MPR on the agenda

The chase by Marty Cej:

The Bank of Canada yesterday cut its forecast for Canadian economic growth and warned that Europe will suffer at least a brief recession, presaging statements from Finance Minister Jim Flaherty later in the day that he will cut the government’s growth projections in the next few weeks and that Europe could trigger another global recession if it can’t resolve its persistent and worsening debt crisis. Today, European leaders will get another chance to fix their troubles and the Bank of Canada gets a chance to explain its latest interest rate decision in greater detail.

The Canadian central bank releases its Monetary Policy Report at 10:30 am Eastern. Linda Nazareth will report from the lock-up as the headlines break and we’ll follow the Q&A with Governor Mark Carney beginning at 11:15. We can expect Carney to field questions on the European mess, the pace of the U.S. economy, the impact of U.S. and European monetary policy on Canada, demand for Canadian exports from developing nations and maybe a question or two on the dollar. We can also expect Carney to field at least one direct question on when he might raise or cut the benchmark interest rate by an enthusiastic young journalist who has been put up to the question by his more experienced, smirking colleagues.

And now that the Bank of Canada has been explicit and as forthcoming with its monetary policy as any central bank can be, we’ll turn our attention to fiscal policy. Minister Flaherty refused to be drawn yesterday on whether the government will be able to stick to its plan to balance the budget by 2014.

Slowing economic growth will make it difficult (impossible?) to meet the government’s revenue expectations while at the same time increasing pressure on Ottawa to shelve planned spending cuts that might exacerbate a slowdown by putting more jobs at risk. And what about Canadians’ household debt levels, which are sitting at U.S.-like levels? And how about the still-booming real estate market? Are Canadians taking on too much risk with interest rates low and home prices continuing to rise?

We’ll also take a look at how interest rates being lower for longer will affect Canadian consumers and companies. Record low bond yields will put immense pressure on banks’ margins and prompt all sorts of accounting gymnastics at the insurers. Are current share prices justified by the outlook for slowing profit growth? And let’s not forget about the impact of puny yields on pension plans. Air Canada is a good example of a pension plan under pressure and it deserves a much closer look today.

And why are we talking about falling earnings expectations, record low bond yields and a slowing global economy? Because European leaders have yet to come up with a credible solution(s) to their debt crisis. Brussels today hosts the 14th crisis summit in 21 months – in fact, it hosts two summits today; a cocktail summit with all 27 leaders from the European Union at noon Eastern, followed by a dinner summit with just the 17 countries that share the euro currency. The 10 non-euro leaders will be shown into an adjacent room where they will sit at fold-out tables and be offered spaghetti or chicken fingers and fries. What markets hope to see is an agreement on detailed plans for bank recapitalizations, a bigger and bolder EFSF and sharper haircuts on Greek debt.

As much as expectations have been massaged lower, a major disappointment today will be priced out quickly and severely by financial markets.

In the meantime, industrial commodities are doing pretty well today after Chinese Premier Wen Jiabao said economic policy will be fine-tuned as needed and the Chinese industry minister said it is studying “stimulative policies” for smaller companies. The market has interpreted the comments as being pro-growth.

It is a big day for earnings. In Canada, we’re tackling Rogers Communications – which appears to have beaten expectations and has named a new CFO; Agnico-Eagle, Goldcorp, Methanex, Open Text and Lundin Mining.

In U.S. earnings, we have Ford, Boeing, Nasdaq, Lockheed Martin, Norfolk Southern, Sprint, Visa, Northrup Grumman and Corning.

Banks Squabble With EU Over Greek Debt Losses

By Aaron Kirchfeld - Oct 24, 2011

The world’s biggest banks are squabbling with European leaders over the size of losses on their Greek bonds as they seek a deal to cut the country’s debt load, two people with knowledge of the discussions said.

The financial companies, represented by the Institute of International Finance, proposed a loss of 40 percent on Greek debt, said one of the people, who declined to be identified because talks are confidential. The European Union is calling on investors to forfeit as much as 60 percent, making a compromise at 50 percent possible, the person said.

