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GOOD CREDIT: Either you have it or you don't: "If you have to ask 'how much?' you can't afford it." What is inflation and when may it arrive? How much is the national debt?

CONTENTS:

NEWS
Not the case in 2010 around the world and at home?
Oops time for U.S.A. yet? Credit rating to be downgraded?
Town of Weston
Private Sector
Federal Government
Across the Pond
And elsewhere

Wall Street Firm Downgrades State
By CHRISTOPHER KEATING, ckeating@courant.com
9:09 PM EDT, June 4, 2010

In another sign of the state's fiscal woes, a Wall Street agency downgraded the state's bond rating Friday in reaction to fiscal maneuvers that have temporarily closed huge holes in the state's budget.

The decision by Fitch Ratings follows moves by Republican Gov. M. Jodi Rell and the Democratic-controlled state legislature to borrow money for operating expenses and to balance the state budget with "one-shot'' revenues that cannot be used in the future.

Although the state has borrowed money for operating expenses in past fiscal crises, the legislature made the extremely rare move this year of borrowing money even before the fiscal year started. Without the borrowing, the state would have a projected deficit of about $1 billion in the 2011 fiscal year, which starts July 1.

Although bond ratings can change when the economy improves, a downgrade can eventually lead to higher borrowing costs for the state.

Fitch is only one of three Wall Street agencies and does not have the final say on the state's fiscal outlook.

But all five major-party candidates for governor complained loudly Friday about the downgrade, saying that it was indicative of a combination of bad decisions and a fear of making tough choices at the state Capitol. The next governor, who will take office in January, will be facing one of the largest deficits in state history — currently projected at more than $3 billion for fiscal 2012...

Senate Republican leader John McKinney of Fairfield said that the state deserves the poor grade that it received.

"I hope the people of Connecticut, the administration and the legislature see these lowered bond ratings for what they are: failing grades for an irresponsible budget solution that borrows too much, taxes too much and does too little to reduce government spending," McKinney said in a statement.

House Speaker Christopher Donovan, a key player in the state budget talks for the past two years, could not be reached for comment Friday.

The Fitch analysts said the practice of borrowing for operating expenses comes on top of an already high debt burden that the state is carrying. For years, Connecticut has ranked at or near the top of all 50 states for the highest bonded indebtedness.

"The downgrade reflects the state's reduced financial flexibility,'' the report said, "illustrated by its reliance on sizable debt issuances during the current biennium to close operating gaps in the context of already high liabilities.''

Copyright © 2010, The Hartford Courant - full story here.

Solution or just deja vu? Wall Street has new way to turn mortgage debt into AAA bonds
Associated Press Writer (by way of LWVCT)
MATT APUZZO
1:38 PM EDT, August 24, 2009

WASHINGTON (AP) — Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place. In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

"There is a little bit of deja vu in this," said Arizona State University economics professor Herbert Kaufman.

But Kaufman said the strategy could help solve one of the lingering problems of the financial meltdown: What to do about hundreds of billions of dollars in mortgages that are still choking the system and making bankers reluctant to make new loans. These are holdovers from the housing bubble, when home prices soared, banks bought risky mortgages, bundled them with solid mortgages and sold them all as top-rated bonds. With investors eager to buy these bonds, lenders came up with increasingly risky mortgages, sometimes for people who could not afford them. It didn't matter because, in the end, the bonds would all get AAA ratings.

When the housing market tanked, figuring out how much those bonds were worth became nearly impossible. The banks and insurance companies that owned them knew there were still some good mortgages, so they didn't want to sell everything at fire-sale prices. But buyers knew there were many worthless loans, too, so they didn't want to pay full price for the remnants of a real estate bubble.

In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

As for the bottom-of-the-barrel bonds that are left over, those are getting sold off for pennies on the dollar to investors and hedge funds willing to take big risk for the chance of a big reward. Kaufman said he's optimistic about the recent string of deals because, unlike during the real estate boom, investors in these new bonds know what they're buying.

"We're back to financial engineering, absolutely," he said. "But I think it's being done at least differently than it was before the meltdown."

The sweetener at the heart of the deal is a guarantee: Investors who buy into the really risky pool agree to also take some of the risk away from those who buy into the safer pool. The safe investors get paid first. The risk-taking investors lose money first. That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments.

"There's no voodoo going on here. It's just math," said Sue Allon, chief executive of Allonhill, which helps investors analyze such hard-to-price investments.

Financial gurus call it a "resecuritization of real estate mortgage investment conduits." On Wall Street, it goes by the acronym Re-Remic (it rhymes with epidemic).

"It actually makes a lot of fundamental sense," said Brian Bowes, the head of mortgage trading at Hexagon Securities in New York. "It's taking a bond that doesn't necessarily have a natural buyer and creating two bonds that might have a natural buyer for each."

The risk is, if the housing market slips even more, even the AAA-rated investments may not prove safe. The deal also relies on the rating agencies, which misread the risk at the heart of the subprime mortgage crisis, to get it right. And then there's the uncertainty about the value of the underlying investments, which FBR Capital Markets analyst Gabe Poggi called "totally combustible." Poggi likes the deals because they appear to have breathed some life into the market, but he said it only works if everyone knows exactly what they're buying.

The Obama administration is also working on a plan to get banks buying and selling risky bonds. But the public-private partnership announced this spring is still in the works and has yet to help investors figure out what those bonds are worth. By creating Re-Remics, banks can help start the process themselves. The concept has been around for years, but it has become increasingly popular lately as a way for banks to sell off bonds backed by commercial properties such as malls and office buildings. Analysts say they've seen a few dozen deals aimed at repackaging debt held over from the mortgage boom. Investment banks have also dabbled in turning collateralized debt obligations, or CDOs, into Re-Remics.

That's where Allon gets nervous.

"I think that's trouble," she said.

CDOs are already complicated. Repackaging them makes it harder to figure out what the investment is worth. The more obscure the concept, she said, the more likely the deal has gotten too creative. Wall Street has a tendency to push the boundaries of good ideas, Bowes said. But he said banks are still smarting from the market implosion and are unlikely to rush into new, risky ventures.

"A lot of the market innovations, they all started out with this fundamentally good concept and they often tend to deteriorate over time, or just evolve into more and more risky versions of the same concept," Bowes said. "This time around, the likelihood is, it will take a lot longer for that to happen."

Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

A Matter of Opinion?
NYTIMES
By DAVID SEGAL
July 19, 2009

THERE will be admirers of Floyd Abrams, the most famous First Amendment lawyer in the country, who are surprised to learn that he represents a corporation widely regarded as Part of the Problem in the economic meltdown. These people are likely to have a passing familiarity with Mr. Abrams’s four-decade career and think of him as a tribune of free speech and a defender of underdogs.

Mr. Abrams has some advice for these admirers: Get over it.

“People sometimes have views of what side of issues I should be on that have little to do with reality,” he says. “I don’t spend my life simply working for the A.C.L.U.”

