The International Monetary Fund will use a “rapid-fire'' emergency-loan program to lend hundreds of billions of dollars to emerging markets as the credit squeeze threatens to hobble nations that until this year were weaning themselves off the fund's aid.
Dominique Strauss-Kahn, the IMF's managing director, said yesterday he has activated the program, which could distribute a record amount of cash. The move comes as the cost of protecting bonds issued by a number of developing countries has climbed sharply, and nations such as Brazil, Mexico and Peru have sold dollars to shore up their currencies.
The financial turmoil may restore the Washington-based lender to a central role in the global economy. Demand for IMF assistance has collapsed in the past few years as buoyant capital markets and rising commodity prices allowed many developing nations to raise funds on their own and build up currency reserves. Now central banks around the world are drawing on those reserves as the credit crisis spreads.
“The IMF had been written off as increasingly irrelevant,'' said Claudio Loser, a scholar at Inter-American Dialogue, a policy-analysis center in Washington, and former director of the IMF's Western Hemisphere department. “Now we could see a renaissance at the fund. Countries that had hoped never to need the fund again may be forced to ask for help as the normal sources of finance dry up.''
Less Burdensome
Strauss-Kahn, 59, announced the plan on the eve of the fund's annual meeting this weekend in Washington. The program will allow the fund's 184 member nations to get loans in 10 days or less, rather than the usual several weeks it takes to process requests. Conditions the fund typically requires, such as cutting government spending, will also be less burdensome.
The IMF had $110.2 billion in outstanding loans at its peak as of Dec. 31, 2003. That had fallen to $17 billion as of September 30.
“The fund did not lend a lot during the last five or six years,'' Strauss-Kahn said. “We have hundreds of billions of dollars which are likely to be used in one year, and even more if we go over this period.''
Iceland's Prime Minister Geir Haarde said Oct. 8 an IMF loan is “definitely an option,'' and a mission from the fund was on the island yesterday. The government has taken control of the country's three biggest banks after they collapsed under the weight of debt.
At Risk
Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, said in an Oct. 7 report that Eastern European nations are among the most at risk, because of large current-account deficits and high levels of external debt.
Estonia's current-account deficit — the broadest measure of trade because it includes transfer payments and investment income — is equal to 16 percent of the country's $28 faxless payday loans.6 billion gross domestic product. Its short-term debt is $10 billion, more than twice its $4 billion in foreign-exchange reserves, according to data compiled by Brown Brothers Harriman.
The data show Bulgaria's $14 billion in short-term debt equals three-quarters of foreign-exchange reserves, and its $12 billion current-account deficit is 25 percent of GDP.
Brazil sold dollars this week for the first time in five years, and Mexico sold $2.5 billion in the spot market Oct. 8 and 9, helping their currencies pare losses. Last month, Peru's central bank was forced to pour record sums into the foreign- exchange market to support its ailing currency.
Default Protection
The cost of default protection suggests other developing countries that may need help. Credit-default swaps for Kazakhstan imply a 52 percent chance the country won't meet its debt obligations in the next five years, according to Bloomberg data. Swaps for Pakistan indicate an 86 percent chance of default.
The IMF has been at the center of some of the biggest financial bailouts of the past three decades, helping broker solutions to the Latin American debt crisis in the 1980s and rescues for Mexico, Russia, Brazil and Asia in the 1990s.
The fund established its rapid loan program in the wake of the so-called Mexican peso crisis of December 1994, when the country was forced to abandon its currency peg to avoid depleting its reserves. During the next six weeks the Mexican peso plunged 45 percent, prompting a $17.8 billion loan from the IMF — at the time, the fund's largest.
In 1997 and 1998, the IMF extended credit lines of more than $80 billion to Indonesia, Thailand and South Korea to help them avoid default after a decline in their currencies pushed up the cost of foreign-debt payments.
Financial Losses
Even a modest pickup in loans would help stem financial losses at the IMF that totaled $165 million in 2007. The fund's first shortfall since 1985 led Strauss-Kahn to announce an 11 percent, or $100 million, cut in operating costs that included eliminating at least 380 of the IMF's 2,900 jobs. Even with the cuts, the fund is expected to lose $135 million in 2008.
“If there are no fires, then the fire department does not have much to do, and after a while people start to wonder whether they need a fire department at all,'' said Michael Mussa, the IMF's chief economist from 1991 to 2001. “This has been the position for the fund in recent years, but things have changed in just a few weeks.''
