Economic Calendar

Saturday, March 10, 2012

Obama’s Re-Election Case Bolstered as Jobs Data Point to Stronger Economy

By Mike Dorning - Mar 10, 2012 2:01 AM GMT+0700
Alan Krueger on U.S. Jobs Report, Economy

A surge in new jobs last month that held the U.S. unemployment rate to 8.3 percent highlights a strengthening economy that bolsters President Barack Obama as he approaches the November election .

The jobs report “is another plus for the president,” said Stu Rothenberg, editor of the nonpartisan Rothenberg Political Report in Washington.

President Barack Obama at the Daimler Trucks North America Freightliner plant in Mount Holly, North Carolina on March 7, 2012. Photographer: Nell Redmond/UPI/Landov

March 9 (Bloomberg) -- James Guyette, chief executive officer of Rolls-Royce North America, talks about the February employment report, the outlook for U.S. economy and expansion prospects for the company. Guyette speaks with Mark Crumpton on Bloomberg Television's “Bottom Line.” (Source: Bloomberg)

“These numbers suggest the economy is moving in the right direction,” he said. “It’s likely to make people more optimistic, and that’s always, always good for an incumbent president.”

Employers added 227,000 jobs in February, more than forecast, the Labor Department reported today in Washington. The median projection of economists in a Bloomberg News survey called for a 210,000 increase. Job growth was revised upward for the prior two months.

The unemployment rate held steady after dropping for five consecutive months from 9.1 percent in August.

“For voters who are used to an unemployment rate that starts with a 9, this looks like progress,” said Dan Schnur, a campaign adviser to Republican presidential candidate John McCain’s first bid for the White House in 2000. “It might not be a huge victory for Obama’s re-election campaign. But it’s not going to be a significant drag on him either.”

‘Better Days Ahead’

Obama said the jobs report shows “the economy is getting stronger” in a speech today to workers at a Rolls-Royce Holdings Plc (RYCEY) factory in Prince George County, Virginia, that manufactures jet engine parts. “It gives me confidence there are better days ahead.”

Rick Santorum, a former Pennsylvania senator seeking the Republican Party’s 2012 presidential nomination, said today the economy is recovering “in spite of” the Democratic Obama administration’s policies.

“Certainly a quarter of a million jobs, roughly, being added is a positive step forward,” Santorum said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend.

The administration “has consistently seen, you know, bad job reports because of bad policies that have led to those job reports,” he said. “And eventually, you know, the economy does recover, in spite of the headwinds that this administration has put in its place.”

Gasoline Prices

The strengthening economy is beginning to translate into greater public optimism, even with recent increases in gasoline prices.

Consumer confidence climbed to a four-year high last week, according to the Bloomberg Consumer Comfort Index (COMFCOMF). For a fifth straight week, half of those surveyed also rated their personal finances as positive, bolstered by a resilient stock market, faster job growth and rising wages.

The Commerce Department last week reported that the economy grew at a 3 percent annual pace in the final quarter of 2011, up from a 1.8 percent gain the prior three months.

A pickup in economic growth during an election year is helpful to an incumbent president such as Obama, said Christopher Wlezien, a political science professor at Temple University in Philadelphia and co-author with Robert Erikson of the forthcoming book “The Timeline of Presidential Elections.”

“It matters more and more as time goes by. It probably matters more now than it did three months ago,” he said.

Slow Improvement Forecast

While potential threats loom -- such as further gasoline price increases, a war in the Middle East or a worsening of the European debt crisis -- most private forecasts anticipate slow improvement in the unemployment rate in the months before Election Day, Nov. 6.

“Over the last several months, the economy has gone from being a net negative for Obama to probably something close to a wash,” said Schnur, director of the Unruh Institute of Politics at the University of Southern California in Los Angeles, interviewed before the release of the jobs report.

The trajectory of the economy is typically much more important in presidential elections than the actual unemployment rate, Wlezien said.

“The point is really are we getting better or are we getting worse and how fast is it changing,” Wlezien said. “Whether the unemployment rate is 6 percent or 9 percent matters less.”

Reagan’s Victory

For example, there was not much difference between the 7.5 percent unemployment rate when President Jimmy Carter lost re- election in November 1980 and the 7.2 percent rate four years later when President Ronald Reagan won re-election by a landslide, he said.

The distinction was the trend lines as each president went before voters. Under Reagan, unemployment had dropped 1.3 percentage points during the 12 months before the election; under Carter, joblessness had risen 1.6 percentage points over the same time period.

The median projection for unemployment during the final quarter of the year is 8.1 percent, according to a Bloomberg News survey of 75 economists conducted Feb. 3 to Feb. 9.

