Category: Market Action

The Europeans have a grave problem: they’re being criticized by parties they don’t regulate:

Tensions between Europe and the rest of the G20 broke wide open in Los Cabos as the president of the European Commission laid bare his frustration with the constant lecturing from outsiders, including Canada.
…
The president of the European Commission, José Manuel Barroso, reacted tersely when asked to respond to recent comments from Prime Minister Stephen Harper that Europe does not need outside help to stabilize its economy.

“Frankly, we are not coming here to receive lessons in terms of democracy and in terms of how to run an economy because the European Union has a model that we may be very proud of,” Mr. Barroso said.

Maybe … maybe the EU should regulate Canadian politicians, as well as the Credit Rating Agencies! Yeah! Yeah, that would be good!

The Greek election has only shifted the focus in Europe:

Spanish bonds slid, propelling 10- year yields to more than 7 percent, after yesterday’s Greek election failed to convince investors that politicians will be able to tame Europe’s financial woes.

Italian debt also fell and German bunds rose, reversing earlier declines. Spain’s yields climbed to euro-era records as a report today showed the nation’s bad loans increased in April. The securities tumbled last week after the bloc’s fourth-largest economy requested as much as 100 billion euros ($126 billion) of aid on June 9 to support its banks. Greek bonds rose after pro- bailout parties won enough seats to control parliament.

The greenback is cementing its status as a reserve currency:

Central banks rebuilding foreign- exchange reserves at the fastest pace since 2004 are crowding out private investors seeking U.S. dollars, boosting demand even as the Federal Reserve considers printing more currency.

After falling to an all-time low of 60.5 percent in the second quarter of last year, the dollar’s share of global reserves rose 1.6 percentage points to 62.1 percent in December, the latest International Monetary Fund figures show. The buying has left the private sector with $2 trillion less than it needs, according to investment-flow data by Morgan Stanley, which sees the dollar gaining 8.2 percent in 2012, the most in seven years.

While the Fed has created more than $2 trillion under its stimulus programs since 2008, the flows signal that there may actually be a shortage of dollars to meet demand as Europe’s debt crisis deepens and the global economy slows.

ING Canada got downgraded:

The cauldron of financial turmoil bubbling over in Europe is now seeing its hot water trickle into Canada. Late Friday, rating agency Moody’s Investors Service announced the downgrade of ING Bank of Canada’s senior deposit ratings from Baa1 from A2.

This comes on the heels of the rating agency’s downgrade of ING’s parent, ING Bank NV, to C- for financial strength.

Small investors prone to panic are reminded that ING Bank Canada is a CDIC member and that:

Up to $100,000 of your savings are eligible for deposit insurance offered by CDIC. Your savings must be:
Held in…
A Eligible deposits—for example, savings, chequing and GICs of 5 years or less
+ Held at…
B Banks and other financial institutions—eligible deposits must be held at a CDIC member.
+ And held in…
C Canadian dollars—U.S. dollar and other foreign currency deposits are not eligible.

Meanwhile, in the True North Strong and Free Google reports:

We received a request from the Passport Canada office to remove a YouTube video of a Canadian citizen urinating on his passport and flushing it down the toilet. We did not comply with this request.

And we have problems even talking about trade:

Canada’s bid to join was hampered by the slow progress it made at enacting stronger prohibitions against the theft of digital intellectual property as well as its staunch protectionism for dairy and poultry producers who are shielded from foreign competition.

Another one of What-Debt’s favourite companies is going to do again what it does best:

Pension woes are back at the top of Air Canada’s concerns as the carrier seeks a new reprieve from retirement funding to avert a looming financial crisis.

Faced with a cash crunch in 2014, the country’s largest airline is preparing to ask Ottawa for another moratorium on company contributions to pensions, and to request other measures to ease the pressure.
…
The Montreal-based carrier’s pension solvency deficit stood at $2.1-billion on Jan. 1, 2011, and analysts expect the airline to report a sharply higher deficit for Jan. 1, 2012.

BBD.PR.D got whacked again today, down 1.42 to close at 14.93. Strangely, BBD.PR.B, the RatchetRate issue with which it interconverts effective August 1, was also hammered, down 0.65 to close at 14.30. The interconversion has been discussed on PrefBlog; BBD.PR.D will reset to 255% of GoC5 – which at current levels will be only a hair above 3%.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums winning 9bp, FixedResets up 1bp and DeemedRetractibles gaining 3bp. Volatility was muted. Volume was very low.

