Global airports, which haven’t seen such bleak economic conditions in decades, face dramatic operational and financial pressures in 2009 and 2010, according to Standard and Poor’s Credit Research.
Among the key points in S&P’s report on the challenges facing airports:
- Global passenger traffic is forecast to fall 5.7 percent, cargo 13 percent and revenues 12 percent in 2009, according to the International Air Transport Association.
- The World Health Organization’s pandemic alert for Influenza A (H1N1), more commonly known as swine flu, has further curtailed air travel.
- High fixed costs and the inability to pass those costs on to tenants and passengers amid the recession
- Dysfunctional credit markets that have limited airports’ ability to restructure debt
The North American market has seen a 9 percent drop in domestic operations in April and a 6 percent drop in international operations, compared with a year ago, while the European Union has seen an 8 percent drop in the same period.
On a brighter note, Asian airports, which have also experienced a low double-digit decline in passenger traffic throughout much of 2008 and early 2009, started to see some signs of stability in April, S&P said.
Sentiment among European credit investors is becoming less negative, according to Fitch Ratings’ European Senior Credit Investor Survey. Although the recession is anticipated to last longer in some key regions, asset class conditions are viewed as slightly better by respondents to the latest edition of the quarterly survey.
In December, 90% of investors said that speculative grade corporate credit conditions would deteriorate significantly, but now only 46% believe that they will, with 29% believing they will deteriorate somewhat.
In the previous survey, 70% of investors believed that credit conditions for European financial institutions would deteriorate either significantly or somewhat. This time, no investors believed that they would deteriorate significantly and 46% believed some deterioration is possible.
An overwhelming majority of respondents are confident that major developed economy governments will fully support the senior debt obligations of all systemically important banks. Nearly 90% of investors believe this.
In most structured finance asset classes, fewer investors believe that fundamental credit conditions will deteriorate as sharply as in December. For example, asset backed securities’ conditions were anticipated to deteriorate significantly or somewhat by 73% a few months ago, but by 53% now. The percentage of investors believing that conditions will remain unchanged in this asset class is now 36% against 24% in December. Similar patterns are shown by the survey for RMBS, CMBS and CDOs. In all of those asset classes a majority of investors still anticipate that conditions will worsen, but to a lesser degree than in December.
In December the factors which over 50% of investors suggested could pose risks to the European credit markets were hedge fund failures, housing market disruptions and lack of credit to corporates. In these cases investors believed there was a high degree of risk posed by these factors. None of these areas received such a high risk assessment this time. The area of greatest “high” risk now is the availability of global liquidity, with 40% of investors perceiving this.
Fitch has extensively researched non financial corporate liquidity since September 2007. This research has consistently shown that the overwhelming majority of Fitch-rated corporates in the ‘BBB’ and lower rating categories have sufficient liquidity to service indebtedness until the end of 2010.
For details see European Senior Credit Investor Survey, March 2009.
European sovereign nations sporting high credit ratings have started to see weakening public finances amid the ongoing economic crisis.
In a report on the deterioration of public finances among highly rated European nations, Standard and Poor’s Credit Research said eroding tax bases, the need to support banking systems and fiscal stimulus to boost economies have all contributed to significant rises in government debt levels.
In the face of the deterioration in highly rated European sovereigns’ public finances, we expect that substantial levels of wealth and diversification, together with timely policy responses, should allow highly rated European sovereigns to remain rated highly. In some cases, however, their ratings could become lower than prior to the crisis.
Since the beginning of the year, S&P has lowered the long-term ratings on Ireland, Spain, Portugal and Greece, and revised the outlook on the U.K. to negative from stable.
S&P said deficits are expected to rise further and peak for every highly European nations in 2010, when most economies should be returning to growth.
Even with a significant deterioration in the US government’s debt position, its rating has a stable outlook and demonstrates the attributes of a Aaa sovereign, Moody’s says in its annual report on the United States.
These attributes include a diverse and resilient economy, strong government institutions, high per capita income, and a central position in the global economy. “Moody’s expects that, because of these factors, US economic strength will emerge after the crisis without major impairment,” said Moody’s Vice President Steven Hess, author of the report. “The global role of the US currency also contributes to the ability of the economy and government finances to rebound.”
He said the government balance sheet has been weakened by the combination of efforts to stabilize the financial system, the effects of the sharp economic recession on federal finance, and the $787 billion federal stimulus package passed earlier this year.
The result has been much higher debt ratios that may persist for some years to come. While these ratios are deteriorating in the US, they are also doing so in most other advanced economies due to the global recession.
Furthermore, the level of debt is less important than the government’s balance sheet flexibility, which Moody’s believes is still high in the case of the US.