For much of the foreseeable future, the famous eloquence and pugnacity of this 73-year-old titan of the bar will serve Standard & Poor’s, the largest of the credit rating agencies. The company, along with its rivals, Moody’s and Fitch, stamped high grades on billions of dollars of debt that went septic as the housing market collapsed. The three have spent much of the last year explaining those grades and other mysteries, like why they gave the Wall Street equivalent of gold stars to the debt of a handful of companies, including Lehman Brothers before it went under and A.I.G. before its rescue.

Until a few months ago, overhauling the rating agencies looked like the proverbial low-hanging fruit of financial industry reform. But legislators have so far been unable or unwilling to truly take on the companies. Now, a number a plaintiff’s lawyers are about to try their luck in court.

Actually, many courts. Dozens of investors have filed lawsuits seeking redress from the rating agencies, contending that the companies bear responsibility for investors’ losses, under a Whitman’s sampler of theories. The recession, in other words, is about to begin its litigation phase, and Mr. Abrams and a handful of partners at the law firm of Cahill Gordon & Reindel are readying defenses for more than 30 suits filed against S.& P. Up first, an oral argument on a motion to dismiss one case is set for July 31.

What is this veteran of free-speech battles doing on the payroll of a company that analyzes securities?

Making an argument about the First Amendment, to begin with. Mr. Abrams will contend that S.& P.’s ratings deserve exactly the sort of free-speech protections afforded to journalists, on the theory that a bond rating is like an editorial — an opinion based on an educated guess about the future. And for the same reason you can’t sue editorial writers, Mr. Abrams will argue that you can’t sue a bond rater because the economy went into a free fall that few saw coming.

“It shouldn’t change the legal dynamics that rating agencies are more important, or play a greater role, or are looked to by this or that element of the marketplace,” he says. “The major similarity here is that both the newspaper and S.& P. are offering opinions on matters that people can and do disagree about.”

Legal scholars give this argument marks that range from “certainly plausible” to “you’re kidding, right?” But Mr. Abrams won’t just be talking about free speech. The First Amendment is no defense against fraud, and that is what is alleged by many of the plaintiffs. Against them, Mr. Abrams will argue that S.& P. was every bit as blindsided as nearly everyone else in the private sector and in the regulatory sphere.

It’s obviously true, he will tell judges and juries, that many of the ratings “didn’t pan out,” as he puts it, but that doesn’t mean the company is liable for investor losses.

Variations of these arguments have worked for S.& P. in the past. In fact, aside from a small settlement in an Orange County, Calif., case 10 years ago, no litigant has wrested even token sums from S.& P. Which means that today, the company stands roughly where the tobacco companies stood in the mid-1990s: unpopular in public, virtually undefeated in court.

The fortunes of Big Tobacco, you might recall, changed substantially for the worse as more people came to believe that cigarette makers had misrepresented the dangers of their products. Ultimately, four tobacco companies settled for more than $200 billion with 46 attorneys general and today are heavily regulated by the government.

Mr. Abrams’s goal isn’t just to prevent a similar defeat, or to beat back litigants using the weapons he’s been wielding since the late ’60s. He wants more than that.

“Look, for the client’s interest, I very much hope that we can get rid of these litigations on motions for dismissal,” he says. “But from a personal point of view, I look forward to the chance to defend them against those charges in court. If we have a real trial, people would say terrible things about them and I would be very happy to show that those things aren’t so.”

It takes a moment to realize what Mr. Abrams is saying here: he doesn’t simply want to defend the ratings of S.& P. He wants to rehabilitate their reputation. The word “quixotic” doesn’t seem to capture how quixotic this sounds.

That said, were he to succeed, his S.& P. work would rank with any other odds-beating moment of his life. It would deserve its own chapter in the biography, would it not?

We pose this question, and Mr. Abrams thinks it over for a moment. Then he grins like a man who has just placed a huge roulette bet and is eager for the wheel to start spinning.

“We’ll see,” he says.

THE meltdown has thus far been cast as a scandal about Wall Street bankers, mortgage pros and lax regulators, but there is hardly a step along the path from real estate appraisal to securitized debt offering that didn’t involve lawyers. They were involved in structuring transactions, writing contracts, reading contracts, compliance, lobbying, and on and on.

“You can’t have a financial calamity without lawyers,” says George M. Cohen, a professor at the University of Virginia School of Law. “You need them to issue an opinion that a certain trading strategy is O.K., even if it might be really questionable. That can be invaluable to an investment bank. The lawyers say, ‘This is all right; everybody is doing it.’ And you’re off to the races.”

It would be silly, however, to expect lawyers who work for Wall Street to acknowledge errors by their employers. From the foot soldiers — who in the case of S.& P., were keeping i’s dotted on those bond ratings — to the generals, who, like Mr. Abrams, are devising and executing legal strategies, lawyers are paid handsomely for their unconditional love.

There is also, of course, a long and noble tradition of legal advocacy in the United States, and lawyers are expected and required to vigorously defend their clients, regardless of outside opinion or the views of naysayers. They’re supposed to be true believers. And if Mr. Abrams were representing you, it’s likely that you’d find his yield-nothing approach very appealing.

When it comes to S.& P., he doesn’t utter the word “regrets” — which S.& P. bigwigs tend to volunteer these days. In two hours of interviews in his office one recent afternoon, about the closest that he will come to suggesting that anything went haywire at S.& P. is this: “Assumptions were made and with respect to a portion of securitized ratings, the assumptions didn’t work.”

Sitting behind a huge desk in a corner office, dressed in a light blue Oxford shirt and a blue tie, he seems most comfortable discussing the finer points of law. Even now, in the senior-discount stage of his life, he gives the impression of a man fit enough to put you in a headlock, though he also seems too well mannered for fisticuffs. He answers questions deliberately, like one accustomed to having his words read back in a transcript. As he speaks, he slowly moves his coffee cup from a spot on his desk to a perch on a small stack of Post-it notes, then back to his desk, then back to the Post-its, over and over.

Mr. Abrams has worked for a mix of corporate clients that has included A.I.G. (before its near collapse), Reynolds Tobacco and, for about 20 years, McGraw-Hill, which owns S.& P. But media cases have made him the only First Amendment lawyer whom anyone outside the legal field can name. (He is representing a New York Times reporter who was called before a grand jury, but he’s no longer the paper’s go-to counsel, he says, because his price is too high.)

He became nationally known in 1971, at the age of 34, after he beat back the Nixon administration when it tried to block The Times’s series about a lengthy, secret account of the Vietnam War that had been drafted by the Pentagon. The Pentagon Papers case, as it was known, arrived at a moment in history when the rights of journalists — to protect sources, to publish classified documents, and so on — were flimsy at best, and by helping to make those rights robust, he became a media darling.

He would go on to defend clients like the Brooklyn Museum, which Rudolph W. Giuliani, then the mayor of New York, tried to shut down in 1999 because he found a piece of art in it offensive. Such fights have given Mr. Abrams the aura of a public-interest lawyer at large, an eminence who knows how to use the Constitution to deflect bullies.