The BoC has released a working paper by Donald Coletti, René Lalonde, Paul Masson, Dirk Muir and Stephen Snudden titled Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting:

We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.

Jonathan Weil of Bloomberg decries dynamic provisioning:

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.
…
The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.

Assiduous Readers with long memories will remember my post titled FRBB Looks at Dynamic Provisioning. The FRBB paper concluded, in part:

We argue that, had U.S. banks set aside general provisions in positive states of the economy, they would have been in a better position to absorb their portfolios’ loan losses during the recent financial turmoil. The allowances accumulated by means of the hypothetical dynamic provision during the cyclical upswing would have reduced by half the amount of TARP funds required. However, the cyclical buffer for the aggregate U.S. banking system would have been depleted by the first quarter of 2009, which suggests that the proposed provisioning model for expected losses might not entirely solve situations as severe as the one experienced in recent years.

So just remember: just because something is good doesn’t mean it’s a panacea. Ain’t nuthin a panacea.

Meanwhile, Spend-Every-Penny wants countries to guarantee deposits in banks they don’t regulate:

Canada is urging the euro zone to embrace a common bank-deposit guarantee as a concrete step to boost market confidence.

The stand – confirmed Friday in a speech by Finance Minister Jim Flaherty – provides the first specifics as to what Canada will push for next week when Prime Minister Stephen Harper and Mr. Flaherty attend the G20 leaders’ summit in Los Cabos, Mexico.

In his speech in Ottawa, the minister praised a proposal from Mario Draghi, the head of the European Central Bank, who has called for a fund to guarantee bank deposits in the 17-member euro zone.

It’s not clear to me why anybody would think that any rational person would base his finances on the word of a European politician anyway. I wouldn’t have any significant money deposited in any of the shaky-country banks anyway … and, if I lived there, would be inclined to be dubious about any European deposits for fear of post-exit confiscation anyway. My preference would be hard assets, by which I mean a box of Krugerrands and a pistol.

Alpha Trading asks the question – can a bank-owned utility do anything useful?:

Alpha, Canada’s newest stock exchange, wants to become the home to the country’s technology sector.

A Deloitte Inc. study commissioned by Alpha found what most observers of the tech sector in this country already know: that the tech industry is stunted. Tech as a percentage of GDP is below the G-20 average and forecast to fall behind Mexico and Saudi Arabia in a few years, the report found.
…
The report, which included interviews with 22 tech sector leaders, laid out a five-point agenda for fixing the problem. The proposed solutions include more support for crowdfunding, establishing a pre-initial public offering “grey” market in tech securities and creating an exchange that focuses on tech. Alpha wants to be that exchange.

BBD.PR.D got whacked today after the announcement of the reset rate, closing down 1.40, or 7.89%, on heavy volume (for this issue!) of 32,479 shares. However, even at the quote of 15.90-35, it’s still idiotically expensive relative to BBD.PR.B at 14.95-05, with which it is interconvertible. I’ve been warning of this in PrefLetter for months. With charts and diagrams!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets down 9bp and DeemedRetractibles gaining 15bp. Volatility was average. Volume was very low.

The ECB won’t disclose records of EU collusion with fuzzy Greek bookkeeping:

The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.

Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history

Disclosing the files when Bloomberg News first sought them in 2010 would have “fueled negative perceptions about Greece’s ability to honor its debt,” ECB lawyer Marta Lopez Torres said at a hearing of the European Union’s General Court in Luxembourg today. “It’s the same now with Spain” which “isn’t able to borrow money,” she said. “Markets are reacting in very volatile ways. It’s affecting the euro economy.”

Sorry this is so late, folks! There were technical difficulties at TMX DataLinx.

I can’t say I’m against this move – but it does open up a can of worms:

Denmark’s government agreed to ease rules for the country’s pension firms to help reduce their liabilities as record-low bond yields inflate the value of their obligations.

Pension companies and life insurers will be allowed to raise the discount rate they use to calculate their liabilities to better reflect long-term growth and inflation prospects, the Business and Growth Ministry in Copenhagen said in a statement late yesterday. The decision sent yields on longer-maturity bonds soaring as the industry’s need to buy up debt assets to match their pension obligations was reduced.
…
The Danish move follows similar changes in Sweden, where 10-year yields surged 30 basis points on June 7 after the country’s regulator put a floor on the discount rate pension funds use to calculate liabilities. Nordic pension funds had come under pressure to increase their asset purchases as the region’s haven status from the debt crisis sent bond values higher and swelled the value of their liabilities.