Despite a worsening government balance sheet, Moody’s cites other factors in support of the Aaa rating. “The current economic downturn has only temporarily altered America’s productivity dynamic, and productivity has risen in the recession period, as is typical,” said Hess. “US labor market flexibility has been a key factor in this trend.”
A higher rate of US population growth through 2025 relative to other advanced economies will also contribute to continued economic growth — and government revenues.
“While our outlook for the US rating is stable, a reassessment of the long-term growth prospects of the economy and the ability of the government to return to a sustainable debt trajectory could put negative pressure on the rating in the future. How the economy and fiscal policy fare after the recession will be key,” said Hess. He added that, over the longer term, contingent liabilities related to Social Security and Medicare programs could also pressure the rating.
Guest post by James A. Kaplan, Chairman and CEO, Audit Integrity
I sense a change in the direction of the tides that bodes well, even during these tough times.
During the late 1990’s, with prosperity rising year after year, it seemed the sky was the limit. The investment industry saw no reason not to remove the regulatory restrictions that had been put in place to safeguard investors after the Great Depression, which, surely, was not going to come again. As share prices went through the roof, shareholders saw no need to question the performance of Company managers, and did not examine the accounting practices that created an appearance of strength. Boards signed off on compensation structures that rewarded management for increasing share prices regardless of fraudulent, or at least, fraud-like behavior.
And from 2002 to 2007 (the Sarbanes-Oxley years), when the shaky underpinnings of these massive corporate megaliths began to give way, stakeholders learned a hard lesson – but the perfect storm of deregulation and deceptive accounting practice only grew in intensity.
In 2008 the real awakening began, and clearly, the emperor has no clothes.
The dramatic deterioration in economic conditions was the shot heard round the world. Economies are suffering in every nation. Foreclosures continue at an astronomical rate.Retirement funds have been decimated through no fault of the people who trusted professional money managers to invest wisely on their behalf.
The chasm between White Hats (companies with strong governance and transparency) and Black Hats (weak governance and transparency) has grown ever wider. Although stakeholders may have learned their lesson the hard way, I believe they have learned it well. When times were good, it may not have occurred to them to carefully examine the behavior of their executives.
Now that the market has deflated, we are discovering that integrity is not optional, but must be demanded regardless of rising or falling share prices. We have learned that fraudulent practices result in egregious short-term gain for the managers, who bear no risk and show no long-term commitment to the company’s health, while resulting in devastating losses to the investors. Of course, our government, hearing the painful screams of stakeholders, has begun beefing up the very same regulatory bodies they de-regulated over the last decade.
I believe this changing tide will reinforce and strengthen the use of Audit Integrity’s Accounting & Governance ratings, which quantify the distinctions between White Hats and Black Hats. Over the ten-year period ending December, 2008, annual stock return spreads averaged 15.29 percentage points difference between companies with the best and worst AGR Equity Factor. During that time the worst decile returned -4.84% annually, while the best decile returned +10.54% annually.
In order to highlight these widening spreads, and to acknowledge those companies with strong governance and accounting, Audit Integrity will begin issuing regular reports on the “Most Trustworthy” companies which Forbes has published annually for the past three years. Our analysis indicates that these companies will continue to generate excess returns and avoid pitfalls over what I forecast to be economically turbulent years ahead.
Global economic activity is expected to contract 2.6 percent this year after expanding 2.1 percent in 2008, the United Nations now forecasts in its mid-year World Economic Situation and Prospects update. The new forecast is much worse than the U.N.’s January prediction for a decline of 0.5 percent in global GDP.
The U.N. report says the global economy could rebound in 2010 but that there are significant risks to that outlook:
If financial markets do not unclog soon and if the fiscal stimuli do not gain sufficient traction, the recession would prolong in most countries with the global economy stagnating at lower welfare levels well into 2010.
Under a more optimistic scenario, in which the financial and credit markets are completely healed in 2009, the U.N. said world GDP could rise 2.3 percent in 2010.
If you noticed some unusual (and inappropriate) language and links in a few Research Recap posts yesterday or this morning, it’s because someone hacked into our blog and put some inappropriate spam links into a handful of posts. We’ve removed those links and are working to ensure this cannot happen again in the future. Please accept our apologies.
Moody’s outlook for the Italian banking system has been changed to negative from stable, making Italy the last major European country to have a negative outlook in the current crisis.
The Italian banking system initially proved more resilient than those of other
countries due to its lower exposure to toxic financial assets, investment banking
and capital market funding, Moody’s said in a Special Report.
However, the financial crisis has spread into the real economy and, as a consequence, Italian banks’ asset quality and profitability indicators deteriorated last year and are likely to worsen further in 2009 and 2010.