There are legends in any field who coast on the fumes of early victories, but Mr. Abrams isn’t one of them, say law professors and fellow lawyers. He is still known for his don’t-give-an-inch approach to advocacy. In the rating agency field, that has earned him some critics.

“In my view, he hasn’t done the industry much good because his tactics have been too aggressive,” says Jerome S. Fons, a former Moody’s managing director. Mr. Fons has an example in mind: in 2004, the S.E.C. proposed a voluntary regulatory framework for the rating agencies. It never got much past the conceptual phase, and whatever it might have ultimately looked like, there’s little reason to think it would have defused the planet-rattling bomb that rating agencies were helping to ignite in 2004. But Mr. Fons says he thinks that at minimum, the framework could have “raised some red flags earlier,” and if that had happened, who knows?

“We told the commission that Moody’s was interested, but before we knew it the whole thing was derailed,” Mr. Fons says. “We were told that Floyd Abrams took a very dim view and without him, it didn’t have a chance.”

Mr. Abrams says he was actually a fan of the 2004 framework, and says it died because the commission lost interest. (A spokesman for the S.E.C. would not comment.)

But Mr. Abrams pleads guilty to the accusation of aggressiveness. He notes that he has filed for motions to dismiss in every case brought against S.& P., and he has taken what he describes as “expansive positions” about the scope of the First Amendment. Still, in his estimation, neither he nor S.& P. has anything to apologize for. Then again, nobody has asked for an apology.

“I haven’t had any personal criticism, no eyebrows raised, no how-could-you’s,” says Mr. Abrams of his S.& P. work. “There might have been a stray curse or two directed at the rating agencies in general, but no personal attacks.”

ATTACKS on his client, on the other hand, have been almost nonstop since the market went south. Like its competitors, S.& P. is paid by the issuers of the bonds it assesses, setting up what appears to be a rather spectacular conflict of interest — like a teacher appraising the work of the students who pay his salary. To detractors, that apparent conflict explains why so many bonds that were later all but worthless were stamped triple-A. It might also explain the now-infamous back and forth of instant messages between two S.& P. analysts, one of whom says the firm’s risk assessment model hasn’t captured half the risk of a particular deal.

“It could be structured by cows,” the analyst wrote, “and we’d rate it.”

Mr. Abrams has made First Amendment claims on S.& P.’s behalf when litigants have requested the firm’s files for lawsuits against underwriters. (Company X sues Company Y, for instance, and wants S.& P. documents for the case.) There have also been victories by rating agencies contending that free-speech protections shield them from lawsuits brought by plaintiffs who say, in effect, “If you hadn’t given a triple-A to this bond, I never would have bought it.” But some legal experts say that this defense is hardly a sure-fire winner.

“I don’t think it’s a good legal argument, though there might be some courts that buy it,” says John C. Coffee, a law professor at Columbia. “I don’t think that a rating is the same as an editorial, because The New York Times’s editorial page isn’t paid for by a sponsor. The direct, commercial relationship of the issuer of the bond and the rating agency puts it into the field of commercial speech.”

Generally, commercial speech isn’t accorded the same high level of protections given to journalists. There are potential legal repercussions, for instance, when a doctor gives a medical opinion that turns out to be wrong, says Rodney A. Smolla, dean of the Washington and Lee University School of Law.

“There’s no question that the rating agencies are entitled to some level of First Amendment protection,” he says. “What’s harder to figure out is what degree of regulation we can impose on the companies. There are millions who rely on the objectivity of those ratings, and if you could prove that those ratings were corrupted by a bribe or tainted by a clear conflict of interest, my view is that those protections would be reduced or eliminated entirely.”

Suits alleging fraud against S.& P. present other complications. Mr. Abrams maintains that the law protects S.& P. and its judgments about the future as long as analysts at the company truly believe the ratings they come up with. “Even if those ratings are wrong, or the company did a lousy job, you can’t bring a lawsuit against someone for offering forward-looking predictions,” he says.

He returns to the editorial-writer analogy, though he has others. You can’t sue economists, he says, or meteorologists.

But there are some differences between a weather forecaster and an S.& P. analyst, and lawyers for the plaintiffs in these cases are sure to point them out. There is little chance that a meteorologist has a financial stake in saying, “It’s going to be sunny.” The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like.

And all sorts of financial institutions are required by law to rely on ratings. (For instance, there are plenty of money market funds that can’t buy bonds unless rated triple-A.) That elevates the commercial importance of those ratings, which gives them a different legal status than, say, a weather report.

The rating agencies aren’t waiting for detractors to argue such distinctions. They have lately been emphasizing the changes they have undertaken voluntarily in recent months. In an interview with public relations executives at McGraw-Hill last week, and in an advertorial that ran in newspapers on Thursday, there was talk about changes that would make the calculations behind ratings more transparent and new steps to mitigate the potential for conflicts of interest.

“This is already a different business than it was two years ago,” says Ted Smyth, who runs McGraw-Hill’s corporate affairs.

But fundamental reforms aren’t on the table, and the changes that are might be like sending diplomats to a country you’ve inadvertently nuked. On Tuesday, one of the largest American pension funds, Calpers, filed suit against all three rating agencies, alleging that “wildly inaccurate” ratings had led to $1 billion in losses. The fund had bought structured investment vehicles, a package of securities that include subprime mortgages, which had been given high ratings before all but evaporating last year. The rating agencies, according to the suit, used methods that “were seriously flawed in conception and incompetently applied.”

And S.& P. isn’t taking fire just from executive suites. By coincidence, on the day of the interview with Mr. Abrams, a noisy protest was staged in front of the company’s office in the financial district of Manhattan. About 100 tenants who live in apartment buildings with affordable-housing units walked in a circle, banging on drums, waving signs and chanting “Investigate before you rate!”

A spokesman for the Association for Neighborhood and Housing Development, which led the protest, explained that it wanted S.& P. to know that it was helping real estate developers engage in what it called “predatory equity” — the practice of buying buildings filled with poor tenants and then using legal tactics to scare them out, so that higher rents can be charged to wealthier renters. The group had already picketed a building owner. Now, because S.& P. had rated some of the deals, it was S.& P.’s turn.

“Our beef is that thousands of tenants have lost their affordable housing because of the pressure of speculative investments that was enabled and encouraged by S.& P. and the other rating agencies,” said Benjamin Dulchin, the group’s executive director. “And that has to stop.”

A year ago, no one would have included a rating agency in a list of picket-worthy institutions, and as the tobacco companies learned, the public image of a corporation can have a huge impact on its fate in court. The sheer quantity of litigation against the rating agencies has exploded, too; the number of cases now pending against S.& P. for ratings-related work is about three times the total number it has faced in the past. Tens of billions are at stake.

NATURALLY, Mr. Abrams is undaunted by S.& P.’s sudden vogue as a bad guy. First Amendment lawyers have a long and storied history of defending speech, by individuals and groups like pornographers and the Ku Klux Klan. Floyd Abrams, as it happens, has never represented a hate group or the publisher of a dirty magazine.

