BANKRUPTCY WATCH

30 03 2008

You can hear all kinds of wild stuff on the internet.  If you’re not careful, you might end up thinking Lyndon Larouche or one of his front groups is a credible source….

England’s Economist, however, is by no means a radical publication, but nevertheless enjoys a good reputation for clear vision and honest reporting.  So when they run a story like this one, with this headline, you want to be sure you’ve got a good plan:

Bankruptcies in America

Waiting for Armageddon

Mar 27th 2008 | NEW YORK
From The Economist print edition

The recent rise in corporate bankruptcies in America may well be a sign of much worse to come


Illustration by David Simonds

CAPITALISM without bankruptcy, it is said, is like Christianity without hell. With recession looming, the air in America’s bankruptcy courts is thick with brimstone and the coals are being heated in readiness for the many sad souls whose sin was to borrow too much. After several heavenly years, in which bankruptcies fell to record lows, going bust is back. How bad will things get?

If the debt markets are to be believed, companies could be in at least as much trouble as they were in the previous two downturns, in the early 1990s and at the start of this decade, after the dotcom bubble burst. A leading indicator is the spread between yields on speculative “junk” bonds and American Treasury bonds. A year ago, the spread was only about 280 basis points; the long-term average is around 500 points. This month the spread exceeded 800 points for the first time since March 2003, reaching 862 on March 17th.

The bankruptcy rate (in the previous 12 months) for high-yielding bonds has so far edged only modestly higher, to 1.28% from a record low of 0.87% in November. But most forecasters expect it to rise sharply over the coming months. 

***

A look at the firms with distressed debt shows that problems are rapidly moving beyond the long-term sick (airlines, cars) and the industries immediately affected by the crisis (home builders, mortgage lenders, monoline insurers). Craig Deane of AEG Partners, a restructuring-advisory firm, says he is now seeing troubled companies in retailing, restaurants, manufacturing and food processing.

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This story from the Sydney, Australia, Herald-Sun talks about the likelihood that the dollar will, over the next three to five years, cease to become the world’s common currency.  No matter who gets elected in November, this is going to take the US down a few pegs and diminish our ability to influence world affairs–such as the boycott of Iran that the Junta is currently orchestrating.  For now, they are succeeding, and there are no signs that Hillary or Obama disagrees with the tactic, but if US banks lose their hegemonic position in the world market, plenty of countries will be only too happy to tell us to go wipe our ass with our stupid greenbacks.  At a certain point, oil will speak louder than anything else.

STATE-backed sovereign wealth funds are likely to diversify their investments and move away from US dollar-denominated assets, a World Bank official says.

Central banks are likely to follow suit, shifting away from the US dollar over the next “three to five years,” World Bank principal investment officer Arjan Berkelaar told a business conference in Sydney yesterday.

Sovereign funds, which are either government-owned or controlled, will increasingly switch from high-grade fixed-income assets such as government bonds to equities and broader-based assets including infrastructure and commodities, he said.

Alternatives would include investments denominated in the euro and pound, with some possible interest in the higher-yielding Australian and New Zealand currencies.

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