Finance Blog number 1

CHICAGO — U.S. consumers are starting to look like a frugal, debt-fearing lot as they pay down billions of dollars in credit-card obligations. But an alarming trend is emerging: A small but growing number of people are skipping mortgage payments in favor of paying their credit card bills.

In an unprecedented shift, for some consumers having a credit card in good standing appears to have taken priority over having a roof over one’s head, experts said.

"This is not a carefree or nonchalant decision," said Ezra Becker, director of consulting and strategy at TransUnion, the credit-tracking firm. "But it really is a clear illustration of the impact this recession has had on consumer preferences and behavior."

While overall consumer debt rose unexpectedly in January, consumers continued to pay off their credit cards that month — a record 16th straight month of lower credit card debt — with such debt dropping about $1.7 billion to $864.4 billion, according to the Federal Reserve.

But a small slice of those consumers are paying down credit cards to the detriment of their mortgage loans. The number of consumers delinquent on their mortgages but current on their credit cards rose to 6.6 percent in the third quarter of 2009 from 4.3 percent in the first quarter of 2008, according to a TransUnion study of 27 million anonymous consumer records pulled randomly from its database. Meanwhile, the portion of those who fell behind on credit-card payments but paid their mortgage dropped to 3.6 percent from 4.1 percent.

TransUnion calls it the new "payment hierarchy" and first began noticing the shift in the fourth quarter of 2007. Experts thought the pattern would reverse itself once the worst of the recession passed, but TransUnion’s latest study confirms that the new behavior is becoming more prevalent and stretches across all income groups.

The trend is more common among consumers with the lowest credit scores. The percentage of consumers with low scores who paid credit cards rather than home loans shot up to 29 percent in the third quarter of 2009 from 19.1 percent in the fourth quarter of 2007, according to TransUnion. And in that low-credit-score group, consumers falling behind on credit cards but keeping pace with mortgage payments declined to 14.5 percent in 2009 from 18.1 percent in the first quarter of 2008.

But mortgage-payment problems are moving up the credit score ladder, according to FICO, the credit score company. A recent FICO Score Trends report found that mortgage-default risk for consumers with high scores now exceeds their credit card default risk, "reversing a long historic trend."

In 2009, 0.3 percent of consumers with FICO scores between 760 and 850 fell into arrears on real estate loans, versus 0.1 percent who did on credit cards.

In 2009, credit card accounts were 1.6 times more likely to become 90 days late than were mortgages, a steep drop from 2005 when credit card accounts were more than three times likely to fall behind 90 days, according to FICO.

Although the numbers are small, the trend is disturbing, said Mark Greene, chief executive of FICO. "We’re identifying lending-industry situations in FICO Score Trends that, to our knowledge, have never been seen before," he said in the report.

You can blame those trends on a deep economic slump that’s pulled the rug out from under long-held jobs, home values and retirement accounts. And, in the wake of a new credit card law as banks tighten the screws on who gets credit and how much they get, some consumers are getting more protective of their credit cards. Plus, with the unemployment rate at a hefty 9.7 percent, people are worried about losing their jobs and perhaps needing their plastic to get by.

On top of that, home values have taken a beating, and many homeowners now find themselves underwater on their home loans, meaning the mortgage outweighs the current value of the real estate. For some, holding on to the undervalued house suddenly doesn’t look like the smartest thing to do now.

"The combination of all these things makes some consumers think that paying money on the mortgage might not be in their best interest relative to the credit card," said TransUnion’s Becker. "If I’m unemployed, I need to rely on the credit cards to get me through it till I get a job."

Another thing to consider, Becker said, is that customers get kicked off credit cards far more quickly than they get kicked out of their homes. It could take a year or longer to get thrown out on the streets; a bank can pull a credit card in default in 90 days, or even less if payments are habitually late.

The mortgage mess isn’t done yet, even as the economy hobbles its way into a recovery. Rachel Bell, FICO’s senior director of analytics, said she expected to see more consumers with high scores go into the home-foreclosure process, particularly on their second homes, as interest rates rise on adjustable-rate mortgages.

"If they have second homes, they’re more willing to walk away," she said. "But even on first mortgages, there are these strategic default decisions we’re seeing where consumers are willing to walk away from a home. If they’re under water financially, they don’t see the benefit of holding on to it."

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Although the foreclosure rate nationwide slipped 2 percent in February from the previous month, Florida continues to be dogged by an increasing number of foreclosures, according to the latest numbers from RealtyTrac.