And to those who would lump S.& P. into any group of reviled organizations in need of a good lawyer, Mr. Abrams says the company is actually misunderstood.

“If any of these cases go to trial,” he says, “I welcome the opportunity to demonstrate that S.& P. sometimes has gotten a truly unjustifiable bad rap.”

Dollar Hits New Multimonth Low vs Euro, Pound, Yen
NYTIMES
By THE ASSOCIATED PRESS
May 22, 2009; Filed at 11:43 a.m. ET

NEW YORK (AP) -- The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.

The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in New York late Thursday -- its first time above $1.40 since Jan. 2. The British pound rose to $1.5916 from $1.5890, peaking at $1.5945 earlier in the session, its highest point since Nov. 6.

Meanwhile, the dollar edged up to 94.51 Japanese yen from 94.23 yen -- after earlier falling to 93.82, its lowest point since Feb. 23.

On Thursday, Standard & Poor's said Britain may have its rating cut because of rising debt levels. Though the ratings agency reaffirmed the country's actual long-term credit rating at ''AAA,'' it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

Because Britain is pursuing similar policies to the U.S. -- with both the Bank of England and the Federal Reserve injecting billions of dollars in their economies by buying assets from banks -- the move also weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and continued to do so Friday. S&P's announcement ''wound up creating more problems for the U.S. dollar than for the British pound,'' HSBC analysts said in a research note.

''The problem for the U.S. is particularly acute because of its reserve status,'' said UBS analyst Brian Kim in an e-mail to investors Friday. Major holders of U.S. debt, such as Middle Eastern sovereign funds and the Chinese government, have not been shy about calling the U.S. out for what it sees as policies that will trigger inflation, shrinking the value of their Treasury holdings. The Fed in March said it planned to buy up billions in long-term Treasurys and $1.25 trillion in mortgage-backed securities, flooding the money supply.

''The dollar has weakened as dollar bears have now added concerns on U.S. credit ratings to their arsenal,'' Kim said.

Earlier this month, the Obama administration hiked its forecast for this year's federal deficit to $1.84 trillion. The deficit is approaching $1 trillion for the budget year that began Oct. 1. Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upwards pressure on inflation, thus cutting the purchasing power of the dollar.

In other trading, the dollar fell to 1.1235 Canadian dollars from $1.1404 and slid to 1.0833 Swiss francs from 1.0936 francs late Thursday.

Spain loses AAA rating
YAHOO
May 28, 2010

LONDON – Fitch Ratings cut Spain's credit rating on Friday, saying the government's efforts to reduce debt will weigh on economic growth in coming months — another blow to Prime Minister Jose Luis Rodriguez Zapatero's efforts to shore up confidence in state finances. Full story here.

The ratings agency cut the country's rating one notch from AAA to AA plus, saying Zapatero's efforts to close the budget deficit "will materially reduce the rate of growth of the Spanish economy over the medium term."

The ratings agency decision echoes concerns from economists that efforts to cut state debt will also withdraw stimulus from the economy and hinder growth. Lower growth in turn means gathering less in tax revenues.

Spain currently has an unemployment rate of 20 percent and is struggling with large deficits and the hangover from a collapsed housing and real estate boom like that in the U.S.

On Thursday, Zapatero's austerity package freezing pensions and cutting civil servants' wages passed by just one vote in Parliament. The narrow margin underscored the government's shaky position in parliament and the depth of resistance by unions to austerity measures.

The measures — which aim to cut spending by euro15 billion ($18.4 billion) this year and next and reduce Spain's oversized deficit — have been welcomed by the European Union and the International Monetary Fund but much criticized at home as a major reversal by the Socialists. The cuts are designed to reassure markets that Spain's government debt problems won't mushroom into a Greek-style crisis.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

LONDON (AP) — Fitch Ratings has cut Spain's credit rating, saying the government's efforts to reduce debt will weigh on economic growth in coming months.

The ratings agency cut the country's rating one notch from AAA to AA plus, the company said in a statement.

Credit Agency Warns U.S. and Others of Risk to Top Rating
NYTIMES
By DAVID JOLLY
March 15, 2010

PARIS — The United States, Germany and other major economies have moved “substantially” closer to losing their top-notch credit ratings and can not depend solely on economic growth to save them, a report warned on Monday.

The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently “stable,” Moody’s Investor Service wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Greece, Portugal and other countries that are already in far worse shape have been rocked by strikes and other protests in recent weeks as they try to adopt tough austerity measures.

Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.

Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. Last May, Moody’s cut Japan’s Aaa rating to Aa2, an acknowledgement of the market’s growing unease with the debt burden of the Asian country.

In the United States, the Obama administration estimates that the deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.

For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10.0 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

In Britain, Moody’s said, the risk is that tax receipts fail to keep pace with forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver. In that situation, the debt — which the government already predicts will stabilize at around 90 percent of G.D.P. — could balloon, undermining the credit rating.

In comparison to both Britain and the United States, the report noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not rise substantially.

Pierre Cailleteau, managing director of sovereign risk at Moody’s, noted that “discretionary fiscal adjustment” — cutting programs or raising taxes — has become “the principal means of repairing the damage that the global crisis has inflicted on government balance sheets,” and it remains to be seen whether governments are capable of carrying out the painful measures necessary.

“Growth will support some governments’ adjustment plans more than those of others,” Mr. Cailleteau said in the report, “but no government can rely on it.”

There is also a danger that, with governments unwilling or unable to begin withdrawing stimulus, central banks could take the initiative to raise interest rates before the economy is ready, the report found. Such a situation might “quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.”

Moody’s praised Spain’s recent efforts to address its finances, although “its adjustment process will undoubtedly be drawn out and painful.”

As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.

Deficit imperils U.S.'s top credit rating
Washington Times
Patrice Hill
Thursday, February 4, 2010

The United States is drawing closer to the kind of debt crisis plaguing some European countries, where a financial emergency forces political leaders to make draconian spending cuts and tax increases to maintain the confidence of international investors.

Moody's, a top Wall Street credit agency, brought the U.S. closer to such a point this week by, for the first time, warning that the U.S. could lose its gold-plated AAA credit rating in coming years unless it quickly puts into place plans to curb budget deficits of more than $1 trillion that have the potential to destabilize government finances and the financial markets.

"Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in [President Obama's Feb. 1 budget] will at some point put pressure on the AAA-government bond rating," Moody's said in a report Tuesday.

Mr. Obama and Senate leaders, during negotiations last month over a $1.9 trillion increase in the government's debt limit, had hoped to put into place a process for coming up with major budget reductions by creating a bipartisan commission to recommend ways of reducing the debt that Congress could consider by the end of the year.

But the commission proposal failed to pass, and Republicans immediately dismissed a back-up plan for the president to create a commission by executive order with the same mission.

Mr. Obama's budget includes the commission plan for tackling the deficit, while offering one major concrete stab at deficit control: a three-year freeze on non-security discretionary spending expected to save $250 billion over 10 years.