The US housing market has a new kind of problem:

Funds planning to invest more than $6 billion to buy and rent foreclosed homes are finding it easy to raise money. The difficulty is spending it.

The number of low-cost foreclosed homes coming to market has dropped, bulk sales have been slow to materialize and prices are recovering in markets such as Phoenix, making it hard for private-equity firms, hedge funds and pension systems to buy as many homes as they need.
…
Investors are trying to spend at least $6.4 billion on single-family rentals, including from funds such as Colony Capital LLC, GTIS Partners, KKR & Co., Oaktree Capital Group LLC (OAK), Och-Ziff Capital Management Group LLC (OZM) and the Alaska Permanent Fund Corp. They want to take advantage of U.S. home prices that are 35 percent below the 2006 peak and growing demand for rentals as the homeownership rate sits at the lowest level since 1997.

There is brinksmanship in Greece:

Alexis Tsipras said he expects the European Union will do all it can to keep Greece in the euro even if he wins elections and carries out his promise to repeal the austerity measures required to receive emergency loans.

“We have no sense that European partners will follow this tactic of blackmail heard from some quarters and stop funding,” Tsipras, whose Syriza party is vying for first place in pre- election polls, said in an interview in Athens today with Bloomberg Television. “Something like that would be catastrophic not only for Greece but for the entire euro area.”

BIS has released a working paper by Mathias Drehmann, Claudio Borio and Kostas Tsatsaronis titled Characterising the financial cycle: don’t lose sight of the
medium term!:

We characterise empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalisation and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the
traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the “unfinished recession” phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.
…
Against this backdrop, if the policymakers “overreact” to short-term developments and lose sight of the (medium-term) financial cycle that may lie behind them, they can store up bigger trouble down the road. Arguably, this is what happened both in the mid-1980s/early 1990s and in the period 2001-2007. In both cases, policymakers reacted strongly to collapses in
equity prices – the global stock market crashes of 1987 and 2001, which ushered in slowdowns in economic growth and/or actual recessions. As we have seen, however, equity prices are not a reliable indicator of the medium-term financial cycle. In fact, in both episodes credit and property prices continued to increase, benefiting from a second breath of life. A few years later, the credit and property price booms in turn collapsed, causing serious financial disruptions and dragging down the economy with them. From the perspective of the medium-term financial and business cycles, the slowdowns or contractions in 1987 and 2001 can thus be regarded as “unfinished recessions”.

We might be headed into one of the periodic outbreaks of handwringing about productivity:

Canada can’t live off its resource wealth forever and must get serious about chronically lagging productivity and innovation, says the Organization for Economic Co-operation and Development.
…
“Canada is blessed with abundant natural resources, but it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and equitable distribution of the fruits of growth,” said Peter Jarrett, head of the OECD’s Canada division and one of the authors of the study.
…
But the 128-page report’s main focus is productivity and innovation policy. The OECD pointed out that while per capita incomes are growing, productivity has stagnated for decades, and has actually declined since 2002.

Canada’s productivity and innovation conundrum isn’t a new theme for Canada. Those challenges were at the heart of last year’s federal task force report on research and development policies, chaired by Open text Corp. chairman Tom Jenkins. Ottawa moved to address several of the report’s recommendations in its March 29 budget.

R&D policies are a joke – they do nothing for productivity, they reward businesses who are willing to jump through the bureaucratic hoops – and reward the specialist lawyers and accountants who help with the application. That’s not productivity, that’s welfare. The three major impediments to Canadian productivity are a coddled financial sector, a coddled transportation sector and a coddled telecommunication sector, but these aren’t the best examples of anti-productive government policy.

I’ll believe that a Canadian government has started to care about about productivity when dairy farmers are told that 50-cow herds, and their massive indirect subsidy granted by import restrictions and dairy quotas, are nothing more than a national cash drain. Dairy farming is the most egregious Canadian example of low productivity.

There’s an interesting funding gap at Deutsche Bank:

Deutsche Bank AG (DBK) has a funding gap of as much as 14 billion euros ($17.5 billion) at its Italian and Spanish units which could reduce capital levels at the firm if those countries leave the euro, according to analysts at Espirito Santo Investment Bank.