In fact, foreclosure activity in the Sunshine State rose by nearly 15 percent in February, over the previous month, and was up more than 16 percent from the prior-year period, according to the Irvine, Calif.-based online real estate company.

Florida also continued to post the nation’s second-highest total number of foreclosures, with 54,032 properties receiving a foreclosure filing in February.

Although still up, the number of foreclosures in Broward County appears to have eased a bit in February, when there were 7,872, or one in every 102, homes in foreclosure. That was up just 2.54 percent from January, when there were 7,677 homes facing default.

Year-over-year, filings were up 48 percent in Broward. In February 2009, there were 5,318 homes in foreclosure.

The picture was even more bleak in Palm Beach County, where there were 4,490, or one in every 143, homes in foreclosure totally free credit score. That was up 62.5 percent from a month earlier, when there were 2,762 foreclosures filed, and up 68.4 percent from February 2009, when there were 2,665 foreclosure filings.

In Miami-Dade County, there were 6,671 foreclosures, or one in every 147 homes, up 44 percent from a month earlier, when there were 3,393 filings, and up 86.6 percent from a year earlier, when there were 3,575 filings.

Nationwide, California continued to lead the way in foreclosure activity, with 68,562 properties receiving a foreclosure filing in February, down nearly 5 percent form the previous month and down 15 percent from a year ago.

Despite a 21 percent drop in foreclosure activity from the previous month, Arizona ranked second highest among states. Florida ranked third for foreclosure activity.

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The unemployment rate in the U.S. held at 9.7 percent in February and employers cut fewer jobs than anticipated, indicating improvement in the labor market even as East Coast blizzards forced temporary closings of some businesses.

Payrolls dropped by 36,000 last month after a revised 26,000 decrease in January, a Labor Department report showed yesterday in Washington. The jobless rate, which has not increased since October, held at 9.7 percent, even as more people entered the workforce.

Stocks and the dollar rallied while Treasuries fell as investors reckoned the economy would have added jobs were it not for seasonal snowfall records in cities including Baltimore and Philadelphia. The U.S. needs employment growth to sustain a recovery from a recession that has cost 8.4 million jobs since December 2007.

“The weather effects were enough to transform what would’ve been a positive into a negative,” said David Resler, chief economist at Nomura Securities International Inc. in New York, referring to payrolls. “Job growth is happening as we speak. Companies are seeing a stabilization of demand.”

The Standard & Poor’s 500 Index rose 1.4 percent to close at 1,138.7 in New York. The dollar strengthened 1.4 percent to 90.3 yen from 89.02 the previous day. The yield on the 10-year Treasury note rose to 3.68 percent at 4:24 p.m. in New York from 3.60 percent late the prior day.

Payrolls were forecast to decrease by 68,000, according to the median estimate of 82 economists surveyed by Bloomberg News. The jobless rate was projected to increase to 9.8 percent.

Technology Services

Among companies adding workers is Accenture Plc, the world’s second-largest technology-services provider, which plans to boost payrolls by about 50,000, with as many as 9,000 jobs being added in the U.S. by the end of August.

“We are seeing a very broad uplift globally” in demand, John Campagnino, director of worldwide recruiting, said in a March 3 interview. He said the trend “brings us right back to the pre-recession” levels.

The number of temporary workers increased by 48,000 in February, the fifth straight monthly gain. Payrolls at temporary-help agencies often turn up before total employment because companies prefer to see a steady increase in demand before taking on permanent staff.

Christina Romer, President Barack Obama’s chief economist, told Bloomberg Television yesterday that it’s “very realistic” to expect employment growth in the U.S. in the next few months. Even so, “anyone that goes out and talks to people across this country knows that the labor market is still very distressed.”

Factory Payrolls

Factory payrolls increased 1,000 in February after rising 20,000 in the prior month. The median forecast by economists called for a drop of 15,000. Payrolls at builders fell 64,000 after decreasing 77,000. Financial firms reduced payrolls by 10,000 after a 13,000 decline.

The labor market may be slow to recover from the biggest slump since World War II, giving the Federal Reserve scope to keep interest rates low and putting pressure on Obama and lawmakers to foster job growth.

“A lot of people are not seeing the kind of job gains or income gains that they are looking for,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said yesterday. “There is going to be a lot of dissatisfaction with politicians and that is giving rise to this political angst.”

Many companies have been reluctant to hire even after the world’s largest economy grew at a 5.9 percent annual rate in the last three months of 2009, the most in six years.