Moody's senior credit officer, Steven Hess, called the freeze a "positive step," but said that it won't bring deficits down to a level where they no longer pose the threat of a fiscal crisis.

That would occur when the debt gets so large that interest payments on the debt are growing faster than the economy and government revenues, and the Treasury can no longer keep up with the debt payments while trying to fund the rest of the government.

"The debt trajectory is clearly continuously upward if further measures are not implemented," Mr. Hess said.

Moody's understands that "the government is constrained for the time being by the high unemployment rate," and that "a big fiscal adjustment right now would be politically difficult and could slow the economic recovery," he said.

But he cautioned that "extra spending for employment creation in the current fiscal year adds to the long-term debt" problem.

Some private watchdog groups have sounded the same warning as Moody's, though none of them has the power of the Wall Street rating agency to help bring about the budget crunch that they are predicting.

Similar, though less veiled, warnings by Moody's and other credit agencies triggered financial turmoil and played a critical role in forcing Ireland, Greece, Portugal and other European countries to take drastic measures to grapple with their huge debt problems in recent months.

Former Sen. Pete V. Domenici, New Mexico Republican and a major player in drafting bipartisan deficit reduction plans in the 1980s and 1990s, said today's political leaders need to focus on how serious the debt problem has become.

"For the first time in our nations history, we risk undermining U.S. economic and military strength and becoming a second-rate power," he said, adding that he is particularly "concerned about the unprecedented level of U.S. debt held by foreign creditors," which leaves the U.S. vulnerable to the whiplash of sentiment changes in international financial markets.

It doesn't matter whether the debt was created by Republicans or Democrats, he added, "the severity of this problem will require members of both parties to come together to find a solution."

Jerry Jasinowski, former president of the National Association of Manufacturers, credits Mr. Obama for trying to get bipartisan action on the economy and deficits.

Republicans should "see if common ground can be found," he said. "Historically, the Democrats resist spending cuts, especially for entitlement programs, and the Republicans have hissy fits at the mere mention of tax increases. But leadership demands tough decisions. We must have some combination of spending cuts and tax increases. There is no other way."

Mr. Jasinowski said that while the current economic challenges are the most "daunting" since the Great Depression, a crisis can be averted.

He noted that bipartisan cooperation between the Clinton administration and the Republican-led Congress in the 1990s produced three years of budget surpluses and a dynamically growing economy.

While no one knows for sure what would happen if U.S. Treasury bonds - once considered the safest haven for investment in the world - were to lose their AAA status from Moody's or other credit-rating agencies, cash-strapped countries in Europe who have lost their AAA ratings are providing a clue about the consequences.

Ireland, which lost its AAA rating last summer as it financed unprecedented large bank bailouts and recession-related spending, was forced to make drastic cuts in spending and raise taxes to ensure it can continue to borrow at affordable rates. Other European countries, including Greece, Italy and Portugal, have faced similar or worse pressures, and their struggles have cast a cloud over the economic outlook for the entire European Union.

Japan's sovereign debt was downgraded from AAA status last year without major consequences. But Japan's savings rate is high enough to finance its own deficits, something not true of the U.S.

On the other hand, a U.S. downgrade could have greater consequences than elsewhere because of the dollar's status as the world's reserve currency and Treasury's status as the world's leading safe haven for investors.

Stocks Waver as Investors Worry About US Debt Load
By THE ASSOCIATED PRESS
Filed at 10:41 a.m. ET
May 22, 2009

NEW YORK (AP) -- Stocks wavered early Friday after a slide in the previous session as investors fretted over the health of government balance sheets.

Trading was quiet ahead of the long Memorial Day holiday weekend.

Investors are asking how the U.S. will pay for its programs to revive the economy and stabilize the banking system after a credit rating agency on Thursday issued a warning that Britain's credit rating could be lowered because of its huge debt load. Those fears spilled over to the U.S., which is also selling debt at a rate of billions per week to bankroll programs aimed at fighting the recession. That helped push the dollar to its weakest level against the euro since January.

''The crisis of deficit financing and deficit spending is moving its way up the food chain,'' said John Brady, senior vice president of global interest rate products at MF Global in Chicago. He said investors are worried about whether the economy will be able to recover if interest rates are higher and the dollar is weaker.

Some bright spots kept selling in check. Banks reduced borrowing from the Federal Reserve's emergency loan program over the past week, and investment banks didn't borrow at all during the week -- the first time that's happened since early September. Also several retailers posted better-than-expected results including Sears, Gap and Aeropostale Inc.

In midmorning trading, the Dow Jones industrial average rose 24.14, or 0.3 percent, to 8,316.27. The Standard & Poor's 500 index rose 2.79, or 0.3 percent, to 891.12, and the Nasdaq composite index rose 4.48, or 0.3 percent, to 1,699.73.

The Dow's drop Thursday was its fourth in five days, but the blue chips began Friday's trading with a gain of 0.3 percent for the week because of a rally Monday.

Bond prices fell slightly, pushing the yield on the 10-year Treasury note up to 3.39 percent from 3.37 percent late Thursday. The 10-year note is a widely used benchmark for home mortgages and other kinds of loans.

The dollar was lower against most other major currencies on worries over a possible downgrade to the U.S. government's credit rating. Gold prices rose about 1 percent as investors looked for safe assets.

Financial stocks traded mixed after the biggest bank failure of the year. Federal officials late Thursday seized Florida thrift BankUnited FSB in a move that is expected to cost the Federal Deposit Insurance Corp.'s insurance fund $4.9 billion. It's the costliest hit since last year's seizure of California lender IndyMac Bank that is estimated to have cost $10.7 billion.

BankUnited is the 34th federally insured lender to be closed this year and Florida's largest banking institution with about $13 billion in assets. A group of investors led by former North Fork Bancorp Chairman and CEO John Kanas bought the bank for $900 million.

In corporate news, Sears Holdings Corp. turned in an unexpected profit for its fiscal first quarter, rebounding from a loss a year earlier, as the retailer worked to manage inventory. The stock jumped $8.58, or 17.1 percent, to $58.77.

Gap Inc. rose 11 cents to $16.09 after reporting better-than-expected earnings for the first quarter after the market closed on Thursday. It said sales at its less expensive Old Navy chain fell at a slower pace than a year earlier.

Campbell Soup Co. said its fiscal third-quarter earnings fell sharply from a year earlier, when profits benefited from the sale of its Godiva Chocolatier brand. Excluding the sale, profits rose even as sales fell. The stock rose 27 cents to $27.06.

In other trading, the Russell 2000 index of smaller companies fell 1.34, or 0.3 percent, to 479.88.

About seven stocks rose for every six that fell on the New York Stock Exchange, where volume came to 218.7 million shares.

Oil fell 5 cents to $61 per barrel.

Overseas, Japan's Nikkei stock average fell 0.4 percent. In afternoon trading, Britain's FTSE 100 slipped 0.1 percent, Germany's DAX index fell 0.4 percent, and France's CAC-40 lost 0.3 percent.