A fatal bus crash north of Dallas that killed at least 16 people is the latest in a series of motorcoach accidents that has prompted Congress to speed up the process tightening regulations involving bus operators.
Proposed federal legislation would require bus operators to provide additional training, enhanced safety measures and new safety equipment to protect and restrain passengers.
The Motorcoach Enhanced Safety Act of 2007, or Senate Bill 2326, is one such bill, proposed by Sen. Kay Bailey Hutchinson, R-TX, and Sen. Sherrod Brown, D-Ohio. The bill, which was introduced last year, will be discussed at an upcoming meeting of the Senate’s Surface Transportation and Merchant Marine Infrastructure Safety and Security subcommittee, Hutchinson’s office confirmed Tuesday. The sponsoring lawmakers hope to have the bill passed by the end of this year.
The act includes provisions for improved safety technologies, better training for bus operators and drivers, as well as advanced security devices and measures to protect passengers from being ejected or severely injured during rollovers, fires and other serious accidents. The bill also asks the U.S. Department of Transportation (DOT) to enhance its federal safety standards when dealing with the bus industry and to enhance the requirements of drivers and motorcoach companies.
A sister bill, H.R. 4690, has been introduced in the House of Representatives by Rep. Bill Shuster, R-Penn. The bill proposes amending federal transportation law to require the Secretary of Transportation to introduce updated federal motor vehicle safety standards to keep motorcoach passengers protected during major accidents.
In addition, to the recent wreck north of Dallas, legislators say three people were killed and 27 were injured in Northern Mississippi on Aug. 1 when a bus carrying tourists to the airport overturned. On Aug. 9, 29 bus passengers were injured when a casino bus in Las Vegas swerved off an interstate, hitting a center divider. Four of the passengers ended up in critical condition. In 2005, 23 people from a nursing home were killed when their bus caught fire on the way to Dallas as it was evacuating the gulf because of Hurricane Rita.
Rates on 30-year fixed mortgages have surged a tenth of a percentage point to a 9-month high on growing concerns about inflation, mortgage backer Freddie Mac said Thursday.
Freddie Mac (FRE, Fortune 500) said 30-year fixed-rate mortgages averaged 6.42% with an average of 0.7 point in the week ending Thursday, up from 6.32% last week. Last year at this time, the 30-year loan averaged 6.69%.
The last time the 30-year fixed rate mortgage was higher was the week ended Sept. 6, when it averaged 6.46%, according to Eileen B. Fitzpatrick, a Freddie Mac spokeswoman.
"Fixed-rate mortgage rates continued to climb this week to the highest point in nearly nine months following the release of May’s consumer and producer price indexes, both of which showed stronger levels of inflation," said Frank Nothaft, Freddie Mac vice president and chief economist, in a statement.
"Additionally, consumer prices rose 0.6% last month, the most since November 2007, and traders began to fully price in a Federal Reserve rate hike by the end of September, based on the federal funds futures market," he added.
For rates to stop climbing and start to ease, "we would have to see some settling of inflation pressures - notably a leveling, if not outright decline, of food and energy costs," said Keith Gumbinger, vice president of HSHAssociates.com, an online publisher of consumer loan information.
While inflationary pressure is pushing interest rates higher, it’s also pushing buyers out of the market and home prices down, said Gumbinger.
"Interest rates were about this level - give or take - last year, but home prices were considerably higher," he said. "Rates may not be lower, but your home prices may be lower."
The 15-year fixed-rate mortgage this week averaged 6.02% with an average 0.7 point, up from last week when it averaged 5.93%. A year ago at this time, the 15-year FRM averaged 6.37%. The last time the 15-year FRM was higher was the week ending Oct. 18, when it averaged 6.08%.
Five-year adjustable-rate mortgages (ARMs) averaged 5.89% this week, with an average 0.6 point, up from last week when it averaged 5.70%. A year ago, the 5-year ARM averaged 6.31%. This is the highest the 5-year ARM has been since the week ending Dec. 27, when it averaged 5.90%.
One-year Treasury-indexed ARMs averaged 5.19% this week with an average 0.6 point, up from last week when it was 5.09%. At this time last year, the 1-year ARM averaged 5.66%.
"The housing market still struggles. New construction of single family (1-unit) homes fell in May to the weakest pace since January 1991 and April’s starts had a downward revision," added Nothaft.