Underemployment Rate

Economists surveyed by Bloomberg last month projected the jobless rate will average 9.8 percent in 2010 and end the year at 9.5 percent.

The underemployment rate — which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking — rose to 16.8 percent from 16.5 percent. The number of part-time workers for economic reasons climbed to 8.8 million in February from 8.3 million the previous month.

Two storms blanketed parts of the country in early February, the second coming during the week that included the 12th of the month, the government’s survey week.

Yesterday’s report showed 1 million Americans said bad weather prevented them from getting to work during the survey week. About 290,000 people on average say bad weather has prevented them from getting to work, according to February figures going back three decades.

Economists at Macroeconomic Advisers LLC in St. Louis projected the weather would reduce the payroll count by anywhere from 150,000 to 220,000 workers. The drop will probably be reversed this month, they said.

January 1996

The most recent storm of similar intensity that occurred during a survey week was in January 1996. The current data for payrolls that month, which have gone through several revisions since the initial estimate, show a 19,000 drop in employment followed by a gain of 434,000 in February.

Government payrolls decreased by 18,000 in February. State and local governments reduced employment by 25,000, while the federal government added 7,000. The increase at the federal level reflected in part the hiring of 15,000 temporary workers to conduct the 2010 census.

The Census Bureau said it will hire 1.15 million temporary workers in the first half of the year to conduct the population count that takes place every 10 years. The program may have the biggest impact on payroll figures in April through June, when the bulk of the hiring will take place, and will then subtract from the job count the following months after the work is done.

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Bets against the fiscally unfit are multiplying, and there’s no telling where they will stop.

So far, Dubai, Greece, Portugal and Spain have come under attack as investors demand higher interest rates on bonds sold by cash-strapped nations. For now, few observers expect to see defaults. But rising borrowing costs alone could exact a toll on already tepid economic recoveries.

What’s more, even deeper-pocketed issuers such as the U.S. and the U.K. could be paying much higher yields by next year, as they struggle with political squabbles about rising deficits fueled by a massive price tag for bailouts and stimulus.

"It all depends on growth," said Jan Randolph, director of sovereign risk analysis at forecasting firm IHS Global Insight. "Economic growth is the great redeemer in these sorts of situations, but it’s not at all clear that we can count on seeing enough growth in a lot of the heavily indebted countries."

Borrowing costs have soared over the past two months in Greece, and this week the deficit hawks have swooped down on two other southern European nations, Portugal and Spain.

Interest-rate spreads between these countries’ bonds and those issued by Germany have widened this year, hitting record levels in Greece.

The tremors come as officials in rich countries struggle with pressures once associated with so-called emerging markets: investors demanding that governments slash spending at a time of falling tax collections, soaring debts and, in many cases, growing public unrest.

The worries in Greece, Spain and Portugal stem in part from the benefits the southern European nations derived earlier this decade from using Europe’s common currency, the euro.

Their ability to issue cheap debt, thanks to the euro’s association with Germany’s sound-money policies, allowed them to borrow more than they could afford and sparked a boom in consumer spending, Randolph said. This also helped the high-saving, export-oriented economies of Northern Europe, by creating a bigger market for their goods.

"In a sense, the euro worked too well," he said. "The benefits masked the fact that these countries were losing competitiveness in terms of labor costs, and now that gap can’t be avoided."

In response, Greece recently promised to sharply cut its budget deficit, from a current level of 12.9% to 3% by 2012. Spain, already facing 19% unemployment after the collapse of a massive housing bubble, says it will cut spending by $70 billion over several years.

But given the scale of the problems and the massive borrowing needs of nations around the globe, it’s little surprise that default fears have failed to go away.

"There’s nothing so far to show they’ve fixed anything," said Tim Backshall, chief strategist for Credit Derivatives Research. "What we’ve seen is a dramatic selloff as investors start to adjust to the lower expectations for the euro area."

While Backshall said he believes most of the selling in government bond markets has come from so-called real money investors who hold securities for the long term, the past week has brought an uptick of traders playing what’s known as sovereign risk.

"Many hedge funds have spotted an opportunity in government debt markets where public finances have been under great stress," Randolph wrote in a recent note to clients. This trade involves "shorting the weaker credits against the stronger, playing on market fears and heightened uncertainty, while making money in the ensuing volatility."