Joel Prakken, senior managing director of Macroeconomic Advisers LLC in St. Louis, who is among those projecting the 8.1 percent jobless rate, said a drop below 8 percent by the election is “within the margin of error” of the forecast. That would break a psychological barrier and further boost public confidence, he said.

Monthly Surprises

“I wouldn’t discount the possibility,” Prakken said. “It’s surprised many how quickly the unemployment rate has fallen. If we just got one or two more monthly surprises, it could be below 8 percent before the election.”

Unemployment rates are difficult to project as the economy recovers from recession because of the way the indicator is computed, Prakken said. Only people actively seeking work are counted as unemployed. As an economy improves, workers who had given up looking for a job typically resume seeking one and consequently add to the number of people counted as unemployed.

The economy needs to add 125,000 jobs per month to keep up with population growth, Prakken said. Employment growth must be higher if discouraged workers pour back into the job market, as happened in February.

The labor force participation rate, the share of working- age people who either have a job or are seeking one, rose in February to 63.9 percent from 63.7 percent.

Underemployment Drops

The so-called underemployment rate, which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking, decreased to a three-year low of 14.9 percent from 15.1 percent.

The slow-growth scenario that most forecasters anticipate sets the stage for a “classic glass-half-full, glass-half-empty argument” between the political parties over the jobless rate during the summer, Schnur said.

Republican front-runner Mitt Romney previewed just such a critique on the night of the Super Tuesday Republican primaries on March 6, arguing that 8.3 percent unemployment may be the best the Obama administration can achieve, yet the country “can do better” than an 8 percent rate.

The White House has focused on the progress made since Obama took office in January 2009. The U.S. lost 818,000 jobs that month.

“We’re picking up from a relatively slow growth rate,” Prakken said. “It’s good news for the president but it’s still pretty dicey.”

To contact the reporter on this story: Mike Dorning in Washington at

To contact the editor responsible for this story: Steven Komarow at


Greece Deal Triggers $3B in Default Swaps: ISDA

By Abigail Moses and Mary Childs - Mar 10, 2012 7:57 AM GMT+0700
ISDA Says Greece Deal Triggers $3B in Default Swaps

A committee of credit-default swaps traders will expedite an auction to settle about $3 billion of contracts tied to Greece after the nation took steps to force investors to participate in the biggest sovereign-debt restructuring in history.

Traders will hold the auction March 19 to “maximize” the number of bonds that can be used to set payout amounts, the New York-based International Swaps and Derivatives Association said on the committee’s website yesterday. Auctions, which set a recovery value on the underlying bonds, typically are held about a month after credit events are triggered.

Evangelos Venizelos, Greece's finance minister, during a news conference in Athens on March 9, 2012. Photographer: Kostas Tsironis/Bloomberg

March 9 (Bloomberg) -- Hans Humes, president of Greylock Capital Management, talks about the credit event declared by the International Swaps & Derivatives Association with regard to Greece's use of collective action clauses forcing investors to take losses under the nation's debt restructuring. The ISDA's determinations committee ruled the use of CACs is a restructuring credit event, triggering payouts on $3 billion of default insurance. Humes speaks with Adam Johnson, Trish Regan and Michael McKee on Bloomberg Television's "Street Smart." (Source: Bloomberg)

March 9 (Bloomberg) -- Peter Tchir, founder of TF Market Advisors, talks about the International Swaps & Derivatives Association's determination that Greece's debt restructuring will trigger payouts on default insurance. He speaks with Mark Crumpton on Bloomberg Television's "Street Smart." (Source: Bloomberg)

March 9 (Bloomberg) -- Michael Harris, director of trading at Campbell & Co., and John Herrmann, president of Herrmann Forecasting LLC, talk about the triggering of payouts on Greek default insurance and the U.S. economy. They speak with Trish Regan, Sara Eisen and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

March 9 (Bloomberg) -- Joseph Tanious, a market strategist at JPMorgan Asset Management, and Todd Schoenberger, a managing director at Landcolt Trading LLC, talk about Greece’s debt restructuring, the global economy and investment strategy. They speak with Trish Regan, Lisa Murphy and Adam Johnson on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

March 9 (Bloomberg) -- Italy's Deputy Finance Minister Vittorio Grilli said the use of collective action clauses in a Greek debt restructuring won't necessarily constitute a credit event. David Tweed reports from Milan on Bloomberg Television's "The Pulse" with Maryam Nemazee. (Source: Bloomberg)

Audio Download: Gross Says Greek Default Swaps to Be Triggered

Greece’s use of collective action clauses forcing investors to take part in the sovereign restructuring should trigger $3 billion of insurance payouts under rules governing credit-default swap contracts. Photographer: Kostas Tsironis/Bloomberg

The viability of credit swaps as a hedge for about $257 billion of government debt was questioned after ISDA rejected a request on March 1 to declare whether the swaps were triggered because the restructuring effectively subordinated private investors to the European Central Bank. Banks, hedge funds and institutional investors use swaps to protect against losses or to speculate on creditworthiness.