Deutsche Bank’s loans amount to 205 percent of deposits at the Italian unit and 314 percent in Spain, according to London- based analyst Andrew Lim, who cited company filings. If those countries exit the euro and the new currencies fall 30 percent, the Frankfurt-based lender could lose as much as 4.2 billion euros of equity as the value of assets at those divisions declines while some funding remains in euros, he said.

Such cross-border funding gaps can be dangerous:

The government forced commercial banks to swallow exchange- rate losses on foreign-currency denominated mortgages by giving borrowers the option to repay their loans in a lump sum at below-market rates. Two-thirds of housing loans were denominated in foreign currencies, mostly in Swiss francs, and installments on them soared as the forint weakened.

Hungarians repaid 170,000 mortgages under the plan in a value of 1.4 trillion forint ($6.3 billion), cutting the total amount of outstanding foreign-currency mortgages by 23.3 percent, the financial market authority said in a report today.

It was a surprisingly uneventful day on the Canadian preferred share market, despite an enormous number of dividends going ex. PerpetualPremiums were off 3bp, FixedResets down 1bp and DeemedRetractibles gained 3bp. Volatility was non-existent, but volume was very high.

PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215 bp, a significant decline from the 225bp reported June 6.

Play the exciting new Spanish Shell Game!

Spanish bond yields surged the most in four months in the first trading after the government in Madrid sought a bailout for its banks. Investors speculated the 100 billion euros ($125 billion) may not be enough.

The lifeline from the euro area, aimed at loosening the connection between banks and the state, risks doing the opposite as foreign investors continue to shun the nation’s bonds and Prime Minister Mariano Rajoy’s government grows increasingly dependent on domestic lenders.

“This 100 billion will be added to the public finances of Spain so it just reinforces the link between banks and the sovereign,” Olly Burrows, credit analyst at Rabobank International, said in a phone interview from London. “Spain is receiving funds to bail out its banks, which have been buying Spanish debt while everyone else has been getting out.”
…
Spanish banks were among the biggest beneficiaries of 1 trillion euros of three-year emergency loans from the ECB, which were recycled into sovereign bonds in a trend Economy Minister Luis de Guindos said in April “increased the correlation between sovereign risk and banking risk.” The ECB may need to offer another round of that financing to ensure local banks can fund the sovereign, [co-chief economist at Deutsche Bank AG in London Gilles] Moec said.

Meanwhile:

French securities slid with benchmark German bunds as Fitch Ratings said it may cut credit grades across Europe because policy makers are failing to demonstrate they can bring the debt crisis under control. The yield on Italian 10-year securities jumped to the most since January as the country prepared to sell bonds on June 14. Germany will offer 10-year bunds, Europe’s benchmark securities, tomorrow, after Austria and the Netherlands auctioned debt today.

Most governments do all they can to attract high-earning migrants. Not the UK:

U.K. lawyers are fielding a flood of questions from multinational firms as a government shake-up of visa rules threatens to cut short the careers of top traders and other executives transferred from overseas.

Changes in the past two years include a five-year cap on how long employees who moved to the U.K. under the Intra Company Transfer system can stay, and the removal of their right to settle permanently. The introduction of a cooling-off period between visa applications means employees have to spend at least 12 months out of the country once their permit expires.

“We’ve seen quite significant panic among a number of clients,” said Ben Sheldrick, a partner with Magrath LLP Solicitors in London. “The government wants to be seen to be tough on immigration and one of the only groups they can be seen to be reducing is the skilled migrants sponsored by multinational firms.”

Canadian banks are worrying about appraisals:

Several Canadian banks have been quietly re-evaluating their appraisal strategies amid increased worries about the accuracy of property values in a market deemed at risk of overheating.

Lenders use a variety of techniques, including full appraisals, so-called “drive-by” appraisals based on the exterior of the home, and databases of market prices, to evaluate homes. The values they arrive at help determine how much money they should lend to mortgage borrowers. They are also key for measures such as the loan-to-value ratio that are used to track the health of loan portfolios and borrowers’ debt loads.

Banks are emphasizing on-site visits to value properties, especially those above a certain price or in rural areas. They are also paying closer attention to who does the appraisal.
…
TD lends 80 per cent loan-to-value up to $900,000, but after that only lends 50 per cent, to protect itself against inflated values on expensive homes.
…
California-based First American Financial Corp. had been selling Canadian banks a “guaranteed valuation” product that guaranteed the valuation of a property was accurate on the day a mortgage was issued. If it turned out later that it wasn’t, the bank could make a claim.