Two Hawaii newspapers managed to hold onto more paid circulation over the past year by increasing the number of papers distributed to hotel guests.
Circulation continued to slip at The Honolulu Advertiser, Hawaii's largest newspaper, but the paper held onto more paid readership than the national average.
The Advertiser reported a 0.2 percent decrease in average paid circulation of its Monday-Friday editions, falling from 140,647 to 140,331 in the six months ending March 30, 2008.
That is compared to the same to the six months ending March 31, 2007, according to a report this week by the Audit Bureau of Circulations.
The Advertiser's Sunday circulation declined 3.7 percent from 156,003 to 150,276 in the most recent period.
Nationally, weekday newspaper circulation declined 3.5 percent and Sunday circulation fell 4.5 percent.
The Advertiser and The Maui News, which saw its weekday circulation grow significantly, may have benefited from the departure of USA Today from daily distribution in Hawaii at the end of 2007. Newspapers typically offer deeply discounted newspapers to hotels for distribution to guests and USA Today was a favorite.
Before stopping printing and distribution in Hawaii, USA Today was selling about 12,000 weekday papers in the Islands, including about 8,600 to hotels.
In the most recent audit, the Advertiser reported that its weekday distribution to hotels jumped 44 percent to 12,299 and its Sunday circulation climbed 18 percent to 6,665 over the same period a year ago.
At The Maui News, weekday circulation bucked the national trend and rose 5.8 percent, from 20,777 to 21,974. Sunday fell 0.5 percent from 25,343 to 25,209.
Nearly all of the weekday gain appears to come from hotel distribution. Sunday hotel circulation was up 11 percent to 2,895 and weekday circulation rose by 961 copies a day — a 53 percent increase — to 2,770.
The Garden Island on Kauai, the only other member of the audit bureau in Hawaii, had not had its circulation numbers posted as of Friday.
The state's other daily newspapers — the Honolulu Star-Bulletin, West Hawaii Today in Kona and the Hawaii Tribune Herald in Hilo — do not belong to the Audit Bureau of Circulations.
A circulation statement by the Star-Bulletin in March 2007 and verified by the Grant Thornton accounting firm put its daily circulation at 64,073 and Sunday at 60,158.
Further gains in food prices would be “terrible'' for the world's poor and throw hundreds of thousands of them into starvation, International Monetary Fund Managing Director Dominique Strauss-Kahn said.
Governments throughout Asia, Africa and the Middle East are seeking to combat food inflation and avoid social unrest by curbing exports or lifting import duties on basic food staples such as rice. Global food prices surged 57 percent last month from a year earlier, according to the United Nations, and the World Bank warns civil disturbances may be triggered in 33 countries.
If food inflation keeps accelerating at its current rate “the consequences will be terrible,'' Strauss-Kahn told reporters at the IMF's semi-annual meeting in Washington today. “Hundreds of thousands of people will be starving, leading to a disruption in the economic environment.''
Haitian Prime Minister Jacques Edouard Alexis was voted out of office by the country's senate today after violent protests over rising food prices, news agencies reported today.
President Rene Preval, who called the no-confidence vote “unjust,'' announced a 15 percent cut in the price of rice, which had doubled this week to $70 for a 50-kilogram (110-pound) bag, Agence France-Presse reported. No replacement for Alexis was announced.
Price Outlook
Consumer-price inflation in poor or so-called developing countries will accelerate this year to 7.4 percent, compared with a January forecast of 6.4 percent, the IMF said this week. Food prices will probably remain comparatively high until at least 2015, the World Bank said in a separate report.
“Economic progress made over the last years could be destroyed,'' Strauss-Kahn said.
Rice, the staple food for half the world, has surged 96 percent in the past year, reaching a record $21.60 per 100 pounds on April 8. That's forced China, Egypt, Vietnam and India, which export more than a third of the world's rice, to curb shipments of the grain. Argentina and Russia have also sought to discourage food exports in a bid to boost domestic supplies.
President George W. Bush's chief economist pays less attention to the U.S. unemployment rate when it rises than he does when it falls.
“I don't focus too much on the monthly unemployment rate because it has been a bit volatile,'' Edward Lazear, chairman of Bush's Council of Economic Advisers, said in a Bloomberg Television interview today after the government reported an increase in the jobless rate in March.