“Bank financial strength ratings (BFSRs) are generally expected to trend downwards, while the effect on deposit ratings is likely to be more limited due to demonstrated and expected systemic support.”
“The financial fundamentals of Italian banks deteriorated in 2008, most notably in
Q4, and will continue to decline through 2009, largely due to asset quality concerns.”
“Unlike other European countries, where major banks have needed emergency recapitalisation by their respective governments, it is not expected that
strong state backing will be necessary in Italy.”
Guest post by Oxford Analytica.
A recent report by the Center for Public Integrity, an advocacy group, documents the extensive, long-term lobbying efforts of 25 firms involved in fostering the hectic growth of the sub-prime mortgage industry. During the peak years of the sub-prime market in 2005-07, these leading securities and investment companies made millions of dollars in campaign donations to both Democrats and Republicans with a stake in overseeing the industry.
While the report has received widespread media coverage in the United States, there is nothing particularly remarkable about its conclusions. Business lobbying is as old as the US republic and is constitutionally protected under the First Amendment. Indeed, furious lobbying and overt political corruption (which would be impossible under current rules) facilitated the post-Civil War railroad construction boom — and bust.
However, lobbying may have helped exacerbate the size of the financial services bubble — and the consequences of its implosion.
- • One credible estimate suggests that over the course of the last decade, the financial services sector collectively donated 2.2 billion dollars to political campaigns, and spent 3.5 billion dollars on lobbying activity in Washington.
- • This may have helped produce a sanguine political response to the surge in sub-prime lending: from 2000-07, the most active 25 originator firms issued approximately 1 trillion dollars in sub-prime mortgages to over 5 million borrowers — generating billions of dollars in additional revenue.
- • Of course, the sector’s implosion ultimately created a surge in systemic risk, led to the collapse of several major financial institutions, and necessitated hundreds of billions of dollars in federal bailout outlays.
- Financial lobbying tactics. In their lobbying efforts, the financial services community has pursued two key tactics:
- • Bipartisan focus. Lobbying has been focused on both parties, in an effort to help foster a deregulatory consensus. While Republicans tend to use more pro-business rhetoric during political campaigns, since the 1970s the Democratic party has also increasingly pursued a deregulatory agenda.
- • Structural context. Lobbying has become inextricably, and quite deliberately, interlinked with campaign fundraising; collectively these activities now form the structural context in which Washington law-making operates and in which electoral politics occurs.
Artificial consensus? The influence of lobbying, particularly on legislation affecting financial services regulation, is difficult to quantify or separate from the general trend to the Right in US politics from 1980 to 2006. However, it is striking that there is a far stronger consensus in Washington, in favour of a limited regulatory agenda, than there is among academic or professional economists.
Even the financial crisis and election of President Barack Obama does not seem to have shifted this consensus much. While Obama has intervened massively in the financial services industry to prop up certain banks (chiefly via the 700 billion dollar Troubled Asset Relief Program enacted under his predecessor) and has also facilitated the rescue of the politically sensitive auto sector, he has repeatedly emphasised that such intervention is temporary. Treasury Secretary Timothy Geithner has also pointedly eschewed using federal equity stakes in banks to change their business practices by, for example, dictating broad new executive compensation rules.
Financial services industry lobbying is constitutionally protected, and has promoted beneficial reforms. However, the growth and success of such lobbying may have helped create an unusual degree of deregulatory consensus in Washington — perhaps inhibiting consideration of the downsides of an increasingly laissez faire approach.
Falling energy investment will have far-reaching and, depending on how governments respond, potentially grave effects on energy security, climate change and energy poverty, the International Energy Agency says. “Cutbacks in investment in energy infrastructure will only affect capacity with a lag, often amounting to several years. So, in the near term at least, weaker demand is likely to result in an increase in spare or reserve production capacity,” the IEA says in a report prepared for the G8 Energy Ministerial in Rome on 24-25.
But there is a real danger that sustained lower investment in supply in the coming months and years, could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery. The faster the recovery, the more likely that such a scenario will happen.
- In the short term, slower economic growth will curb growth in emissions. But, in the medium and longer-term, the crisis may lead to higher emissions, as weak fossil-energy prices and financing difficulties curb investment in clean energy technologies, increasing reliance on fossil-fuelled capacity.
- At the same time, investors will remain risk averse, so that funding for clean energy projects will be available primarily for proven technologies in attractive markets. Once the recession is over, the likely burst of economic growth or “catch-up effect” may also cancel out any short-term emissions benefit.
- There is also a very real risk that the world’s preoccupation with dealing with the crisis will lessen the chance of reaching a comprehensive climate-change agreement in Copenhagen.
- Cutbacks in energy investment will impede access by poor households to electricity and other forms of modern energy – a vital factor in pulling people out of poverty.