But First American posted a first-quarter loss in 2011 as it took a $45-million reserve strengthening charge relating to this obscure Canadian product.

Policies that were experiencing claims had been written mostly in 2007 and 2008. Sources say the issue stemmed mainly from Alberta, where the housing market underwent a correction starting in 2007, and problems became apparent as default rates increased, leading banks to seize more homes as collateral.

If I were worried about an overheated property market, I’d convert today’s appraisal into 2008’s equivalent and lend against that – which is much the same thing as lowering the LTV ratio.

It was a positive day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets winning 11bp and DeemedRetractibles up 7bp. Volatility was low. Volume was well below average.

Red letter day! For the first time in a long time, somebody’s talking about the flip side of safe banking:

Mr. Flaherty boasts about Ottawa’s strict supervision and holds up the banks’ conservative lending culture as a virtue. What he fails to mention to his audiences in places such as Istanbul, London and Washington is that Canada’s entrepreneurs and smaller businesses are starved for cash.
…
According to the Organization for Economic Co-operation and Development, the outstanding debt of Canadian small and medium-sized enterprises (SMEs) essentially has been unchanged since 2000. Lending to smaller companies decreased 0.1 per cent in 2008, increased 3.7 per cent in 2009 and dropped 0.9 per cent in 2010, the 34-member OECD said earlier this year in its first annual scorecard of financing for SMEs and entrepreneurs.
…
While there is no longer an outright ban on international lenders setting up in Canada, the rules are structured in such a way that there is little incentive to do so. No investor can hold more than 20 per cent of the voting shares in a bank with equity of more than $12-billion and a majority of the directors must be Canadians.

So the lenders that are large enough to shake the Canadian banks’ entrenched position – the Wells Fargos of the world – either stay small in Canada, or avoid the country altogether.
…
There are more than 7,000 banks in the United States insured by the Federal Deposit Insurance Corp. Most of those institutions are small, confining their lending to a specific community. The result is a more competitive credit market. SMEs accounted for 29 per cent of all business lending in the United States in 2010, compared with 18 per cent in Canada.

Canada’s banks were left relatively unscathed by the Credit Crunch and that’s a good thing. But next time you hear a regulator boasting about how wonderful the safe Canadian system is, ask what the costs are. All the costs, all the indirect costs of a comfortable oligopoly, not the relatively trivial direct costs. A Lamborghini is a great car … but I wouldn’t pay $10-million for one.

You can talk about billions, and you can talk about percentages, but sometimes it’s most graphic to talk about the impact on the average guy:

The average American family lost 38.8 percent of its wealth from 2007 to 2010, with the biggest losses concentrated among households with the most assets tied to their homes, a Federal Reserve study shows.

Median net worth declined to $77,300 in 2010, an 18-year low, from $126,400 in 2007, the central bank said in its Survey of Consumer Finances. Mean net worth fell 14.7 percent to a nine-year low of $498,800 from $584,600, the central bank said today in Washington.

I do enjoy taking pokes at CalPERS, the $200-billion+ fund that doesn’t do its own credit analysis! Their ten-year 90bp underperformance vs. their benchmark makes it easy, as the press has noticed:

The California Public Employees’ Retirement System, the largest U.S. pension, has seen its market value decline 4.8 percent this year after stocks fell amid the brewing fiscal crisis in Europe and slowing of the U.S. economic recovery.
…
If the trend continues, it would mark the third time in five years that the fund has lost money, including a 23 percent decline in fiscal 2009, the worst on record. While Calpers spreads its return over 15 years to smooth taxpayers’ burden, another loss may make it hard for the fund to meet its assumption of 7.5 percent earnings annually to cover benefits to 1.6 million retired employees and their families.

It was rather a dull day for the Canadian preferred share market, with PerpetualPremiums down 3bp, FixedResets flat and DeemedRetractibles off 2bp. Volatility was muted. Volume was quite low.

Strains in Greek banking are becoming more obvious:

Credit Agricole SA, the foreign bank with the biggest risks in Greece, reached an accord with Greek authorities that will let its unit in the country access emergency funding should the need arise, two people with knowledge of the matter said.

