World Markets Simplified

Consumer price inflation in the Republic of Korea accelerated to 4.7% year-on-year (y-o-y) in July from 4.4% in June while in Viet Nam it rose to 22.2% y-o-y in July compared with 20.8% in June. In Singapore, consumer price inflation surged to 5.2% y-o-y in June from 4.5% in May on account of higher costs for housing, transport, and food. In Japan, consumer price inflation eased to 0.2% y-o-y in June from 0.3% in May. 

* On 28 July, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) decided to keep the rates steady for its overnight borrowing and overnight lending facilities at 4.5% and 6.5%, respectively. Meanwhile, the reserve requirement ratio for banks and non-bank financial institutions (with a quasi-banking license) was raised by 1 percentage point from 20% to 21%, effective 5 August. 

* Last week, Standard & Poor's (S&P) lowered Malaysia's local currency (LCY) long-term sovereign credit rating from A+ to A with a stable outlook following the implementation of a revised methodology for sovereign ratings. Meanwhile, S&P affirmed Malaysia's LCY short-term rating at A-1 and foreign currency (FCY) long-term and short-term ratings at A- and A-2, respectively. 

* In Hong Kong, China, a trade deficit of HKD40.3 billion was recorded in June. In the Republic of Korea, merchandise trade surplus widened to USD7.2 billion in July from USD2.8 billion in June on the back of strong export growth. In the Philippines, the trade deficit in goods climbed to USD780 million in May. In Thailand, the trade surplus was registered at USD1.9 billion in June. 

* The Republic of Korea's gross domestic product (GDP) grew 3.4% y-o-y in 2Q11, based on advanced estimates of The Bank of Korea. Industrial output in the Republic of Korea grew 6.4% y-o-y in June. In the People's Republic of China (PRC), manufacturing PMI fell for the fourth straight month in July to 50.7. In the Philippines, the volume of production index for total manufacturing eased in May to 0.9% y-o-y from 2.7% in April. In Singapore, manufacturing output expanded 10.5% y-o-y in June, while in Thailand manufacturing production increased for the first time in 5 months to 3.3% y-o-y in June. In Viet Nam, the index of industrial production increased 9.6% y-o-y in July, down from 12.7% growth posted in June. 

* Notable issuance from emerging East Asia last week included Citic Pacific's CNH1 billion 5-year bond at a yield of 2.3% and China Resources Land's additional USD250 million via a tap on its 5-year bonds issued in May. Hong Kong, China issued inflation-linked iBonds for the first time, offering HKD10.0 billion worth of 3-year bonds. Also, Syarikat Prasarana Negara Berhad (Prasarana) priced MYR2 billion worth of 10- and 15-year Islamic medium-term notes. Korea South-East Power (KOSEP) issued a USD300 million 5.5-year bond at a coupon rate of 3.625%. Singapore's real estate developer Wing Tai Holdings issued a total of SGD125 million of senior notes last week. Thailand's state-owned Bangkok Mass Transit System (BMTS) issued a total of THB3.9 billion of bonds, and state-owned Provincial Electricity Authority issued THB1.1 billion of 10-year bonds with a coupon of 4.25%. 

* Government bond yields fell last week for all tenors in Indonesia, and for most tenors in the PRC; Hong Kong, China; Malaysia; the Philippines; Singapore; and Thailand, while yields rose for most tenors in the Republic of Korea and Viet Nam. Yield spreads between 2- and 10- year maturities widened in Indonesia and Thailand, while spreads narrowed in most other emerging East Asian markets.

Monday 1 August

With the debt ceiling "compromise" deal still in flux, although at least according to the FX market expected to be approved shortly, despite the protestations of liberal democrats (one wonders if Obama will accuse said group of hostage tactics much as he accused conservative republicans of the same last week), below is what the current shape of the proposed deal looks like courtesy of the WSJ's Washington Wire blog.

Here's the outline of the debt ceiling deal as of now, according to officials on both sides:

$900 billion in the first stage of deficit reduction. 

WASHINGTON – 

President Obama announced Sunday night that a deal between the House and Senate has been reached to raise the debt ceiling. Obama says the deal will end the crisis and remove the cloud over the economy.

