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Puerto Rico Default “Likely”, FT Reports | Zero Hedge

Puerto Rico Default “Likely”, FT Reports | Zero Hedge.

The market just hit a fresh all time high today which means another major default must be just around the horizon. Sure enough, the FT reported moments ago that a Puerto Rico default “appears increasingly likely” and is why creditors are meeting with lawyers and bankruptcy specialists (most likely Miller Buckfire, fresh from its recent league table success with the Detroit bankruptcy) on Thursday in New York.  The FT cited a restructuring advisor, supposedly desperate to sign the engagement letter with creditors and to force the bankruptcy, who said that “the numbers are untenable” and “to issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying.”

The untenability of PR’s cash flows results from a “debt service burden that requires paying between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise.”

For Puerto Rico bonds, such an outcome would not be exactly a surprise, most recently trading at 61:

The rest of the story is largely known:

If Puerto Rico is forced to take that step, the effects will ripple through the entire $4tn municipal bond market. Because the debt is generally triple tax free, in a world of zero interest rates demand is high and it is distributed widely, including in funds that imply they have no exposure to Puerto Rico.

 

But yields have gone up nevertheless – and prices down – suggesting the markets are increasingly nervous about prospects for repayment. Estimates on how much of that debt is insured range from 25 per cent to 50 per cent of total issuance.

 

“Everyone thinks they can get out in time,” the restructuring adviser said.

 

Puerto Rico cannot really raise taxes much more, since the debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio – at 83 per cent – that makes California, Illinois or New York – each at 6 per cent – models of prudence. Meanwhile, at 14 per cent, the unemployment rate is twice the national average.

What would make a Puerto Rico default more interesting is that as in the case of GM, political infighting would promptly take precedence over superpriority and waterfall payments. According to the FT, “any radical step, which the local government denies considering, would involve significant legal wrangling. Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but that too would give rise to partisan fighting. The Democrats would say that pension claims have priority while the Republicans would uphold the priority of payments to bondholders, citing the constitutional sanctity of contracts.

Of course, since in the US a bond contract now is only worth the number of offsetting votes it would cost, nobody really knows what will happen. And so, we sit back and watch, as yet another muni quake appears set to hit the US, in the process obviously sending the S&P to higher, record highs.

In the meantime, keep an eye on bond insurers AGO and MBI which have taken on water in today’s session precisely due to concerns over what a Puerto Rico default would do to their equity.

French firm Total to join UK shale gas search | Environment | theguardian.com

French firm Total to join UK shale gas search | Environment | theguardian.com.

Fracking protesters

Fracking protesters in Balcombe last summer. Photograph: Rod Harbinson/Demotix/Corbis

The French energy company Total will become the first major international oil company to join the exploration for UK shale gas when it announces an investment package on Monday.

Total is to join a shale gas exploration project in Gainsborough Trough in Lincolnshire currently operated by Ecorp of the US, according to the Financial Times. The other partners in the project are Dart Energy and UK-listed Igas and Egdon Resources.

The coalition government has made the exploitation of Britain’s unconventional gas reserves a priority, offering tax breaks to shale developers and promising big benefits. This is in contrast to France where hydraulic fracturing, or fracking, the process by which shale gas is released, is banned.

George Osborne, the chancellor, has argued that shale has the potential to reduce Britain’s reliance on increasing expensive gas imports and create thousands of jobs.

Exploration for shale gas and other unconventional hydrocarbons is taking place or is planned in Wales, Scotland, the south of England and the Midlands and the north.

Opposition from environmentalists has hindered the work. Protesters say the fracking process – injecting water, sand and chemicals underground at high pressure into shale rock to release the oil and gas trapped inside – can contaminate groundwater and cause earthquakes. The operation of rigs and attendant noise and truck movements can disrupt the local area.

Last summer Cuadrilla Resources faced protests in the Sussex village of Balcombe, and protesters are currently camped outside a drilling pad at Barton Moss in Salford where Igas plans to drill an exploratory well.

Geologists estimate there could be as much as 1,300tn cubic feet of shale gas lying under parts of the north and Midlands. One-tenth of that would equal around 51 years’ gas supply for the UK.

China “Fixes” Liquidity Crisis By Banning Media Use Of Words “Cash Crunch” | Zero Hedge

China “Fixes” Liquidity Crisis By Banning Media Use Of Words “Cash Crunch” | Zero Hedge.