That said, he thinks uncertainty will have to get much greater before there is a real risk of default in Greece, let alone Portugal, Spain or fiscally challenged Ireland. (Those noting the debt worries refer to Portugal, Ireland, Greece and Spain as Europe’s PIGS, and to that group plus Italy as the PIIGS.) Randolph notes that during the 1980s, Ireland’s bonds traded at similar spreads to Greece’s now, without any default.

What’s more, any possible default would deal a blow to the credibility of the euro itself. Economists don’t expect the European Central Bank to stand idly by while a monetary union that took years to assemble disintegrates.

"I believe the EU cannot let either Greece or Spain default, any more than Canada would allow one of its provinces to default," said Maurice Levi, a professor at the University of British Columbia in Vancouver.

But then, few in February 2008 would have predicted the scale of devastation in the financial sector before governments finally stepped in. And even if sovereign defaults still look like a long shot, higher rates and stability worries alone can do their damage when economies are in a weakened state.

That point was driven home Thursday by a stock market selloff led by banks. Spanish banks BBVA (BBVA) and Santander (STD) each plunged more than 9%. Falling spending and higher unemployment can wreak havoc on bank balance sheets, further impeding growth.

"The fundamentals in a lot of these places look pretty ugly," said Backshall. "There’s a sense this probably isn’t the end of this trade." 

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Goldman Sachs’ banking titans and top congressional Democrats don’t often see eye to eye — executive pay caps, anyone? But here’s something the megabank and Capitol Hill agree on: One of the best ways to get financing to worthy small businesses is through a little-known community lending vehicle called a CDFI.

Taken together, Goldman Sachs and the federal government have earmarked more than $300 million to invest in these local financiers in 2010. Compared to Wall Street’s bailout billions, that’s pennies on the dollar, but for CDFIs it’s a jackpot. Next year’s funding pool is almost three times bigger than any they’ve ever had before.

A CDFI is a Community Development Financial Institution, a certification conferred by the Treasury Department. The program gives low-interest government loans, grants and tax credits to organizations that specialize in economically developing low-income and otherwise underserved markets.

CDFIs were a hot topic at the small business lending forum Treasury Secretary Timothy Geithner convened last month to brainstorm solutions to the ongoing credit crunch small companies face. Wary of lending to firms struggling through the recession, banks slashed their small business credit this year.

That left CDFIs, which specialize in riskier loans, scrambling to pick up the slack. Funding requests surged. For the 2010 fiscal year, the CDFI Fund received applications totaling $467 million, a 97% jump from 2009.

Entrepreneur William Ortiz-Cartagena turned to the Opportunity Fund, a California CDFI, for the $10,000 loan that launched his San Francisco parking logistics company. Gentle Parking now has a staff of 12.

"It was very hard to start this company, because traditional lending institutions were just ‘no, no,’ just not even see me in the door," Ortiz-Cartagena told attendees at the lending forum. "I couldn’t even get an appointment with a traditional institution."

Opportunity Fund got Ortiz-Cartagena the money he needed and walked him through the steps of starting a business. "They really sit down with you and make sure that first your business plan is viable — that it can be successful — and then help you throughout the process," he said.

The success CDFIs have had getting money out into communities through the downtown is now being rewarded. For fiscal year 2010, Congress appropriated $247 million for the Treasury’s CDFI Fund, a funding level President Obama signed into law last week. That’s a giant jump from the $107 million the fund got in 2009.

Goldman Sachs (GS, Fortune 500) added more financial fuel with the "10,000 Small Businesses" initiative it launched last month. Over the next five years, Goldman Sachs will dole out $300 million to CDFIs across the U.S. A bank spokesman said $50 million of that money will be distributed through grants, with loans making up the other $250 million.

Community development financiers routinely depend on bank loans and philanthropic donations to fill their coffers, but Goldman’s cash wad is of record size. It’s the largest single-source CDFI funding pool specifically dedicated to small business financing, according to Mark Pinsky, CEO of the Opportunity Finance Network, an industry trade group.

Goldman Sachs said it chose to work through CDFIs because of their track records and community expertise 500 fast cash payday loan.

"They have deep knowledge of local markets and relationships with the borrowers and businesses that are the least-served by the traditional banking system," said Alicia Glen, managing director of Goldman Sachs’ Urban Investment Group.

First at bat

The first CDFI to get an infusion of Goldman capital is Seedco Financial in New York City. The organization landed a $20 million loan, which it will in turn begin lending out early next year.

Part of the money will go to create a new financing program aimed at more mature small companies. Seedco will target businesses that have been around for at least three years, generate annual revenue of $300,000, and have five or more employees.