The president's announcement came in just as the Asian markets opened, helping to not only boost stocks, but also to raise the US Dollar.

White House, Lawmakers Bang out Deal

Details on the deal as still coming out. Various media outlets have reported that officials on both sides of the debate say the deal will include the following:

The debt ceiling would be raised in three phases, starting at over $900 billion 

$900 billion in spending cuts over 10 years so they don't create a drag on the economy 

A bipartisan committee would then find more cuts 

A vote on a balanced budget amendment, but no guarantee that it will pass 

Even though a deal has been reached, it doesn't mean this is over. A vote is still needed in both chambers. However, leadership on both sides of the aisle in the Senate say they support the deal.

Democratic Majority Leader Harry Reid said that both his party and opposition Republicans gave more ground than they wanted to. He said it'll take members of both political parties to pass the measure.

Minority Leader Mitch McConnell said that the pact "will ensure significant cuts in Washington spending" and he assured the markets that a first-ever default on U.S. obligations won't occur. Both the leaders said they will brief their colleagues tomorrow on the details of the agreement.

House Speaker John Boehner announced the deal to lawmakers during a conference call Sunday night. House Minority Leader Nancy Pelosi said she would take the plan to her fellow representatives Monday.

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Senate blocks Reid plan

Senate Republicans have blocked action on a Democratic approach to resolving the debt-ceiling crisis. It was a test vote largely unrelated to the talks between the White House and congressional leaders on a compromise that can clear both the House and Senate.

The Senate voted 50-49 to clear a procedural hurdle toward consideration of a bill put forth by Majority Leader Harry Reid. Sixty votes were needed to advance the measure. Reid himself was one of the people to vote against the deal, though no one has said why.

The outcome of the vote on Sunday did not affect the effort to come up with a compromise to stop the debt crisis, in which the government would be unable to meet all its debt obligations.

Tuesday, August 2 is the deadline the US Treasury Department says the debt ceiling must be raised by, otherwise the country will not be able to pay all of its bills. Several Wall Street analysis groups say the deadline is probably closer August 8-15.

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Frequently Asked Questions

Q: What is the debt ceiling?

A: It's a legal limit on how much debt the government can accumulate. The government takes on debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from the Social Security trust fund, which comes from payroll taxes. Congress created the debt limit in 1917. It's unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Congress has increased the debt limit 10 times since 2001.

Q: What is the federal deficit, and how does it differ from the debt?

A: The deficit is how much government spending exceeds tax revenue during a year. Last year, the deficit was $1.29 trillion. The debt is the sum of deficits past and present. Right now, the national debt totals $14.3 trillion _ a ceiling set in 2010.

Q: Why is the prospect of not raising the debt ceiling so worrisome?

A: The government now borrows more than 40 cents of each dollar it spends. If the debt ceiling does not rise, the government would need to choose what to pay and what not, including benefits like Social Security, wages for the military or other bills. It also might delay interest payments on Treasury bonds. Any default could lead to financial panic weakening the country's credit rating, the dollar and the already hobbled economy. Interest rates would likely rise, increasing the cost of borrowing for the government and ordinary Americans.

Q: Who holds the $14.3 trillion in outstanding U.S. debt?

A: The U.S. government owes itself $4.6 trillion, mostly borrowed from Social Security revenues. The remaining $9.7 trillion is owed to investors in Treasury securities _ banks, pension funds, individual investors, state and local governments and foreign investors and governments. Nearly half of that _ $4.5 trillion _ is held by foreigners including China with $1.15 trillion and Japan with $907 billion.

Q: How did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion?

A: The biggest contributors to the nearly $9 trillion increase over a decade were:

2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion. 

Additional interest costs: $1.4 trillion. 

Wars in Iraq and Afghanistan: $1.3 trillion. 

Economic stimulus package under Obama: $800 billion. 

2010 tax cuts, a compromise by Obama and Republicans that extended jobless benefits and cut payroll taxes: $400 billion. 

2003 creation of Medicare's prescription drug benefit: $300 billion. 

2008 financial industry bailout: $200 billion. 