UPDATE: 7-day repo is now up 220bps at 980bps – as the “liquidity crisis” is worse than any other seasonal effect on record…

and to think the media was proclaiming the crisis over just an hour ago as the rate (in green) was sent around the world…

How do you “fix” a nations’ banking system’s increasingly desperate need (and dependence upon) for government-provided liquidity without giving in and just providing all the inflation-stoking liquidity the banks demand? Simple – in China – you ban the media from discussing it. As The FT reportsChinese propaganda officials have ordered financial journalists and some media outlets to tone down their coverage of a liquidity crunch in the interbank market, in a sign of how worried Beijing is that the turmoil will continue. The censors have warned reporters not to “hype” the multiple-sigma spikes in overnight-funding rates and have forbidden the press from using the Chinese words for “cash crunch.”

Of course – early prints in today’s repo market are seeing levels normalize back to around 4-5% (just as Goldman Sachs ‘suggested’ they would because this liquidity spike is nothing but ‘seasonals’ – hhhmm)

Via The FT,

Chinese propaganda officials have ordered financial journalists and some media outlets to tone down their coverage of a liquidity crunch in the interbank market, in a sign of how worried Beijing is that the turmoil will continue when markets reopen on Monday.

Short-term interest rates for loans in the interbank market shot up last week in an apparent repeat of the cash crunch in June

Money market rates surged again on Friday, even after China’s central bank announced on Thursday evening that it had carried out “short-term liquidity operations” to alleviate the problem.

In response Chinese censors have warned financial reporters not to “hype” the story of problems in the interbank market, and in some cases have forbidden them from using the Chinese words for “cash crunch” in their stories, according to two people with direct knowledge of the matter who asked not to be named.

The Communist party’s powerful propaganda department and various other party and government bureaux frequently issue bans and detailed instructions to Chinese media on “sensitive” issues that could undermine party legitimacy.

That directive also ordered media to “strengthen their positive reporting” and “fully report the positive aspect of our current economic situation, bolstering the market’s confidence”, according to a copy obtained by the FT.

 

Will the real International Energy Agency please stand up?

Will the real International Energy Agency please stand up 

by Kurt Cobb, originally published by Resource Insights  | NOV 16, 2013

It was as if the International Energy Agency were appearing on the old American television game show To Tell the Truth last week as it offered a third contradictory forecast in the space of a year.

You may recall that on To Tell the Truth the host would begin by reading a statement from a person with an unusual story or profession. Then, a celebrity panel would question three contestants who claimed to be that person. Afterwards, the panelists would vote on whom they believed was the real person. Finally, the host would say, “Will the real [name of person] please stand up?” (Some episodes are still availablehere on YouTube.)

The difference is that the contestants on To Tell the Truth would try to tell similar, plausible stories so as to stump the panel. In the non-game-show world of energy forecasting, the IEA–a consortium of 28 countries, all net oil importers except for Canada and Norway–plays all three contestants and does not even attempt to be consistent. So, it’s possible that the agency is just a collective mental case withmultiple personality disorder.

However, one has to allow for the fact that the IEA is not just one person or one voice. Still, if the agency were a single person, what it has released over the last year as official pronouncements would likely have a psychiatrist reaching for theDSM-IV (Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition).

Last November in its 2012 World Energy Outlook (WEO), the agency noted rising U.S. oil production and even predicted that the United States would become energy self-sufficient by 2035 (a doubtful call, in my view). It also noted that growing oil demand in the Asia has more than outweighed declines in European and U.S. consumption, keeping upward pressure on prices. It said that growth in Iraq’s oil exports was not a sure thing. While the 2012 WEO is really a rather optimistic document on supply, it did not paint an especially rosy picture, indicating that obtaining the supplies of oil necessary to meet projected demand was not a foregone conclusion.

Then, only six months later came the agency’s so-called Medium-Term Oil Market Report which read like an ad for the North American oil and gas industry. The agency touted a “supply shock” in oil from American tight oil fields unleashed by a new kind of hydraulic fracturing–a shock that would send “ripples throughout the world.” Unlike six months earlier, worldwide supply was supposed to take flight on the wings of fracking.

This enthusiasm didn’t last long. In its latest report, the just-issued 2013 World Energy Outlook, the agency sounded like a group of Gloomy Guses noting that “Brent crude oil has averaged $110 per barrel in real terms since 2011, a sustained period of high oil prices that is without parallel in oil market history.”