"We believe that in the $50,000 to $250,000 — and even up to $750,000 — loan amount range, we will be able to have a more material positive impact," said Lesia Bates Moss, president of Seedco Financial.

Targeting small but established companies serves a key goal of both Seedco and Goldman Sachs: Financing job creation.

For one small engineering firm in New York City, a recent Seedco loan is translating directly into financial salvation and two new jobs.

Founded in 2003, IAQ Systems grew steadily until the end of 2008, when the recession hit home.

"We have been hammered on the payment part," IAQ founder and President Sai Barade said. "We were not getting paid on time, and the demand was such that we had to deliver. The ends were not meeting; there was a big gap."

Late last year IAQ landed a contract with the New York City school system that will yield $8 million over three years. But to get that work moving, IAQ needed a loan to make payroll and cover overhead costs.

The company previously tapped bank lines of credit, but "at the end of 2008, all the banks were shrinking away from giving us any lines or loans," Barade said.

Seedco Financial turned around a $200,000 loan within two weeks. "Seedco was very responsive," Barade said. "They understood where we were." The company has 10 employees now and plans to soon add two more.

It doesn’t take even $200,000 to create jobs, though. Opportunity Fund, the San Jose, Calif., lender that financed William Ortiz-Cartagena’s parking business, has an average loan size of $7,000. Its target borrower has one to five employees.

"There is this credit crunch for small businesses, and there is this reality that we need more loans to flow to small business if we are going to have a robust job creating recovery," said Eric Weaver, Opportunity Fund’s CEO and founder.

Opportunity Fund has developed a niche lending to day care and health care providers who work out of their homes. Its interest rates typically run from 6% to 8%.

"For a very small amount of capital, you can start or expand that business," Weaver said. "It is hard work, but it is very important work and it is real income to a family." 

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General Motors is killing off another well-known brand — Saab, a quirky line of cars known for angular roof lines and ignition keyholes between the front seats — after talks with a Dutch would-be buyer collapsed.

GM, Dutch automaker Spyker Cars and the government of Sweden, where Saabs are made, were in discussions as late as Friday morning. Spyker said the sale was too complicated to complete quickly. GM declined to elaborate on why the deal failed.

GM plans to begin liquidating the brand early next month. However, the Detroit automaker will continue to honor warranties and provide service and spare parts to current Saab owners once the Saab dealerships close, Automotive News reported Friday. The auto trade publication also reported that the brand has 218 U.S. dealers.

Enthusiasts appreciated touches like placing the ignition lock between the front seats rather than on the steering column. Saabs were also known for unusual design, with flatter front windshields and sloping rear windshields that gave the cars an almost backward silhouette.

Saab was also a pioneer in turbocharged engines, beginning with the release of the Saab 99 in the 1970s, and the first carmaker to offer heated seating, in 1971.

GM bought a 50 percent stake and management control of Saab for $600 million after it split from Swedish truck maker Scania in 1989. It bought full ownership in 2000 for $125 million more.

Even after the GM takeover, Saab remained closely associated with Sweden and its history of making safe, reliable cars personal loan for poor credit. But GM never made money on the acquisition. Industry analysts complained Saab lost its distinctiveness in the crowded market for luxury cars under GM, which stripped it of its angular design.

"More and more frequently, they were using GM platforms and sheet metals, moving away from that uniqueness based on styling," said Tom Libby, an independent Detroit-area auto analyst.

It’s the third time this year GM has failed to sell an unwanted brand. In September, auto industry magnate Roger Penske scrapped plans to buy Saturn after he was unable to find someone to make them when GM stops making them in 2011. GM is phasing out Saturn.

And last month, GM halted a deal to sell the European Opel brand to a group led by Canadian auto parts maker Magna International Inc. GM will keep Opel, which, unlike Saab, it considers critical to its international plans.

GM did successfully sell Hummer, which will go to Chinese heavy equipment maker Sichuan Tengzhong Heavy Industrial Machinery Corp.

Saab employs about 3,400 people worldwide, most of them at its main plant in Trollhattan, Sweden. It also has a parts distribution center and a design center in separate locations in Sweden and an engine plant in Finland.

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Options traders are growing less bullish on the yen after efforts by Japanese officials to boost the world’s second-biggest economy and a U.S. jobs report led to the currency’s biggest weekly decline in a decade.

Japan’s currency plunged 2.5 percent against the dollar and 1.3 percent versus the euro on Dec. 4 after the U.S. Labor Department said employers cut the fewest jobs since the recession began. The yen sank 4.5 percent versus the greenback for the week, the most since February 1999 and retreating from a 14-year high. Traders sold yen and bought dollars on speculation interest rates in the U.S. will increase before June.

