Tags: S&P | Warns | Cracks | Showing | Corporate | Debt

S&P Warns Cracks Showing in Corporate Debt

Thursday, 21 April 2005 12:00 AM

1. S&P Issues Warning on Corporate Debt
2. Dollar Disaster on the Way?
3. Survey: Fund Managers Defensive on Stocks
4. China Pension Crisis Dwarfs U.S. Problems
5. Analysis by Andrew Wilkinson: Mixed Messages in the Market

1. S&P Issues Warning on Corporate Debt
2. Dollar Disaster on the Way?
3. Survey: Fund Managers Defensive on Stocks
4. China Pension Crisis Dwarfs U.S. Problems
5. Analysis by Andrew Wilkinson: Mixed Messages in the Market

After a lengthy term of benign conditions, rumblings of discontent are beginning to be felt in the U.S. bond market, according to an article published today by Standard & Poor's Ratings Services titled "U.S. Distressed Credits Hint At Breaking Away From Languorous Lows."

After a lengthy term of benign conditions, rumblings of discontent are beginning to be felt in the U.S. bond market, according to an article published today by Standard & Poor's Ratings Services titled "U.S. Distressed Credits Hint At Breaking Away From Languorous Lows."

Many of the factors that contributed to the bullishness in prior years -- such as low inflation, surging corporate profitability, and an accommodative monetary policy -- are now poised to weaken from previous levels.

"Continued volatility in the bond market could create pressure points for distressed credits, which have substantially benefited from benign financing conditions," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group.

2. Dollar Disaster on the Way?

Treasury Secretary John Snow recently sounded off on the dire state of the world's economy.

The Washington Post reports that Snow once again implored China to stop pegging its currency to the dollar and promised a major slashing of the U.S. trade gap.


 
4. China Pension Crisis Dwarfs U.S. Problems

Financial Intelligence Report has offered a drumbeat of warnings about the looming pension crisis that will explode as 77 million baby boomers retire. We have talked about the impact here in the U.S., Europe and Japan.

But booming China will face the same financial nightmare.

China is headed for a retirement crisis that makes America's Social Security problems look tame by comparison, USA Today reports.

About 25 years ago, when China initiated a free-market economy, it also did away with its comprehensive social welfare system.

And since 1997, Beijing has been trying to replace the collectivist model with a different system that makes use of smaller guaranteed pensions with individual retirement accounts.

The idea is that these retirement accounts should account for the balance between the phased-out old-style pensions and the revamped version.

The problem? China's government oversees the accounts and has so far chosen to place funds in low-yield conservative investments.  All this comes as the population is rapidly aging.

The number of Chinese retirees will jump from 48.2 million last year to 70 million in 2010 and 100 million by 2020, according to the Ministry of Labor and Social Security.

China faces a danger the United States and Europe never encountered: Its citizens will get old before the country gets rich.

"Today, we're using money from younger and middle-aged workers to pay for retirees' pensions. But when these younger people get old, there's no money for them," says Tao Liqun, director of the social security division at the China Research Center on Aging.

Officials claim the national pension fund lacks the $300 billion necessary for current retirees.

Today's problems are the result of China's "one child" policy and the collectivist welfare system introduced by Mao Zedong and the Communists after they took power in 1949.

The controversial population-control measure led to a situation in which one worker supported two parents and four grandparents.

But today's brisk economic development and a more mobile society are destroying that custom.

In 1970, there were eight Chinese workers for every retiree. Today, there are around six. By 2040, there will be only two -- less than in the far more prosperous United States, where the ratio is projected to be 2.3 to 1.

Back when the majority of people didn't live long enough to collect them, China was able to promise relatively generous pensions. But today's Chinese live to an average of 70 years, up from just 41 years in 1950.

As China has become more and more market-oriented, many of the state-owned factories that propped up the old system have disappeared. And surviving businesses have cut millions of workers just to stay afloat.

Some provincial governments, responsible for doling out pensions, are now seizing the individual retirement accounts intended to supplement workers' social security payments.

5. Analysis by Andrew Wilkinson: Mixed Messages in the Market

At the moment, it seems to be open season for people taking a stand on the economy and stock market.
 
But they don't appear to be applying any real rationale -- and when they do, their logic is massively flawed.
 
Markets are supposed to efficiently react to new news, but that's not what we are seeing. The response to three doses of inflation data in recent days proves this point:
 
First: Producer prices (or prices of raw materials) were remarkably downbeat, encouraging stocks to rally, even in light of a recent sharp slump in equities. At the same time, bond traders breathed easier and pushed down expectations about future rate increases.

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Thursday, 21 April 2005 12:00 AM
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