The report goes on to say, “The capacity of technologies to unlock new types of resources, such as light tight oil (LTO) and ultra-deepwater fields, and to improve recovery rates in existing fields is pushing up estimates of the amount of oil that remains to be produced. But this does not mean that the world is on the cusp of a new era of oil abundance.” The most recent forecast calls for rising oil prices in real terms through 2035. This is in part because the agency expects that “no country replicates the level of success with LTO” that we are seeing in the United States today.

What’s really happening here? Is the IEA getting better at seeing the future? Not really. What’s happening is that the IEA is being asked to do something which it cannot possibly do: accurately predict oil supplies 22 years into the future. So, given this impossible task, the agency responds by following current trends (and industry hype) and then extrapolating them.

Now that the IEA has had a chance to re-examine the industry’s claims in light of more experience with tight oil development, it is backing off its previous assessment in its Medium-Term Oil Market Report from May. Fatih Birol, chief economist for the IEA, told the Financial Times that he would now characterize rising oil production in the United States as “a surge, rather than a revolution.” He expects OPEC to become dominant once again in oil markets early in the next decade. The Financial Times characterized the report as predicting an oil supply crunch.

But, will the IEA have a change of heart once again? It might, depending on what it hears from industry sources and what it chooses to believe. But, the takeaway from the last year of IEA projections is not that the agency is suffering some sort of breakdown, but that it has been given an impossible task that in the volatile world of oil supplies has it casting about for a coherent story. In short, it is trying to tell the truth without knowing the truth for the simple reason that in this case the truth cannot known. That has made it a poor contestant in its own real-life episode of To Tell the Truth stretched out over the past year.

It is a fool’s errand to try to predict the future of world energy supplies. But, it is even more foolish to base our public policy, business and personal decisions on such predictions.

P. S. There is a minor acknowledgement that such forecasts are exercises in futility in a disclaimer at the end of the 2013 World Energy Outlook summary. The disclaimer reads: “The IEA makes no representation or warranty, express or implied, in respect of the publication’s contents (including its completeness or accuracy) and shall not be responsible for any use of, or reliance on, the publication.” This is standard boilerplate, I know. But, it is not the kind of language that inspires confidence.

 

Canadian Housing Bubble? 9 Signs We’re In For A Major Correction

Canadian Housing Bubble? 9 Signs We’re In For A Major Correction. (source/link)

housing bubble
Maybe Canada doesn’t have a housing bubble.

Maybe this time, it really is different. Maybe life expectancies have grown, and with them, people’s willingness to take on more debt. That would mean house prices could stay up higher than history would suggest.

Maybe interest rates aren’t going back up. If there is no inflationary pressure, either in Canada or in the U.S., there isn’t much reason for central banks to push interest rates back up.

Maybe we’re in for an endless housing boom. Maybe. But if history is still any guide to go by, then folks, it looks like we have one whopper of a housing bubble on our hands. Because just about every single indicator that warns economists of trouble in the housing market is now flashing red.

Investment bank Goldman Sachs and British business paper the Financial Times are the latest to throw in with the “Canada has a housing bubble” crowd. Goldman put out a report last month saying that some parts of Canada are suffering from overbuilding, and given the excess construction, a “price decline can be quite significant.”

Meanwhile, FT declared Monday that Canada’s “property sector is perched precariously at its peak.”

 

 

India Central Bank Scrambles With Currency Collapse Fallout: Gives USD To Oil Companies, Everyone Else Tough Luck | Zero Hedge

India Central Bank Scrambles With Currency Collapse Fallout: Gives USD To Oil Companies, Everyone Else Tough Luck | Zero Hedge.

 

Financial Times: “World Is Doomed To An Endless Cycle Of Bubble, Financial Crisis And Currency Collapse” | Zero Hedge

Financial Times: “World Is Doomed To An Endless Cycle Of Bubble, Financial Crisis And Currency Collapse” | Zero Hedge.

 

Jim Rogers: “The Whole ‘Economic’ World Is Artificial… It’s Going To End Very Badly” | Zero Hedge

Jim Rogers: “The Whole ‘Economic’ World Is Artificial… It’s Going To End Very Badly” | Zero Hedge.

 

Eurozone crisis live: Italy denies wrongdoing over derivative contracts | Business | guardian.co.uk

Eurozone crisis live: Italy denies wrongdoing over derivative contracts | Business | guardian.co.uk.

 

Oil guru says US shale revolution is ‘temporary’ – FT.com

Oil guru says US shale revolution is ‘temporary’ – FT.com.

 

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