Hundreds of billions less in revenue than expected since the Great Recession began in December 2007. 

Other spending increases in domestic, farm and defense programs, adding lesser amounts. 

Munoth Communication (MUNOTHI) is engaged in the business of trading in mobile phones. It was incorporated in 1984 and got its present name on April 5, 2003 

Just to make sure that we all get the message that a consolidated sell off across all asset classes is what the cental planning doctor ordered, here comes Moody's to not only trim all the gains in the EURUSD since the Boehner debacle, but to remind us that the Fourth Reich is coming, even as the US of Aa- still struggles to pass its 2009 budget. Oh, and as a reminder Moody's put Italy's Aa2 rating on downgrade review on June 17, which means the formal downgrade is due right… about…. now.

Spain's Prime-1 short-term ratings are unaffected by today's action

New York, July 29, 2011 — Moody's Investors Service has today placed Spain's Aa2 government bond ratings on review for possible downgrade.

Spain's Prime-1 short-term ratings are unaffected by today's action.

The initiation of the ratings review is driven by the following concerns:

1.) The continued funding pressures facing the Spanish government, which the precedent set for future euro area support arrangements by the official package for Greece is likely to exacerbate, and the resulting increase in risks to bondholders.

2.) The challenges posed to the government's fiscal consolidation efforts by the weak growth environment and the continued fiscal slippage among several regional governments.

Funding costs have been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments. Pressures are likely to increase still further following the announcement of the official package for Greece, which has signalled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits. The package has not relieved market concerns over the position of such sovereigns because (i) it sets a precedent for private sector participation in future sovereign debt restructurings in the euro area, and (ii) while an expansion of powers has been proposed for the EFSF, it is not clear when the powers will be implemented.

Moody's views positively that the central government has been successful in meeting its near-term fiscal consolidation targets, but the rating agency nonetheless notes that challenges to long-term budget balance remain due to Spain's subdued economic growth and fiscal slippage within parts of its regional and local government sector.

Moody's review will evaluate the weight of these risks, set against the Spanish government's high Aa2 rating and its credit strengths, which include (i) a low public debt ratio compared to other highly rated EU sovereigns; (ii) its success in achieving budget targets for 2010; and

(iii) its implementation of key structural reforms, including progress made in the recapitalization of the banking system. Moody's will also evaluate the outlook for economic growth against the high debt levels of the private sector and the need for an ongoing rebalancing of the economy.

Moody's has today also placed the Aa2 rating of Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) on review for possible downgrade as the FROB's debt is fully and unconditionally guaranteed by the government of Spain.

In the absence of any unexpected development, Moody's expects that any change in the rating following the review is most likely to be limited to one notch.

The announcement of the rating review closely follows the publication of two Moody's Special Comments, which explain why the official support package for Greece has negative credit implications for non-Aaa-rated euro area sovereigns with high debt burdens or large budget deficits, and why the fiscal under-performance of several Spanish regional governments has adverse credit implications for Spain's sovereign rating.

RATIONALE FOR REVIEW

The main driver of Moody's decision to place Spain's sovereign rating on review for possible downgrade is the increased vulnerability of the Spanish government's finances to market stress and consequently to elevated funding costs and event risk. Funding costs have in fact been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments.

Moody's ratings are not affected by short-term market moves; however, the risk of a sustained rise in funding costs nevertheless has to be factored into the agency's analysis of a country's prospective debt affordability.

While the likelihood of a shift in sentiment that would prevent a country with Spain's fundamental strength from accessing private financing on affordable terms remains low, the risk of such a shock has risen in recent months.

Moreover, the official support package for Greece announced last week somewhat increases the potential for adverse market dynamics given (i) the precedent it sets for possible private sector participation in the future provision of support for euro area member states, and (ii) the uncertainties surrounding the content of the package, including whether the EFSF will be expanded and when the promised expansion in the scope of its powers will be implemented. As Moody's stated earlier this week, the official support package for Greece has negative credit implications for non-Aaa-rated euro area sovereigns with large debt burdens and/or high deficits, (See Moody's Special Comment entitled "EU Support Package Permits Orderly Default by Greece and Buys Time, But Credit Effects Are Mixed for Other Euro Area Sovereigns", published 25 July 2011). Moody's will factor this into its risk analysis for such euro area sovereigns.