The talks are part of an attempt to solve the two-year-old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the 17-nation currency. EU leaders are scrambling to reach an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain before another summit in two days.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said talks on private-sector involvement in a second aid package for Greece are focusing on losses of “about 50 percent, 60 percent.”

Charles Dallara, managing director of the IIF, the lobby group for 450 of the world’s biggest financial companies, said on Oct. 22 that “discussions are making progress, albeit limited.” The group remains “open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access,” he said.

Larger Writedowns

EU policy makers have been calling for larger writedowns amid a deteriorating Greek economic and financial situation, as highlighted in a draft report last week by the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika.

Greek two-year notes currently trade at about 40 percent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 percent on the net present value of their holdings of the nation’s debt. That plan includes up to 35 billion euros ($49 billion) in high-quality collateral for the investors.

One option being considered involves a swap with no collateral of any kind in a so-called hard restructuring, people familiar with the matter said on Oct. 21. Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either European Financial Stability Facility bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 percent discount off face value.

To help European lenders shoulder sovereign losses, lenders may be required to raise about 100 billion euros in capital by mid-2012, according to two people briefed on the matter. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, they said.

Reuters reported the 40 percent proposal by banks late yesterday.


Still waiting for a European solution

The BNN Chase by Marty Cej:

European leaders have adjourned to Wednesday, taking fresh proposals from the weekend’s summit back to their respective parliaments where dismay and disappointment will be expressed in a multitude of languages. Formal plans should be drawn up by Tuesday and announced at the completion of another summit Wednesday.

There will be three main pillars to the plan: A haircut for holders of Greek debt that is likely to become more of a buzz cut; larger European bank recapitalizations, and some kind of external support for the EFSF bailout mechanism that assures markets that those in greatest need of bailouts or backstops – Greece now, Italy soon – will get what they need when they need it. The next three days ought to see plenty of leaks to the media as governments try to lessen the shock to markets and voters of coming to an actual decision.

The solution will be televised.
In the meantime, central bankers elsewhere continue to wrestle with the impact of the European debt crisis on their own economies. Federal Reserve Bank of Dallas President Richard Fisher was one of three Fed members to dissent from Open Market Committee decisions in August and September to lower borrowing costs and stimulate the U.S. economy through “unconventional” means. Fisher doesn’t like “Operation Twist” – the Fed’s plan to sell shorter-term bonds and buy longer-term bonds in a bid to push yields at the long end lower – and he doesn’t care who knows it. Fisher sits down with us at 1:00 pm on Headline.

Our conversation with Fisher comes less than 24 hours before Bank of Canada Governor Mark Carney must explain to markets why interest rates won’t be raised anytime soon even as inflation accelerates beyond the central bank’s preferred target pace.

Canada’s benchmark rate is expected to remain unchanged and the accompanying statement is expected to be explicit in its assessment of the threats to the Canadian economy from the European debt crisis and U.S. unemployment. A survey released today by the National Association for Business Economics shows U.S. companies’ hiring plans at their worst level since January 2010.


Caterpillar doesn’t seem to be feeling the pinch, though. A few minutes ago, the world’s biggest maker of heavy yellow earth-moving equipment, reported higher-than-expected third-quarter earnings, record revenue and thousands of new jobs. The company said it expects year-end profit at the high end of its previously announced range and “2012 is shaping up to be better.” The quarterly earnings report from Caterpillar is always full of economic analysis and detail from around the world and this one is no different. Paul Bagnell has the file.

As I was typing that last bullet point, three deals were announced: Healthcare provider Cigna agreed to buy Healthspring for $3.8 billion; Oracle agreed to buy cloud computing company RightNow Technologies for $1.5 billion and J.M. Smucker agreed to buy a majority stake in Sara Lee’s coffee business for $350 million up front and another $50 million over the next 10 years.
Back to earnings, we’ll be taking a look at numbers from Netflix, Texas Instruments and West Fraser Timber.

This week sees Canadian earnings season pick up with numbers beginning tomorrow from CP, CNR and Astral Media. Wednesday will be busy with Rogers Communications, Corus, Agnico-Eagle, Mullen Group, Methanex, Goldcorp, Sherritt, Lundin Mining and Open Text.