“The improving U.S. jobs market suggests the Federal Reserve won’t stand pat on interest rates longer than the Bank of Japan,” said Kazutoshi Yasuda, general manager of the markets department in Tokyo at FX Prime Corp., a unit of Itochu Corp. Increased U.S. borrowing costs would lead traders to favor using yen to finance higher-yielding investments, leading to more losses for the Japanese currency, he said.

Options showed declining bets the yen will rise. The odds for a gain to 84.5 yen per dollar by the end of March from 90.56 last week fell to 38 percent from 80 percent on Nov. 30, data compiled by Bloomberg show. Chances of a decline to 92 versus the dollar by Dec. 31 reached 63 percent. Options grant buyers the right to purchase or sell an asset at a predetermined price.

Weekly Tumble

The yen tumbled 3.6 percent versus the euro last week, the sharpest slide since the five days to April 3. The yen also fell 4.5 percent against the dollar, the most since the week ended Feb. 19, 1999, when it slumped 5.9 percent. The yen’s biggest drop during the week came after the U.S. Labor Department said payrolls dropped by 11,000 last month, the smallest decrease since the recession began.

The yen traded at 89.90 per dollar as of 11:53 a.m. in Tokyo from 90.56 last week, and was at 133.87 versus the euro from 134.54.

“What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.”

Federal-funds futures contracts on the Chicago Board of Trade show a 43.3 percent probability the U.S. central bank will raise its target rate for overnight bank borrowing to 0.5 percent by June from the current range of zero to 0.25 percent, up from 12.6 percent odds a month ago.

‘Finally Turning’

UBS AG expects the Fed to set its key rate at the top end of its 0.25 percent range in April and follow with a quarter- point increase in June. The jobs report and last week’s gains “suggest the greenback is finally turning,” Mansoor Mohi-uddin, the Zurich-based bank’s global head of currency strategy, wrote in a note to clients.

The yen was the best performer against the dollar among the 16 most-traded currencies the past four years, Bloomberg data show. It surged to 84.83 on Nov. 27, the strongest since July 1995, from 124.13 in June 2007. The yen tends to advance amid financial turmoil because Japan’s trade surplus reduces reliance on foreign capital.

Record low U.S. interest rates have kept the dollar under pressure at the expense of the yen, making the greenback the favorite for so-called carry trades, where investors raise funds in countries with low borrowing costs and use the proceeds to invest in countries with higher returns.

Benchmark rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 in Australia and 2.5 percent in New Zealand.

Libor

The London interbank offered rate, or Libor, for three- month loans in the U.S. currency has been below the equivalent yen rate since Aug. 24. In the decade before then, the dollar rate averaged 2.94 percentage points more than the yen rate.

Contracts betting the yen would climb against the dollar rose to 51,710 on Nov. 27, the most since May 2008, according to the Commodities Futures Trading Commission in Washington based on contracts at the Chicago Mercantile Exchange. As recently as June, there more contracts betting on a decline than a gain.

Such “extreme” positioning may suggest that the decline in the yen represents traders unwinding “long” positions rather than an outright bet on the currency’s depreciation, Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a note to clients on Dec. 4.

The median estimate of more than 30 strategists surveyed by Bloomberg is for the yen to end March at 92 to the dollar and 136 to the euro.

‘Urgent Steps’

Fujio Mitarai, head of Japan’s largest business lobby, called on the government to take “urgent steps” on Nov. 27 to curb gains in the yen, which make Japanese exports less competitive and threaten corporate profits. The same day, Finance Minister Hirohisa Fujii said in Tokyo the nation will “do what is necessary” and he may contact U.S. and European officials to act.

Exports make up about 12 percent of Japan’s economy, compared with 6 percent in the U.S. The nation’s gross domestic product is forecast to shrink 5.7 percent this year, according to the median estimate of economists surveyed by Bloomberg. That compares with a contraction of 2.4 percent in the U.S.

The Bank of Japan announced an emergency 10 trillion yen ($113 billion) credit program on Dec. 1 to combat falling prices and the stronger yen. The spread between dollar- and yen-based Libor narrowed to 2.72 basis points on Dec. 4 from as much as 7.25 basis points on Sept. 8.

Stimulus Plan

“The BOJ’s action worked,” said Masato Mori, senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp. “Stopping the yen’s advance will require additional spending from the government.”