Warren Buffett Unusually Silent on Credit Rating Agencies
NYTIMES
By DAVID SEGAL
March 18, 2009

In his annual Berkshire Hathaway letter, Warren E. Buffett recently urged investors to pose tough questions at the shareholders meeting in May. Here is one on the mind of some Buffett watchers: When are you going to fix Moody’s?

Mr. Buffett, known as the Oracle of Omaha, owns a stake of roughly 20 percent in the Moody’s Corporation, parent of one of the three rating agencies that grade debt issued by corporations and banks looking to raise money. In recent months, Moody’s Investors Service and its rivals, Standard & Poor’s and Fitch Ratings, have been prominent in virtually every account of the What Went Wrong horror story that is the financial crisis.

The agencies put their seals of approval on countless subprime mortgage-related securities now commonly described as toxic. The problem, critics contend, is that the agencies were paid by the corporations whose debt they were rating, earning billions in fees and giving the agencies a financial incentive to slap high marks on securities that did not deserve them.

At least 10 of the big companies that failed or were bailed out in the last year had investment-grade ratings when they went belly up — like deathly ill patients bearing clean bills of health.

Moody’s rated Lehman Brothers’ debt A2, putting it squarely in the investment-grade range, days before the company filed for bankruptcy. And Moody’s gave the senior unsecured debt of the American International Group, the insurance behemoth, an Aa3 rating — which is even stronger than A2 — the week before the government had to step in and take over the company in September as part of what has become a $170 billion bailout.

Mr. Buffett, 78, one of the world’s richest men, is known for piquant and unsparing criticism of his own performance, as well as the institutional flaws of Wall Street.

But on the subject of the conflict of interest built into the rating agencies’ business model, Mr. Buffett has been uncharacteristically silent — even though that conflict is especially glaring in his case because one of the companies that Moody’s rates is Berkshire. (Its Aaa rating, for the record, is the same as the one from Standard & Poor’s. Fitch downgraded Berkshire for the first time last week.)

Mr. Buffett also seems to have said nothing about a problem that some contend is just as serious and endemic: because ratings are required in so many transactions, the agencies’ inaccurate ratings have no effect on their own bottom lines. And a company that is paid regardless of its performance is a company that will eventually underperform, says Frank Partnoy, a professor of law at the University of San Diego.

“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not,’ ” says Mr. Partnoy, a former derivatives trader. “If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,” Mr. Partnoy says, “and they’re not too happy about it.”

Mr. Buffett declined to be interviewed for this article. Of course, he has bigger problems on his mind than a company that makes up less than $2 billion of his $127 billion empire.

Berkshire Hathaway, the conglomerate he has run for decades, recently reported its worst year ever: in the fourth quarter, net income fell 96 percent to $117 million.

Short-selling Berkshire Hathaway has recently become a popular strategy, according to a report in Bloomberg News. But betting against Mr. Buffett has never been a profitable strategy in the long term, and the company’s class A shares, which now trade at about $82,000, way off the 52-week high of $147,000, look tempting to many analysts.

Justin Fuller, a partner at Midway Capital Research and Management and author of the blog Buffetologist, says that anyone buying shares of Berkshire now is essentially buying the company at its 2004 price and getting everything that Mr. Buffett acquired since then gratis.

“During the dot-com boom everyone said the old man had lost his touch, because he said he wouldn’t invest in technology companies,” Mr. Fuller says. “When all the brick-and-mortar stock valuations improved, he was lauded as a genius again. He’s able to recognize these manias and waits for the world to go crazy, then comes in as lender of last resort and scoops up assets on the cheap.”

Mr. Buffett has been scooping. In the last year, he dipped into his multibillion-dollar war chest and also sold some shares in a variety of companies to add to his holdings, which now include preferred shares of Goldman Sachs and General Electric, each of which pays Berkshire 10 percent annually on its investment.

But he has also made an ill-timed deal to buy shares of ConocoPhillips and he acquired two Irish banks that have fared poorly, decisions he describes in his annual letter as a few of the “dumb things” he did in 2008. He does not say much about his stake in Moody’s, and close readers of his letters say he has a history of highlighting some errors in order to obscure subjects he would rather not discuss.

“Warren deserves credit for his candor in admitting mistakes,” says Alice Schroeder, author of “The Snowball,” a biography of Mr. Buffett. “But he chooses which mistakes to discuss. It also pays to listen for the ‘dog that didn’t bark.’ ”

One of those nonbarking dogs, she says, is Moody’s.

“He hasn’t discussed publicly what he might be doing to influence the management at this time of crisis,” she says. “Last spring, he knew the rating agencies were deeply involved with the financial crisis. Since he didn’t sell Moody’s then, he should explain what he’s doing to influence the management.”

Moody’s, meanwhile, believes the ratings system may need tinkering but it is not broken.

Michael Adler, a Moody’s spokesman, said the company’s role was simply to assess the odds that a given bond issuer will default — in some cases, taking into account the possibility of government intervention. He said anyone who makes assumptions about the stock price of those issuers based on Moody’s findings about its bonds is misusing the data. (A lot of investors are misusing the data, in that case.)

Mr. Adler also stated in an e-mail message that there were potential conflicts of interest with any ratings system, whether issuers, government or investors pay.

“Moody’s, for its part, has implemented a series of changes and procedural safeguards to help mitigate potential conflicts and increase the transparency of our analysis,” Mr. Adler wrote. “That said, we believe that a healthy dialogue with regulators and other capital market participants is beneficial.”

But not all models for paying rating agencies are equally risky, says a former Moody’s managing director, Jerome S. Fons — and none is more vulnerable to conflicts of interest than the issuer-pays model.

Mr. Fons, who left the company in 2007 as part of a reorganization, says that Mr. Buffett has long found his connection to Moody’s a little awkward. Mr. Buffett never attended any board meetings, he says, and Berkshire has never bought any additional shares after it acquired its stake in 2000 as part of a deal with Dun & Bradstreet, then its parent company.

It is widely assumed that Mr. Buffett does not use rating agencies at Berkshire: like many leading investors, he employs his own researchers.

“I think he’d love to sell his stake in the company, but he can’t,” Mr. Fons says. “As soon as it was known that he was selling, the value of the company would plunge.”

It is hard to expect any capitalist to push for change that squeezes profits. Then again, Mr. Buffett is not just any capitalist. He is the closest thing that the United States economy has to a life coach.

Typically, chief executives who show up on television after announcing their worst year ever offer some variation of “Don’t worry, America, I’ll do better soon.” When Mr. Buffett appeared on CNBC last week, the subtext was more like, “Don’t worry, America, you’ll do better soon.” (He said that though the economy had “fallen off a cliff,” he was, as ever, bullish about the country’s long-term prospects.)

Mr. Buffett is more than just our reassurer in chief. He also has a history of speaking out against parts of the financial system he considers broken or unfair, even if those parts benefit him. He is one of the few superrich people in favor of steeper estate taxes, for instance.