Emporiki Bank, the Greek unit of Credit Agricole, will be able to tap so-called Emergency Liquidity Assistance from Greece’s central bank under certain conditions, the people said, declining to be identified because the matter is private. Access will probably be restricted to situations where deposits are declining, the people said. Greek banks without a foreign parent already use the facility.
…
Jean-Paul Chifflet, Credit Agricole’s chief executive officer, said on May 22 that his bank renewed a request for access to ELA funding with Bank of Greece’s governor. France’s third-largest bank “can’t increase significantly” exposures to Greece, Chifflet told investors last month at the company’s annual general meeting. Emporiki’s loans exceed deposits, requiring Credit Agricole to provide cross-border funding to help fill the gap.

Credit Agricole reduced that funding to Athens-based Emporiki to 4.6 billion euros at the end of March from 5.5 billion euros in December, partly as deposits rose, the bank said May 11. Credit Agricole also tapped 1.6 billion euros of ECB funding for Emporiki at the end of March.

The problem in Europe is that highly indebted countries owe money in currency they can’t print, right? It’s a good thing we’re smarter than that in Canada:

• New Brunswick’s tax-supported debt as a percent of consolidated operating
  revenues has risen rapidly in the past five years.

• We are lowering our issuer credit and senior unsecured debt ratings on
  the Province of New Brunswick to ‘A+’ from ‘AA-‘.

• The stable outlook reflects our expectation that New Brunswick’s program
  review initiative will be successful at achieving cost efficiencies and that the province will achieve fiscal balance in the next two fiscal
  years as per its budget plan.

…
The ratings on New Brunswick reflect Standard & Poor’s opinion of the
following credit strengths:

• The province’s relatively resilient economic performance since the global economic and financial crisis began in 2008 compared with peers’.
• The province’s sound liquidity support of more than C$700 million in cash and marketable securities available to address potential fiscal pressures. As well, the province has a pool of sinking funds, which
  totaled over C$4.0 billion as at the end of fiscal 2012 that can be used for debt repayment if needed.

Credit concerns include our view of the following:

• New Brunswick’s very high tax-supported debt burden (net of sinking funds), which rose further in fiscal 2012 to 149% of consolidated operating revenues or about 38% of GDP. We expect its tax-supported debt
  burden to peak at 155% of operating revenues in 2014.

• Challenges stemming from long-term demographic trends that are likely to
  affect health care demand and revenue growth.

Fortunately, 38% of GDP is still a lot smaller than 120% of GDP.

There was a modest upward move in the Canadian preferred share market today, with PerpetualPremiums up 9bp, FixedResets gaining 2bp and DeemedRetractibles winning 10bp. Volatility was minimal. Volume was quite low.

Bernanke had some cheerful commentary:

Federal Reserve Chairman Ben S. Bernanke said the economy is at risk from Europe’s debt crisis and the prospect of fiscal tightening in the U.S., while refraining from discussing steps the central bank might take to protect the expansion.
…
Bernanke also warned lawmakers that “a severe tightening of fiscal policy at the beginning of next year that is built into current law — the so-called fiscal cliff — would, if allowed to occur, pose a significant threat to the recovery.”

Spain gets more interesting daily:

Spanish Prime Minister Mariano Rajoy said he’s talking to his European peers about how to shore up the country’s banks as Fitch Ratings cut Spain’s credit grade to within two steps of junk.
…
Rajoy spoke minutes before Fitch downgraded Spain by three levels to BBB, within two steps of non-investment grade. Fitch said the cost to the state of shoring up banks may amount to as much as 100 billion euros ($126 billion) in the worst case, compared with its previous estimate of 30 billion euros, as Spain will remain in recession next year.
…
Spain’s 10-year bond yield fell to 6.088 percent yesterday from 6.282 percent on June 6, retreating from the 7 percent threshold that triggered bailouts in Greece, Ireland and Portugal. The Treasury met its issuance goal at a bond auction, selling 2.07 billion euros of Spanish securities, surpassing the maximum target of 2 billion euros.

It was a day of solid recovery for the Canadian preferred share market, with PerpetualPremiums gaining 6bp, FixedResets up 10bp and DeemedRetractibles winning 23bp. Of great interest is the observation that the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) has returned to negative territory. Volatility was minor.