A stimulus plan worth as much as 4 trillion yen may be agreed upon today, Chief Cabinet Secretary Hirofumi Hirano said last week. The government planned to announce the measures on Dec. 4 before disagreements between Prime Minister Yukio Hatoyama’s ruling Democratic Party of Japan and coalition partners, who want a larger package, caused a delay.

Bonds to be issued in the fiscal year starting April 1 may reach 146.2 trillion yen compared with a revised 132.3 trillion yen this year, according to Citigroup Global Markets Japan Inc.

“There is probably enough in the policy action in Japan by the government and the BOJ to argue for further upside on cross- yen currencies near term,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney.

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Opportunities for Nordic bank mergers will emerge as new capital rules expose weaker players in a post-crisis world, but big-scale tie-ups are doubtful in 2010 as lenders focus on loan losses and curbing risk.

Analysts say that the one possible big deal — between Nordea and Swedbank — is unlikely in the near term due to uncertainty over bad loans, adding that Swedbank’s shares do not fully discount the lender’s exposure to the troubled Baltics.

Consolidation in Nordic banking would make sense: markets are mature, growth opportunities limited and players too small to compete on a pan-European scale. The banks are good targets for foreign players because they are efficient and have been — at least until recently — highly profitable.

Add the new capital requirements that add to costs and eat into profits, and the need for scale is more acute than ever.

But the crisis has made banks shy of risk-taking and left the developments in the regulatory environment uncertain.

“Never say never, but I think all the Nordic players, or financial institutions, are quite busy running their own shops at the moment,” Nils-Fredrik Nyblaeus, senior advisor to SEB chief executive Annika Falkengren, told Reuters.

“The main owners of each of the banks have to be convinced that the synergies are by far outweighing the risk with it, and that’s obviously not the case at this moment.”

Predictions that Europe could see a wave of consolidation as a result of the crisis have so far not come true as most of the bigger players tread carefully.

But there have been rumblings.

The top executive of Nordea, which, with a $46 billion market capitalization, is on par in size with Deutsche Bank, recently said Swedish rival Swedbank made a good fit for his group.

Christian Clausen said the financial crisis had spurred the long-term need for strategic tie-ups, although he added that he expected little would happen in the near future.

SWEDBANK-NORDEA A HOT TIE-UP?

While the recent crisis has not led to any major bank failures or nationalizations in the region, lenders are still smarting from the worst downturn in decades.

Heavy exposure to the Baltics and Ukraine — economies among the worst hit by the recent downturn — and Ireland has left several Nordic players facing very painful loan losses.

The tough climate has made Swedbank — the biggest lender in the Baltics — the hottest tip for a tie-up, with Nordea seen as the main candidate. Some have put potential synergies at 400 million euros ($600 million) a year. 

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The Federal Reserve on Tuesday raised its estimate for economic growth next year and forecast lower unemployment ahead, although the jobless rate will stay uncomfortably high for at least the next three years.

The projections were included in the minutes of the Fed’s Nov. 3 and 4 meeting. The forecast shows the central bank expects gross domestic product, the broadest measure of the nation’s economic activity, to grow between 2.5% to 3.5% in 2010. That’s a bit more bullish than the 2.1% to 3.3% growth it had forecast for the period back in June.

The unemployment rate, which hit 10.2% in October according to the Labor Department’s latest reading, is expected to improve to between 9.3% to 9.7% for all of 2010. The Fed’s June forecast was for 2010 unemployment between 9.5% to 9.8%.

The central bank’s forecasts don’t show the labor market getting a lot better in the next few years. Its 2011 forecast is for unemployment between 8.2% to 8.6%, while 2012 unemployment is expected to be between 6.8% to 7.5%, still above the average 6% annual unemployment rate recorded by the Labor Department over the last 30 years.

Going forward from 2012, the forecast is for the unemployment rate to improve to between 5% to 5.2%, levels not seen since the first few months of the latest recession. But that long-term employment outlook is slightly more bearish than the Fed’s previous estimate of a 4.8% to 5% long-term unemployment rate.

Keith Hembre, chief economist First American Funds, said the slightly more optimistic numbers in the forecast are more bullish than the commentary in the minutes, which discuss many areas of weakness and uncertainty about the state of the recovery.

"They’ve had a tendency to be overly optimistic (in the numerical forecasts), and that’s likely the case again today," he said. For example, a year ago the Fed’s forecast was projecting that unemployment in 2009 would come in at between 7.1% to 7.6%. Unemployment hit the upper end of that forecast, 7 easy payday loan.6% in January and has risen steadily from there.