Given how hard it would be to revamp the rating agencies, and given his credibility and the impact that reform would have on his portfolio, Mr. Buffett may be ideal for a job that no other executive or public official could do: rating agency reform.

“Nobody is better positioned than Buffett,” Mr. Fons says. “If he comes up with a good plan, people would pile on immediately. And if he really is a high-minded idealist, if he wants to leave a meaningful legacy, this would be it.”

Weston taxes: Not necessarily highest in state
Weston FORUM
Written by Kimberly Donnelly
Friday, 14 May 2010 00:00

Being number one is usually a good thing — unless it has to do with how much a town pays in taxes.

First Selectman Gayle Weinstein said earlier this week she is frustrated with the perception many people have that Weston has the highest tax rate in the state.

“We do have the highest taxes per capita,” Ms. Weinstein said. But, when it comes to an equalized mill rate — an indicator that takes into consideration when towns last did a revaluation — Weston ranks number 104 out of 169 municipalities in the state.

“The equalized mill rate is a far better indicator of a community’s tax burden,” Ms. Weinstein said.

Comparing taxes per capita means one simply takes the grand list — all of a municipality’s taxable property — and divides it by the number of taxpayers. Weston’s housing values are higher than average, and the population of the town is relatively small, thus skewing the “per capita” numbers, Ms. Weinstein said.

Municipalities set their tax rates in mills. A mill is equal to $1 for every $1,000 in assessed property value. But every five years, towns and cities are required to “revalue” property to reflect a more current market. Mill rates generally decline right after revaluation (because property values usually go up).

The problem is municipalities throughout the state are on different schedules for revaluation. An equalized mill rate considers all towns as if they were in the same point in the revaluation process.

The most recent equalized mill rate shows Weston’s is 13.63. That is lower than the state average of 14.13. And, it puts Weston’s ranking for relative tax burden at 104.

WESTON: From 2003 HOUR...the policy swings back to spending down the surplus in 2008, we suspect.

Interest-Rate Payoff on California I.O.U.'s
NYTIMES
By MICHAEL QUINT
July 3, 1992 - we wonder about this date, too (According to Wikipedia, Davis was State Comptroller - we think the Times misspelled his office - until 1995)

The inability of California to pay all its bills in cash is a black mark against its reputation in financial markets, but there is a silver lining for people and businesses who are issued i.o.u.'s instead of cash.

If the recipients of the i.o.u.'s hold the check-like pieces of paper, the state has promised to pay a 5 percent interest rate, which is much higher than the annual rate they could earn on a short-term bank deposit. If the i.o.u.'s are deposited or cashed at a bank, the bank will receive the 5 percent rate.

The 5 percent rate is well above average rates for money market accounts of 3.40 percent for large banks in Los Angeles and 3.30 percent in San Francisco. According to Bank Rate Monitor of North Palm Beach, Fla., investors would have to tie up their money in a bank certificate of deposit with a term of more than two years if they wanted to match the 5 percent rate being offered by the state.

Robert Heady, publisher of The Bank Rate Monitor, notes that the interest rate offered by the state is likely to become even more attractive in coming days as banks reduce rates on deposits in response to the Federal Reserve's move yesterday to ease monetary policy and cut short- term interest rates.

The 5 percent interest rate was set by California officials in the Pooled Money Investment Board, which handles investments of excess cash by state agencies. After talking with local bankers, the state agreed to pay the maximum 5 percent rate allowed by law.

"We asked for the maximum interest rate to compensate for the expenses of handling the paper and customer inquiries," said Gregory Wilhelm, director of government relations for the California Bankers Association. So far, the state has issued only about 20,000 of the i.o.u.'s, although it expects to issue about 800,000 if its cash shortage continues through July.

Gray Davis, the State Controller, said interest paid to banks and corporations would be subject to state tax. For individuals, he said, the state had not yet determined if the interest was subject to tax or was tax-exempt, like the interest on bonds issued by the state.

Not all the state's bills are being paid with i.o.u.'s. Payments to local school districts and bond investors, which are required by the state Constitution, are still being made in cash.

Op-Ed Contributor
Golden State Bailout
By JOE MATHEWS
NYTIMES
May 22, 2009

Los Angeles

IS California too big to fail?

That’s the question President Obama and Congress will soon face. While many states have severe fiscal problems, the depth and unusual persistence of California’s budget problems — the state has run deficits for most of the decade — has emptied Sacramento’s till. On its current path, California will run short of the cash it needs to pay its bills in late July.

It’s highly unlikely that the state’s political leaders will be able to fix the problem themselves. Typically, states build up a cushion of tax revenues in the spring to pay expenses through the fall, when little cash comes in. But enormous drops in tax revenue have left California without the savings to meet even one month’s worth of expenses.

The other methods of cash management — transfers to the general budget from other state accounts and short-term borrowing in the credit markets — are no longer enough to address the problem. California’s leaders have drawn so deeply in recent years on the state’s hundreds of special funds that there is little cash left to repurpose.

And selling short-term notes in the credit markets is difficult because of California’s credit rating, the lowest of any state. Even if the state could pay high interest costs, California may require more cash — more than $20 billion by some estimates — than it can plausibly acquire in the markets.

It is true that California’s Legislature and governor, Arnold Schwarzenegger, could take bold action to conserve cash. But the size of the deficit and the state’s governing system make such action next to impossible. A two-thirds vote of the Legislature is required to pass any budget or raise any tax in the state, and compromise has become a dirty word.

A legislative deal reached in February to address part of the budget problem came under such fierce attack from the left (for its spending cuts) and from the right (for its tax increases) that voters rejected five of its major components in a special election on Tuesday. The state Republicans, egged on by right-wing talk radio hosts, have started campaigns to recall two Republican lawmakers who voted for the compromise. California is not a patient that can heal itself.

What to do? Bankruptcy would appear to be out. Federal law authorizes only local governments, not states, to seek bankruptcy protection. Yet in California, irresponsible voices on the right (and a few on the left) have suggested testing the limits of the law and forcing the state to begin to delay or default on its obligations.

That would be a disaster, not only for California, but also for the country. Financial analysts fear that the failure of California’s government could further damage the state’s economy (and by extension, the nation’s) and shake confidence in the bond markets, making it difficult for cities and counties to borrow and perhaps sending some local governments into real bankruptcy.

Others in Sacramento — including the Assembly speaker, Karen Bass, and the state treasurer, Bill Lockyer — are investigating the possibility of federal assistance. This could take several forms. The Treasury could offer guarantees on any short-term bonds that California sells to raise cash. Or money from the Troubled Asset Relief Program could be used to backstop such notes. Or Washington could speed up some of the stimulus money earmarked for the state.

Each of those ideas, or a combination of the three, offers hope. However, as a condition of any assistance, the federal government should charge the state a fee that includes penalties if it fails to make major changes in its budgeting process. At a minimum, California should be required to submit for federal approval a multiyear plan to meet its obligations and to eliminate its structural deficit. Washington might also require the establishment of a board to oversee state finances. (Federal loan guarantees to New York City in the 1970s provide one model.)