OSFI has released an outline of the new paperwork rules for bank mortgages:

Re-qualification at Renewal – Current practice regarding residential mortgage renewals has served FRFIs well. OSFI agrees, for example, that having a good payment record is one of the best indicators of credit worthiness. OSFI, therefore, expects that FRFIs themselves will remain responsible for deciding what level of review to place on borrowers’ qualifications at the time of renewal. FRFI renewal practices should be articulated in internal policies governing their underwriting of residential mortgage loans. FRFIs, however, will be expected to refresh the borrowers’ credit metrics periodically (not necessarily at renewal) so that FRFIs can effectively evaluate their credit risk.

2. Home Equity Lines of Credit (HELOCs) – OSFI is maintaining its position that the HELOC component of a mortgage be restricted to a maximum loan-to-value ratio of 65 per cent. HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance. However, HELOCs at or below an LTV ratio of 65 per cent will not be required to be amortized, as the revolving aspect of a HELOC is a fundamental feature of the product.

The BoC has released a discussion paper by Francisco Rivadeneyra titled The U.S.-Dollar Supranational Zero-Coupon Curve:

The author describes the construction of the U.S.-dollar-denominated zero-coupon curve for the supranational asset class from 1995 to 2010. He uses yield data from a cross-section of bonds issued by AAA-rated supranational entities to fit the Svensson (1995) term-structure model. Results show the expected pattern of interest rates over the U.S. business cycle. The author computes the spreads relative to the U.S. Treasury zero-coupon yields data of Gürkaynak, Sack and Wright (2007). The average spread for this period is equal to 44 basis points; it increases during recessions and narrows during expansions. Also, the slope of the term structure of spreads shows a countercyclical pattern.

The Toronto Water Department has confirmed that it was their gross incompetence that dumped sewage into Union Station and PATH last week:

On the morning of June 1, a brief, but intense rainfall event caused a rapid surge of storm water flow within the City’s sewer collection system and wastewater treatment plants. (The downtown area experienced rainfall ranging from 27mm to 37mm.) The heavy rainfall event did not exceed the capacity of the entire sewer collection system.

As part of the contract for the TTC’s Union Station New Platform Project in the subway, the TTC’s contractor is also reconstructing a large sewer on behalf of the City for the Union Station Revitalization Project. To enable construction of the new lowered sewer, a section of the existing sewer was removed and pumps put in place in order to install maintenance holes at one of the future connection points. During the heavy rainstorm, sanitary and storm water overflowed from the open section of sewer at this location (flooding was localized to this area of the City).

The contractor and the project management team are working to put in place measures to avoid a recurrence during construction. One such measure includes the installation of two additional pumps on site as contingency. As well, the pipe that was temporarily exposed to perform this work will be capped by Friday.

In other words, they placed a bet that full capacity of the sewage line would not be needed during repair. They lost the bet and Toronto paid. Thanks a lot, guys! Fortunately for the guys who should be fired, council’s got other things on its mind:

Plastic shopping bags will be banned in Toronto as of Jan.1, 2013 after city council, in a surprise move, voted to make Toronto the first major city in Canada to forbid retailers from providing plastic single-use carryout bags.
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It’s not clear if the city even has the jurisdiction to pass such a ban.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 2bp, FixedResets winning 13bp and DeemedRetractibles down 4bp. Volatility was minor. Volume was very low.

PerpetualDiscounts now yield 5.09%, equivalent to 6.62% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.4% (OK, just a hair under) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, a slight (and perhaps spurious) decline from the 230bp reported May 30.

Oh, the technology!

The Romney and Obama campaigns want supporters to be able to send contributions instantly using their smartphones, a step that would let telecommunications companies join in collecting fees that now flow to bank-card networks.
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Campaigns will have access to texters’ phone numbers, creating the opportunity to “upsell” them for larger donations, according to Armour, a press secretary in Al Gore’s 1988 presidential campaign.
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Political campaigns can expect to see 50 to 70 percent of a donation, with the rest going to fees to aggregators and carriers, Sege said. By comparison, a “card not present” transaction, such as one involving a credit card number entered into a campaign website, carries a fee ranging between 2 and 3 percent, according to Trish Wexler, spokeswoman for the Electronic Payments Coalition, a trade group that represents credit card networks and banks.

Tax the rich? It gets a little complex:

Increasing volatility in tax collections is complicating local governments’ emergence from the worst fiscal crisis since the Great Depression. States projected or dealt with a combined $54 billion of deficits in the fiscal year starting July 1, according to a report from the Center on Budget and Policy Priorities, a nonprofit group in Washington focusing on issues affecting lower-income Americans.

