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90 seconds at 9 am: UBS pays big fine over Libor manipulation, traders face criminal charges; Germany and China growing faster; US bulding permits rise; RBNZ in currency trades

90 seconds at 9 am: UBS pays big fine over Libor manipulation, traders face criminal charges; Germany and China growing faster; US bulding permits rise; RBNZ in currency trades

Here's my summary of the key news overnight in 90 seconds at 9 am, including news Swiss banking giant UBS has agreed to pay US$1.5 bln in penalties to US, UK and Swiss regulators for attempting to manipulate the Libor inter-bank lending rate. Two former traders were also charged with criminal conspiracy.

Staying in Europe, German business confidence rose for the second month in a row in December according to a closely-watched survey. Some say that Europe's largest economy may support region-wide growth in 2013.

In China, the World Bank has raised its growth forecast for the country, saying the boosts from stimulus measures and infrastructure projects are working. The World Bank sees China growing 8.4% in 2013, advancing at higher rate than 2012.

There is no progress on fiscal cliff negotiations overnight. However, US building permits rose to a 4 year high in November, more evidence US housing markets are staging a modest recovery.

Staying in the US, the Government there has announced it plans to sell out its remaining one third shareholding in GM over the next 15 months - it "invested" more than US$50 billion to rescue the carmaker, but it looks like it will leave losing money on the deal.

Back in New Zealand, data released by the RBNZ shows that the central bank put its toe in the water in November selling a modest about of NZ$ in the currency markets. There is no way to know whether this is the beginning of RBNZ action, but it is the most since 2008 that it has traded.

Separately, Bill English has said that there is no realistic way he can weigh against the rise in the currency as the forces buying it are just too relentless.

However, the NZ dollar has eased back overnight as Dow is falling in mid-day trade, oil is rising, and gold is confirming yesterday's fall.

The NZ$ starts today at 83.7 USc, 79.7 AUc and the TWI is at 74.6.

We will have full coverage of the Q3 NZ GDP results at 10:45am today.

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Or right here:

Long-Term Rating On New Zealand's Christchurch City Council Lowered To 'AA-', Short-Term Rating Affirmed, Outlook Negative

MELBOURNE (Standard & Poor's) Dec. 19, 2012--Standard & Poor's Ratings Services said today that it had lowered its long-term credit ratings on New Zealand's Christchurch City Council (CCC) and the council's wholly owned subsidiary Christchurch City Holdings to 'AA-' from 'AA'. The short-term ratings on both entities were affirmed at 'A-1+' and the outlooks remain negative.

"The downgrades reflect our view that the council's financial management--while still positive--is increasingly being affected by a difficult environment stemming from a prolonged recovery period following the earthquakes in 2010 and 2011. Although we consider CCC's financial strategy to be prudent, the degree of control over the reconstruction held by the Crown, rather than by CCC, in our view reduces the council's political and managerial strength," Standard & Poor's credit analyst Claire Curtin said.

Significant repair and reconstruction costs have affected the council financially. It has significant capital expenditure responsibilities from earthquake repairs and infrastructure reconstruction, which is affecting budgetary flexibility and performance, and increasing the debt burden. We expect capital expenditure to rise to about 40% of total expenses as the reconstruction gains pace, and will remain elevated in the medium term. CCC's modifiable revenues are around 35% of total consolidated revenues.

In addition, earthquake-related impacts have dampened revenues and weakened the council's budgetary performance. These impacts have reduced the number of ratable properties while increasing expenses. CCC's operating balance was weak in fiscal years ended June 30, 2011 and 2012, but performance is expected to improve as elevated earthquake-related operating expenditure eases. We expect CCC's operating balance to average in excess of 5% for 2011-2015. Primarily funded through debt and deferrals, CCC's large capital program and its currently weak operating performance result in a large deficit after capital expenditure, of about 15%. We anticipate that CCC's operating performance will improve as revenues increase and recovery costs ease. However, we forecast that CCC's deficit after capital expenditure will remain high over the medium term given the duration of the reconstruction program, which is anticipated to take more than five years.

CCC has implemented some special rates levies to raise council revenues and fund the reconstruction over time; in the interim, a significant amount of capital expenditure is being debt-funded, increasing CCC's debt burden to more than 180% of revenues. We anticipate that debt will remain below this level, however. Our base case anticipates that CCC will not fully achieve its capital-expenditure program as scheduled--given its large size--of around NZ$1 billion per year over the coming four years. We expect that interest costs will rise to be in excess of 5% of revenues as CCC's debt levels rise, but that interest will remain less than 9% in the medium term.

Contingent liabilities continue to weigh on the CCC rating. Insurance cover remains difficult to source, and further damaging seismic activity could have a significant financial impact on CCC. Litigation risk has also heightened, although we do not currently consider it likely that litigation will result in significant financial impact on CCC within the rating horizon.

Ms. Curtin added: "The negative outlook reflects our view that there is at least a one-in-three chance of a further downgrade for CCC in the coming two years. We consider that the most likely rating driver for negative rating action is from a rising debt burden--such as if total tax-supported debt was expected to exceed 180% of revenues and/or interest to exceed 9% of revenues. CCC's debt levels could increase more than anticipated due to an escalation in CCC's share of reconstruction costs above our expectations. This could occur from a shortfall in insurance recoveries, project cost escalation that CCC was required to fund, or further earthquake activity causing greater damage to council infrastructure."

The outlook could be revised to stable when we consider there is greater certainty concerning the likely peak of CCC's debt levels. This would likely stem from greater clarity on the anticipated total cost of the reconstruction to CCC. Greater confidence that seismic risk had eased would also provide certainty on potential costs.

Due to the strength of the institutional framework, we do not currently consider that there is a high probability of the long-term rating falling to lower than 'A+'.

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The noose slowly closes ... "Two former traders were also charged with criminal conspiracy."

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Interesting points on the NZD, thanks.

I note from the Bloomberg article you've linked to, that Bill English pretends to say there's nothing we can do, the following quote is a bit of a giveaway:

“I am pretty happy about the state of demand for our bonds,” English said.

My takeout is that from the narrow view of government accounts, English likes the relatively cheap interest, and doesn't really care about the effect on the private sector of the damage done by the capital flows on the currency. He doesn't actually want to do something about the currency. There are many things he (or the RB under his control) could do if he did.

He says he is helping to control business costs; maybe in minor ways there is a reduction in government spending, although with their spin a non increase is a reduction. That aside, all other costs, including rent, electricity, local rates and many others are up even in NZD terms, plus the 40% currency appreciation over his term. He says that now businesses would be happy with the NZD at 75c, where they would have liked 65c when he came in. If he looks closely he'll see its at pretty close to 85c now. He's like the guy holding the carrot ahead of the donkey's nose, all the while whipping its backside with a higher currency.

Nevertheless good to see Wheeler has put the RB's toe in the water. Hopefully he can also look at the NZ big picture, rather than lose sleep like Bollard did over a narrow RB view of its own accounts. Time to put the whole foot in, one way or the other. (and I agree that the OCR is not remotely the best tool to influence the exchange rate.)

 

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