There would be fierce resistance to federal aid. Other states may wonder why California deserves special attention — it’s a fair point, and it might be wise for the government to offer similar guarantees to other states in distress. California officials might worry about the loss of sovereignty. And Democrats in the administration and Congress, many of them Californians, may be tempted to help a Democratic state without conditions.
But they shouldn’t. By attaching strings to any aid, the federal government would give the state its best chance at saving itself.

Most important, President Obama should press California’s elected officials and its voters — 61 percent of whom supported him last November — to make constitutional changes. Among these would be the elimination of the gridlock-creating two-thirds vote for budgets and tax increases, and new curbs on ballot initiatives that mandate spending for popular programs without identifying new tax dollars to pay for them.

Federal officials may resist intervening at first, out of misplaced caution. But the combination of the state’s size and its dysfunction means that Washington will probably have to intervene sooner or later. There can be no American recovery if California collapses.

For USA too?
Rating Agency Lowers Its Outlook for Britain
NYTIMES
By JULIA WERDIGIER
May 22, 2009

LONDON — Britain was in danger of losing its AAA credit rating because of concerns by the Standard & Poor’s rating agency about the government’s deteriorating finances and the limited ability to lift the debt burden anytime soon.

The ratings agency on Thursday lowered its outlook to “negative” from “stable”, prompting Britain’s currency, the pound, to slide against the dollar, and stocks and bonds to decline.

“Even assuming additional fiscal tightening,” S.&P. said in a report, “the net general government debt burden could approach 100 percent of gross domestic product and remain near that level for the medium term.”

A rival agency, Moody’s, has a “stable” rating for Britain, and says it is not under review.

Prime Minister Gordon Brown, who is facing a general election next year, increased borrowing to rescue the banking system, lubricate the credit markets and cut some taxes to fuel consumer spending. Coupled with low interest rates, the money was intended to pull the country out of the recession but the spending program also burdened the government with the highest debt level since World War II.

Britain’s budget deficit reached £8.5 billion, or $13.4 billion, in April. The Treasury said earlier that it expected the deficit to reach £175 billion, or 12.4 percent of gross domestic product, this year, a forecast many economists called optimistic. The British economy shrank 1.9 percent in the first quarter, and the government expected the economy to contract 3.5 percent this year.

S.&P. “had to reflect the deteriorating fiscal situation and we won’t see any significant steps of fiscal tightening until after the election and that will calm the rating agencies,” said Brian Hilliard, a senior economist at Société Générale in London.

In the report, S.&P. estimated that Britain would spend up to £145 billion, or 10 percent of the G.D.P. expected for the year, to support the banking system.

The agency also voiced concern about “how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed and consequently the pace at which historically high fiscal deficits are likely to narrow.”

Losing its top-level credit rating would make it more difficult for Britain to raise money through bond sales and more expensive to finance its debt. If it happened, Britain would be the fifth country in Western Europe after Greece, Ireland, Portugal and Spain to have its credit rating lowered.

But Britain’s latest bond auction of £5 billion on Thursday was well received. The outcome came as a relief to the government after a similar sale in March failed to attract enough buyers. The sale is part of the government’s plan to auction £220 billion of gilts this year.

Stamford tries to keep credit rating amid downturn
Stamford ADVOCATE
By Stephen P. Clark
Article Launched: 04/25/2008 01:00:00 AM EDT

STAMFORD - Before the city holds its first bond sale in more than two years next month, it must get past the credit rating agencies.

That's who determines whether Stamford keeps its AAA rating.

City officials will meet with Standard & Poor's today and Moody's Investors Service next week.

The agencies will examine financial performance, debt management, economic conditions and other factors.

City officials will take analysts from each agency on a tour of Stamford to show them the economic development that is under way, Director of Administration Sandra Dennies said.

Stamford has had an AAA bond rating since 1996, when Mayor Dannel Malloy first took office. If the city's bond rating is downgraded, it may have to insure the bonds it issued.

States and municipalities issue general obligation bonds to fund public projects. The interest rate paid on these bonds depends mostly on ratings assigned to them by the three major credit rating agencies - S&P, Moody's and Fitch Ratings.

For example, AAA bond ratings yield lower interest rates than A bond ratings. A municipality issuing an A bond rating usually pays considerably more interest over the life of the bond, leading to higher taxes for residents.

"Cities that do not have a AAA bond rating, that have to have their bonds insured, are paying dearly for that," Dennies said.

On May 13, the city plans to sell $88 million in general obligation bonds. Of that amount, $47 million will pay off a short-term bond from last year, and the rest will help finance the $72.5 million capital budget for the next fiscal year. The city also may refinance $18 million in bonds at lower rates later this year.

The credit rating agencies will review, among other things, the city's $383 million in bonded debt, its $200.8 million post-employment benefits liability and the unemployment rate.

Last month, the unemployment rate in Stamford hit 4.5 percent, up from 3.6 percent during the same month last year, according to the city's financial adviser, Chris Martin of Webster Bank. Although the rate has risen, it is favorable compared with the state's 5.5 percent rate and Fairfield County's 4.9 percent, Martin said.

The city had no bond sale last year, Dennies said, partly because of the 2006 property revaluation, the first one in seven years, which drew heavy criticism.

The most recent bond sale was in February 2006, when it issued $59 million in general obligation bonds to help finance the Stamford High School construction project, a public safety radio system, the Urban Transitway project and the redesign of several railroad underpasses.

Moody's assigned Stamford a AAA rating in part because the city changed its Charter to allow the accumulation of reserves in a rainy day fund.

"Moody's believes the city will continue to enhance its improved financial position due to a revision to Stamford's previously restrictive Charter," the report read. "Due to state aid reductions, poor investment earnings and overtime expenses, the city's fund balance was reduced to a narrow $5.2 million (just 1.6 percent of revenues) in fiscal 2002. Revenue enhancements and spending and hiring freezes enabled the city to improve its general fund position to $17.3 million (4.8 percent of revenues) in fiscal 2004."

Rating agencies recommend that municipalities maintain a rainy day fund that is at least 5 percent of the total budget.

The review comes as state Attorney General Richard Blumenthal investigates the rating agencies' use of a dual system for bonds. Blumenthal testified last month before the U.S. House Committee on Financial Services that the practice should be banned.

"Wall Street profits, Main Street pays," Blumenthal said. "The current dual system of rating bonds issued by state and local governments is dangerously misleading and misguided. It imposes a secret Wall Street tax on states, cities and school districts across this nation. Rating agencies admit that municipal bonds frequently receive substantially lower credit ratings than corporate bonds with the same or worse rates of default. This dual rating system costs municipalities in Connecticut and around the country millions of dollars in unnecessary interest and fees every year."

Martin said the investigation shouldn't affect Stamford's review.

"It's really kind of business as usual to the extent that the city has capital needs, has a well-articulated plan for addressing them and is going to the market to get the lowest rate possible," he said. "We have every expectation that it will be a favorable outcome."