“It’s important to keep investor confidence in this instrument as it will affect the ability of sovereigns to issue bonds,” according to Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam, who said the decision will “restore confidence” in the market. “If you want to attract investor demand, you have to offer them an instrument that will allow them to hedge exposure, and CDS is the best instrument for that.”

Collective Action

Greece’s use of collective action clauses, or CACs, in its debt restructuring triggers payouts on the contracts, ISDA’s determinations committee said in a statement yesterday. Before the ruling, the cost of five-year Greek swaps rose to a record $7.68 million upfront and $100,000 annually to insure $10 million of debt.

Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after the CACs are triggered, the Finance Ministry said. Bondholders tendered 152 billion euros ($199.5 billion) of Greek-law bonds, or 85.8 percent, and 20 billion euros of foreign-law debt. Greece extended its offer to holders of non-Greek law bonds to March 23, after which sweeteners will no longer be available.

‘Preliminary List’

“ISDA has already been working with members to put together a preliminary list” of bonds that can be used in the auction, ISDA General Counsel David Geen said on a conference call with reporters yesterday.

The committee is considering “the range of obligations that are either currently outstanding or may be outstanding once some of these exchanges occur,” ISDA Chief Executive Officer Robert Pickel said on the call.

In a restructuring credit event, investors have the right to choose whether to settle their contracts.

Policy makers including former ECB President Jean-Claude Trichet opposed payouts on Greek swaps on concern traders would be encouraged to bet against failing nations and worsen the region’s debt crisis.

A swaps trigger “raises the question of which country is next and which banks are most exposed,” Hank Calenti, a bank analysts at Societe Generale SA in London, wrote in a note. “Less than six months ago we had the head of the ECB exhorting that there must be no credit event on Greece.”

Swaps Stigma

While policy makers had hoped to achieve debt sustainability in Europe’s most indebted nations without triggering default swaps, political determination to avoid the stigma of a credit event waned as Greece struggled to meet the terms of its bailout.

Standard & Poor’s downgraded the nation to selective default on Feb. 27 after the government retroactively inserted CACs into bond terms. Moody’s Investors Service, which downgraded the nation’s sovereign rating to its lowest level of C on March 2, said today it considers the nation to have defaulted.

Greece reached its target for participation in the debt restructuring after using CACs to force the hand of holdouts.

“I’ve been surprised throughout at the strong desire not to trigger CDS,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “This should be good for anyone seeking protection elsewhere, such as Spain or Italy.”

ISDA’s Geen said the determination should resolve concerns that credit swaps aren’t effective hedges.

Issue ‘Moot’

“That issue, of course, is moot at this point,” he said, “but we think it’s a fair question.” ISDA definitions contain “a number of conditions that must be met before a credit event can occur, which are important to balance the interests of the buyer and the seller,” he said.

Credit-default swaps on Greece cover $3.16 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps payout of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.

The actual payout on Greece will be “much smaller” than the net amount reported by DTCC, Pickel said. A gross $68.9 billion of contracts were outstanding as of March 2 before accounting for offsetting trades.

While there were concerns at the time about a daisy chain of losses if counterparties failed to meet their commitments, the settlement of swaps guaranteeing debt of Lehman, as well as Fannie Mae and Freddie Mac, were “orderly” and caused no major disruptions for the market, according to regulators.

Restructuring Events

Swaps on western European governments can pay out on a credit event triggered by failure to pay, restructuring or a moratorium on payments. A restructuring event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to ISDA rules. Any of these changes must result from deterioration in creditworthiness, apply to multiple investors and be binding on all holders.

The determinations committee which decides whether a credit event has occurred consists of representatives from 15 dealers and investors. The group, which includes Deutsche Bank AG (DBK), Pacific Investment Management Co. and Morgan Stanley, rules after a request is made by a market participant.

The trigger is “a better outcome for markets,” said Jason Brady, a managing director at Thornburg Investment Management Inc., which oversees about $81 billion from Santa Fe, New Mexico. “It means people got what they expected. Yeah, Greece defaulted. We’re not changing that fact at all; why make other parts of the market say something different just because you don’t like that part of the market?”

To contact the reporters on this story: Abigail Moses in London at; Mary Childs in New York at

To contact the editors responsible for this story: Paul Armstrong at; Alan Goldstein at