Hembre said the slightly more bullish numbers from the Fed shouldn’t be taken as a sign that the central bank is getting close to raising rates or removing other programs it has put in place to pump trillions of cash into the economy.

While Fed officials have said they believe that the recession that started in December 2007 likely ended at some point this summer, there have been repeated warnings that growth would be somewhat sluggish going forward. Fed Chairman Ben Bernanke recently said economic headwinds, including tight credit and continued weakness in the labor market would stop growth "from being as robust as we would hope."

The Fed’s forecast comes the same day the Commerce Department lowered its estimate for the third quarter’s GDP growth rate to 2.8% from its earlier reading of 3.5%.

Despite the lower unemployment estimates released Tuesday, the minutes they were attached to said that Fed "staff boosted its projection for the unemployment rate over the next several years." Those projections were more detailed than the annual estimates spelled out in the summary.

The Fed policymakers were particularly concerned that the forecasts were more uncertain than normal, and they were worried about a sluggish recovery.

"Business contacts continued to report plans to be cautious in hiring and capital spending even as demand for their products increased," according to the minutes.

But Fed policymakers seemed to be more optimistic than they had been at their late September meeting, when they believed there was a greater risk of the economy not living up to the forecasts. Now they believe there is roughly equal chance that the economy could do better than expected as they are worried about it falling short. 

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While the national economic picture is starting to brighten, the states are still suffering their worst budget crises in decades, a new report found.

States that have already slashed services and raised taxes to close a collective $54 billion budget gap now face another $51 billion deficit this year and next, according to preliminary results from the Fiscal Survey of States released Thursday.

"These are the worst numbers we’ve ever seen in the decades of putting together this report," said Scott Pattison, executive director of the National Association of State Budget Officers. "States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending in ways that impact every part of state government."

The full report, which will be released in December, is jointly compiled by the budget officers’ group and the National Governors Association. Fiscal year 2010 started on July 1 in 46 states.

Some $135 billion in federal stimulus funding helped states avoid even more draconian cuts, particularly to health services and education. But it was not enough to put the states back on solid footing.

States typically continue to suffer for two years after a national recession is declared over. Many economists predict that the current downturn ended last quarter, when the gross domestic product grew at a 3.5% annual rate.

Back-to-back expenditure reductions

Governors and lawmakers are expected to reduce spending by at least 4% this fiscal year, on top of a 4.8% pullback last year, the study found. This is the first time that expenditures have declined in back-to-back years.

Based on preliminary projections, half the states plan to lay off workers in the current fiscal year, Pattison said in a conference call with reporters. "State governments consider layoffs or furloughs a last resort," he said.

The national recession and soaring unemployment rate, which topped 10% last month for the first time in 26 years, has wreaked havoc on state tax revenues. Some 42 states cut their fiscal 2009 budgets, and 33 states slashed spending for 2010.

Also, states hiked taxes and fees by a total of $23.8 billion, along with $7.7 billion in other revenue increases, for fiscal 2010.

The survey came a day after two other reports also depicted states’ grim financial situations. One, from the Center on Budget and Policy Priorities, said states need as much as $50 billion in additional stimulus funds to keep them from making severe cuts that could threaten the national economic recession and cost 900,000 people their jobs.

Meanwhile, the Pew Center on the States released the names of 10 states in the greatest economic peril.

Already, less than five months into fiscal 2010, several states are looking at additional budget cuts.

Rhode Island announced Tuesday that it is facing a revenue shortfall for the current fiscal year of $130.5 million. Gov. Donald Carcieri said the state must examine its aid to local governments, since it has already cut personnel and social service programs.

And in California, Gov. Arnold Schwarzenegger said Tuesday that his state is facing a budget gap of up to $7 billion. The state will likely announce across-the-board spending cuts in January.

"So we just have to hang in there, tighten our belts and live within our means," Schwarzenegger said.

Last month, Massachusetts Gov. Deval Patrick announced a plan to close a $600 million mid-year budget gap that includes $352 million in cuts across state government, limited revenues hikes and draining a $60 million surplus from the last fiscal year.

And earlier this week, New York Gov. David Paterson said the state would have to come up with an additional $10 billion in savings. He is cutting state agencies funding by 10%, and is proposing reducing $1.3 million in local assistance programs, $686 million in education funding and $471 million in health care spending.

"Frankly, we are running out of money," he said.  

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