California Governor Jerry Brown, a Democrat, last month cut the most-populous state’s revenue forecast by $4.3 billion after capital gains receipts fell 5 percent, instead of gaining 15 percent as forecast. In response, he proposed steps such as reducing government employees’ workweek by 5 percent.
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A one-step rating cut in January by Moody’s Investors Service, to Aa3, has contributed to weakness in Connecticut debt, said Brian Steeves, a portfolio manager at Belle Haven Investments in White Plains, New York. The rank is Moody’s fourth-highest.

Moody’s cited pension and debt costs as well as the state’s susceptibility to “financial market fluctuations,” given the dependence on capital gains.

There are more official worries about the US national debt:

The U.S. government risks a fiscal crisis unless it makes significant changes in tax and spending policies, the Congressional Budget Office said.

The nonpartisan agency said today that without policy changes, the national debt within 15 years will top the historical peak set after World War II. In 1946, government debt amounted to 109 percent of the economy.
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The gap between projected taxes and spending is so large, the report said, that if lawmakers merely wanted to prevent the debt-to-GDP ratio from increasing over the next 25 years, they’d have to immediately and permanently cut $700 billion from the $3.6 trillion U.S. budget.

Nothing will happen until the Treasury Secretary has to ask the President to play “Bond Salesman”. That’s what it took in Canada in 1994.

There is more despairing acknowledgement that the TMX / Maple deal is anti-competitive:

Chief among the concerns is that the result will be higher costs for users of TMX’s services that provide trading and market data, RBC said in its submissions. ITG, another large trading house, echoed many of RBC’s concerns in its own comments, which were also handed to the OSC on Monday.
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RBC argues that the Maple proposal “will require a significantly different approach to the regulation of fees and fee models in Canada,” and will require the OSC to bulk up to deal with the added workload.

“The commission should recognize the very substantial increase in its capacity and capability that will be required in order to make it an effective regulator of market structure and fees,” RBC said.
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ITG’s suggestions were along the same lines, saying that “the structure proposed by the Maple acquisition is fraught with conflicts of interest across every facet of the trading, clearing and settlement infrastructure of this country” and those conflicts “have the potential to seriously affect the ability of other participants to compete effectively in our capital markets.”

A successful deal will mean more jobs for more important regulators! Golly, I wonder if the regulators will approve it.

Investors have learned to demand to be shown the money whenever the Europeans politicians talk about ending the crisis. They are not yet so realistic about the G-7:

Asian stocks rose as finance ministers and central bank governors from the world’s leading economies agreed to coordinate their response to Europe’s financial crisis and U.S. service-industry growth tempered concern the world’s largest economy is slowing.
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Finance ministers and central bank governors from the Group of Seven economies agreed to coordinate their response to Europe’s financial crisis on a conference call yesterday. G-7 officials said they will work together to help Spain and Greece place their public finances on a sustainable footing, Japanese Finance Minister Jun Azumi told reporters in Tokyo following the call.

I’m just overjoyed that they’re going to work together to coordinate their response! Yay!

The latest wooly-thinking comes from commentary on the Wisconsin gubernatorial re-run:

Over the past year, Wisconsinites divided into two camps: those who see public unions as critical to ensuring a stable middle-class and those like Mr. Walker who see them as the source of ballooning government debts and higher taxes.

Wrong! Public unions are not the source of ballooning government debts and higher taxes. The source of ballooning government debts and higher taxes are gutless wonder politicians (and do-gooders and their wooly minded supporters) who agree to ludicrous contracts. You will never hear me criticize welfare recipients, whether of the human or corporate variety, who ask for government largesse. Anybody can ask for money! It’s a free country! The villains are the idiots who give it to them.

What, never? Hardly ever.

Much more interesting was the note that:

But since Mr. Walker signed the collective-bargaining bill, which was passed last year by Wisconsin’s Republican-controlled legislature amid weeks of protests around the state capitol, membership in the state’s public-sector unions has withered.

That is because the law ended the automatic deduction of union dues. Public workers must now choose to opt in to the union, rather than being included by virtue of their job.

The result is that the main union that represents state and municipal workers in Wisconsin saw its membership fall by more than half to about 29,000 from 63,000 in the past year. The Wisconsin wing of the American Federation of Teachers lost a third of its members.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets winning 18bp and DeemedRetractibles off 9bp. Insurance losers were again notable in the Performance Highlights table, but on a much less overwhelming basis than they were yesterday. Volume was average.