, the comp can be reduced in value by 3% to reflect the market.

In some areas more than half the appraisals come in with these adjustments, according to David Adamo the CEO of mortgage broker Luxury Mortgage,

Another option is an "automated valuation model," which uses a mathematical formula to set home values. They establish a baseline home price by examining sales prices and the square footage of recently sold homes in the neighborhood. So if a house is 1,500 square feet in a community where the average home sells for $200 a square foot, the AVM puts the appraisal value at $300,000 and increases or decreases it as new sales data is recorded.

However, these valuations don’t take into consideration a home’s condition or appearance - or even verify the square footage - so the results can be very far off.

Plus, "those AVMs can have trouble keeping up with the market, too," said Nanette Traylor, an underwriter with Salt lake City-based mortgage lender Castle & Cooke Mortgage.

Impact on Obama’s plan

But finding accurate appraisals is more important than ever now that the Obama administration has announced its Homeowner Affordability and Stability Plan. The first prong of this program allows homeowners with Freddie Mac or Fannie Mae loans to refinance into current record-low rates even if they are slightly underwater, meaning they owe more on their mortgages than their homes are worth.

However, eligibility will directly hinge on appraisals: Anyone who owes more than 105% of the value of the home won’t qualify. That adds to the pressure appraisers may feel to "hit the number" so people on the bubble can slide in and refinance.

"There’s clearly a heightened sensibility among lenders today," said the Appraisal Institute’s Amorin. "They’re saying, ‘We better take a really good look at the collateral." 

Source

WASHINGTON – Federal regulators said Monday they will launch a revamped program to shore up the nation's troubled banks that includes the option of increasing government ownership in financial institutions.

The new plans are the Obama administration's latest attempt to bolster the strength of the banking system without nationalizing any institutions, which the White House has said it does not intend to do.

The Treasury Department, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and the Federal Reserve jointly issued the statement amid growing concern that some of the country's biggest banks may need additional assistance to survive the fallout from the worst financial crisis since the 1930s.

The new program – a crucial component of President Barack Obama's strategy for handling the $700 billion financial bailout – would give the government greater flexibility in dealing with troubled banks.

In a new twist, regulators have the option of allowing the government to boost its ownership in banks without having to pour more taxpayer money into them. That would be done through a technical change converting the status of the government's shares in a financial institution.

Citigroup Inc. has approached banking regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. They spoke on condition of anonymity because they are not authorized to speak on behalf of the government or the company.

Still, the regulators suggested keeping banks private is a priority.

"Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption (of the program) is that banks should remain in private hands," the regulators said.

The new federal program, like the old one, will allow the government to continue to inject more taxpayer money, or capital, into a bank, in an effort to ride out the financial storm. Of the first $350 billion in bailout funds, $250 billion was used to provide capital injections to banks, including Citigroup, Bank of America Corp. and others. But the Obama administration has not said how much of the second $350 billion will be used for that purpose.

The regulators on Monday did not name any specific banks or respond to reports that the government was considering increasing its ownership of Citigroup.

The White House just last week downplayed persistent speculation that some banks could be effectively nationalized by the federal government.

"A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery," the regulators said. "The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses.''

A revamped program, announced by Treasury Secretary Timothy Geithner earlier this month, to plow federal money into banks in return for giving the government ownership stakes will start Wednesday guaranteed fast personal loans.

Regulators provided some details on that program Monday.

"Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory," the regulators said.

Such a conversion into common stock would give the federal government more control of a bank – without necessarily having to put up more taxpayers' dollars and could be applied retroactively to banks that already have received billions in capital injections. The banks also benefit because preferred shares pay higher dividends so converting them into common shares will help ease their repayment burden.

Such an option is being considered for Citigroup but also could be available for other banks as well, according to people familiar with the new capital injection program. They spoke on condition of anonymity because they are not authorized to speak for the government.

When asked about reports that the government was considering increasing its ownership of Citigroup, Treasury spokesperson Isaac Baker said the department did not comment on conversations with specific banks.

"We've made clear that we will do what is necessary to strengthen and stabilize the financial system so that it can provide the credit necessary to support economic recovery," Baker said in a statement.

The government is open to considering a request to convert preferred shares purchased as part of its $700 billion rescue program into common stock "if the institution and its regulator believe it would promote the long term stability of that institution and we believe it's in the best interest of long term stability of our economy and financial system," Baker said.

The Wall Street Journal reported late Sunday that Citigroup was in talks with federal officials over the possibility of the government expanding its ownership of the struggling bank to as much as 40 per cent of its common stock. The newspaper said bank executives hope the stake will be closer to 25 per cent.

The new capital injection program will require banks to under go “stress tests" to examine their financial health and determine whether additional capital is needed. Details on how these tests will work may be provided Wednesday, the people familiar with the plan said.

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized,'' the regulators said. However, as part of the stress tests, banking examiners will be looking closely at both the quality and quantity of capital.

Later Monday, Geithner will join Obama and other guests at a fiscal responsibility summit at the White House to discuss how to curb a burgeoning federal deficit laden with Social Security, Medicare and Medicaid obligations.

Source