The review of Spain's sovereign rating is consistent with this objective and follows Moody's rating action on Italy, whose Aa2 sovereign rating was placed on review for possible downgrade on 17 June 2011, in part to reflect similar concerns.

The second driver underlying Moody's review is its continued concern over the central government's ability to ensure compliance by regional governments with fiscal targets, especially given the limited effectiveness of the central government's debt authorization powers. (See Moody's Special Comment entitled "Spanish Regions: Continued Fiscal Slippage Would Have Negative Ratings Impact", published 28 June 2011.) Moody's expects the regional governments to miss their collective budget deficit target by up to 0.75% of GDP, which would make the achievement of the overall budget target for the general government sector (deficit of 6% of GDP in 2011) more difficult. The rating agency expressed concern that regional governments' finances may prove difficult to control due to structural spending pressures, particularly in the healthcare sector.

FACTORS TO BE CONSIDERED IN THE REVIEW

Moody's review of Spain's credit rating will focus on both external and domestic factors.

In terms of the external factors, Moody's review will largely focus on the broader question of how best to reflect the impact of last week's precedent-setting announcement of a Greek package on funding pressures facing non-Aaa-rated euro area sovereigns that are vulnerable to elevated market stress and loss of confidence, be it due to the need to finance large budget deficits or to roll over very high debt levels.

The impact of last week's euro area decisions on the depth, breadth and price of Spain's market access and the risks borne by its bondholders as a result will be an important factor in that assessment. The package announced remains subject to uncertainties and execution risks. Moody's review will therefore monitor progress in implementing the expanded EFSF powers to support sovereign debt prices. It will also assess the impact of the package's announcement on market dynamics and on Spain's access to and the cost of private funding in the medium term. Moody's notes that the Spanish Treasury has already issued an important portion of its funding requirement for the year at affordable interest rates, and should be able to accommodate temporarily higher interest rates within its current budget parameters. Spain's debt affordability ratio, defined as debt interest payments as a share of total government revenues, is roughly in line with that of Belgium and lower than that of Italy.

As for the domestic factors, Moody's will assess the likelihood that the central government will again be able to compensate for fiscal slippage at the regional government level. Any additional measures at the regional government level, both to correct the fiscal slippage currently evident and to address the structural spending pressures on the regional finances, will also be assessed during the review period.

In this context, Moody's notes that the government was able to achieve the target set for the general government budget deficit in 2010 (9.2% of GDP versus target of 9.3%), and reduced its own central government deficit by a full percentage point of GDP more than the target (5.7% of GDP versus target of 6.7%). At around 60% of GDP in 2010, Spain's public debt ratio is lower than that of several important European countries, including several Aaa rated sovereigns. Judging from the budget execution for the year to June, the Spanish government also seems to be on track to achieve its target for the current year (central government deficit of 4.8% of GDP), although Moody's believes that budget execution will probably deteriorate in the remainder of the year due to higher interest rates paid from May 2010 onwards.

Moody's also notes that the Spanish economy has so far grown broadly in line with the agency's baseline assumptions. The necessary rebalancing of the economy is progressing, with positive signs from the export sector.

Spain is — next to the Netherlands and Ireland — the only euro area country that has managed to surpass its previous peak level in exports, signaling stronger underlying export dynamism than most of its peers. The key downside risk continues to be the weakness of private consumption against the background of high household debt, rising interest cost and persistently high unemployment. The recently implemented changes to the collective bargaining system are widely considered to be inadequate to significantly increase urgently needed flexibility in the labour market.

GDP data for Q2, to be published at the end of August, should give further clarity on the outlook for the economy.

PREVIOUS RATING ACTION AND METHODOLOGY

Moody's last rating action affecting Spain was taken on 10 March 2011, when the rating agency downgraded Spain's government bond ratings to Aa2 and assigned a negative outlook. The rating action prior to that was taken on 15 December 2010, when the rating agency placed Spain's Aa1 ratings on review for possible downgrade.