That contrasts with Lazear's comments last month following a report that joblessness fell in February. Then, he said “what we do tend to place more weight on is the unemployment rate because the unemployment rate is not volatile.''
Lazear's latest remarks followed a Labor Department report earlier today that showed U.S. employers cut 80,000 jobs in March and unemployment rose to 5.1 percent, from 4.8 percent a month earlier. By historical standards, Lazear said joblessness isn't that high.
“Even at 5.1 percent, I would point out that that is still a historically low rate of unemployment, well below the average for the 90s, which was 5.8 percent, so we still have a decent labor market,'' he said.
He added, “obviously we don't like to see negative job growth.''
At a White House press briefing March 7, Lazear said “the unemployment rate number tends to be pretty stable,'' and added that February's rate of 4.8 percent was “still at a very low level of unemployment.''
Labor Market Expert
Lazear, a Stanford University labor market economist, said the Bush administration's forecast for the economy to accelerate in the second half of the year is on target after little growth in the first half.
“I don't think we're unrealistic at all,'' he said. In the first half, “what we're expecting is growth rates that are close to zero — slightly positive perhaps, slightly negative perhaps.''
Other members of the Bush administration remained optimistic.
Labor Secretary Elaine Chao said in a separate Bloomberg Television interview that she doesn't believe the economy is in a recession. The unemployment rate is “still quite low,'' she said.
Phillip Swagel, the assistant Treasury secretary for economic policy, told reporters at a briefing today “we know it's a slowdown. We have a very realistic view of the economy.''
Swagel cited “flat'' personal income and spending, “negative'' job growth, rising unemployment and weakness in manufacturing. Asked if he agreed with Federal Reserve Chairman Ben S. Bernanke's view earlier this week that a recession is possible, Swagel replied, “Sure.''
The U.S. trade deficit narrowed more than forecast in December as exports reached record levels and Americans spent less on imported autos and goods from China.
The gap between imports and exports shrank 6.9 percent, the biggest decrease in more than a year, to $58.8 billion from $63.1 billion in November, the Commerce Department said today in Washington. The deficit for all of 2007 decreased for the first time in six years.
A weaker dollar and expansion of emerging economies are feeding overseas sales for U.S.-made goods and may forestall a deeper slump at U.S. manufacturers. The narrowing deficit is one of the few remaining bright spots for the economy and will probably lead the government to increase its estimate of fourth- quarter gross domestic product later this month.
“The trade balance is going to continue to be a support for the economy,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. “The drop in imports is probably consistent with the view the domestic economy is turning quite soft.''
Economists had forecast the gap would narrow to $61.5 billion, according to the median of 76 projections in a Bloomberg News survey. Estimates of the deficit ranged from $57 billion to $66.5 billion.
The dollar, which had fallen against the euro earlier today, stayed lower after the report. It traded at $1.4609 per euro at 8:37 a.m. in New York, from $1.4573 late yesterday. The U.S. currency was little changed versus the yen, at 108.30 yen per dollar.
2007 Deficit Shrinks
For all of last year, the deficit shrank 6.2 percent to $711.6 billion, the biggest decrease since 1991. Last year was the first time the trade gap narrowed since 2001.
Exports rose 1.5 percent to $144.3 billion in December, setting a record for a 10th straight month and reflecting more demand for U.S. made capital equipment and industrial supplies. For the year, exports rose 12 percent to a record $1.622 trillion.
Imports in December declined 1.1 percent to $203.1 billion, reflecting lower demand for foreign-made autos, consumer goods, food and capital equipment.
Also contributing to the drop in imports was a 14 percent decline in purchases from China, which helped shrink the month's trade gap with the Asian nation 22 percent to $18.8 billion. Petroleum imports rose 4.2 percent to a record $36 billion as the average price rose to $82.76 a barrel, also the highest monthly average ever. Prices increased in late December and early January and may push up the value of imports for the January report. They have since declined.
Fourth-Quarter Growth
Today's report may cause the Commerce Department to revise its estimate of fourth-quarter economic growth higher. The government projected last month that the trade gap narrowed to a $521 billion annual pace in the last three months of 2007. For all of last year, trade contributed 0.55 percentage point to growth, the most since 1991.
The government will release a revised estimate of the expansion for the last three months of 2007 on Feb. 28.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are scheduled to testify to the Senate Banking Committee later today on the state of the U.S. expansion. Central bank policy makers have forecast the economy will avoid a recession.
“The Fed's policy actions should help to promote a pickup in growth over time,'' Fed Bank of San Francisco President Janet Yellen said in a speech on Feb. 12. “I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters.''
Fed's Rate Cuts
The Fed's Open Market Committee is scheduled to next vote on interest-rate policy on March 18. Policy makers lowered the benchmark rate by three-quarters of a percentage point in an emergency decision announced Jan. 22 and followed that with a half-point cut at the scheduled Jan. 29-30 meeting.
After eliminating the influence of prices, the trade deficit decreased to $49.3 billion from $53.6 billion. This is the figure the government uses in calculating GDP.
For the year, the trade deficit with China, the second- largest U.S. trading partner after Canada, increased 10 percent to a record $256.3 billion.
The gap with China is a political sticking point for the U.S. and other countries.
Group of Seven policy makers, meeting in Tokyo last weekend, said China should do more to defuse global trade tensions by allowing the yuan to climb against the dollar and other currencies. The G-7 also forecast the U.S. economy may slow further, eroding global growth.
Canada, Mexico
The December trade gap with Canada was little changed at $4.7 billion and the deficit with Mexico decreased 14 percent to $6.5 billion. For the year, the deficit with Mexico was a record $74.3 billion.
Growth in Asia and Latin America is helping to keep demand for U.S. exports strong even as parts of Europe show signs of slowing.
Procter & Gamble Co., the largest U.S. consumer-goods company, said Jan. 31 that second-quarter profit beat analysts' estimates because of higher prices and exports. It also boosted its full-year earnings forecast.
“We're seeing some slowdown in the U.S. and maybe a little bit in Western Europe but certainly not in the emerging markets,'' P&G Chief Financial Officer Clayton Daley said in a Bloomberg Television interview.
The weaker U.S. dollar also is helping exports by making U.S.-made goods cheaper. The dollar declined 7 percent last year against a trade-weighted basket of currencies from the U.S.'s biggest trading partners.
Harley-Davidson Inc. said Friday its fourth-quarter profit tumbled 26.3 percent due to slumping U.S. motorcycle sales amid a weakening economy.
CEO Jim Ziemer called the retail environment "challenging" for this year. The Milwaukee-based company expects moderate growth in both earnings per share and revenue, however. Analysts expected slightly lower revenue and higher earnings in 2008.
Harley’s (HOG, Fortune 500) shares gained 2.9 percent in morning trading Friday.
Harley said its profit for the quarter ended Dec. 31 totaled $186.1 million, or 78 cents per share, compared with a profit of $252.4 million, or 97 cents per share, a year ago. Revenue dropped 7.7 percent to $1.39 billion from $1.50 billion in the period.
Analysts had expected a profit of 82 cents per share on revenue of $1.34 billion, according to a poll by Thomson Financial. The earnings estimates typically exclude one-time items.
Worldwide retail sales of Harley-Davidson motorcycles were down 6.1 percent in the quarter, and 14.2 percent in the U.S. The company said the domestic heavyweight motorcycle market was down 9 percent in the quarter. Overseas, Harley’s sales were up 17.4 percent.
Harley’s shipments were down 12.5 percent to 81,206 units, a drop of 11,642 units.
For the year, profit fell to $933.8 million, or $3.74 a share, from $1.04 billion, or $3.93 a share, in 2006. Revenue slipped 1.3 percent to $5.73 billion from $5.8 billion in 2006.
Worldwide sales fell 1.8 percent in 2007, while U.S. sales were down 6.2 percent. The overall heavyweight market was down 5 percent for the year, Harley said. Internationally, Harley’s sales finished the year up 13.7 percent.
Shipments for the year were down 5.3 percent to 330,619 motorcycle units, from 349,196 bikes in 2006. Harley-Davidson cut its bike shipments in the wake of expected falling sales and even idled its plants for a week in November.
First quarter shipments are expected to be between 68,000 and 72,000 bikes, compared to 67,761 units in the first quarter of 2007.
Ziemer said Harley will monitor its wholesale shipments throughout the year.
For the year, Harley-Davidson said it expects moderate revenue growth and earnings per share growth of between 4 and 7 percent compared to 2007.
But analysts are expecting a drop in revenue to $5.6 billion for 2008 and earnings per share of $3.79, according to a poll by Thomson Financial.
The company bought back 20.4 million shares of its stock in 2007 at a cost of $1.15 billion.
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