WTO to China - They're not THAT Rare!

On the wire (NYT):

BRUSSELS — In a dispute that highlights growing tension between China and its Western trading partners, the World Trade Organization ruled Tuesday that Beijing violated global rules by restricting exports of nine raw materials used in the manufacturing of high technology products.

The case, lodged by the United States, the European Union and Mexico, dates from 2009 and underlines the anxiety in the West about the way China is consolidating its trading dominance.

Significantly, the ruling strengthens other European arguments against Chinese restrictions on another category of exports — rare earths, 17 minerals also used in the high-tech industry. However the case also demonstrates how dependent technology industries have become on some exports from China.

The W.T.O. panel rejected China’s argument that its restrictions were motivated by a desire to protect the environment and prevent a critical shortage of the materials.

The decision on Tuesday concluded that Chinese quotas, export duties and license requirements put in place a discriminatory system for the sale overseas of industrial raw materials widely used in the steel, aluminum and chemicals industries, including coke, zinc and bauxite.

“This is a clear verdict for open trade and fair access to raw material,” Karel De Gucht, the European trade commissioner, said in a statement. “ Furthermore, in the light of this result, China should ensure free and fair access to rare earth supplies,” he added.

The E.U. quota of Chinese raw earth elements declined to 30,000 tons in 2010 from around 50,000 tons in 2009, according to an E.U. official who was not authorized to speak publicly.

The U.S. trade representative, Ron Kirk, called the W.T.O. decision on the raw materials “a significant victory for manufacturers and workers in the United States and the rest of the world.”

“China’s extensive use of export restraints for protectionist economic gain is deeply troubling,” Mr. Kirk added in a statement. “China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials. They have also caused massive distortions and harmful disruptions in supply chains throughout the global marketplace”

Americans and Europeans had challenged China’s environmental protection argument by pointing out that the raw material consumption was not being controlled domestically.

China must now either appeal the ruling or comply with it. If it fails to do so the United States, Europe and Mexico could eventually be allowed to respond with equivalent trade sanctions.

In a statement issued by its mission to the W.T.O. in Geneva, China said “that although these measures have certain impact on domestic and international users, they are in line with the objective of sustainable development promoted by the W.T.O. and they help to induce the resource industry toward healthy development.”

The nine raw materials covered by the ruling on Tuesday are used in medicines, CDs, electronics, the automotive industry, ceramics, refrigerators and batteries among other products.

Of all the E.U. imports of some categories of magnesium, 95 percent are sourced in China, as is 91 percent of imports of some categories of manganese while almost 30 percent of E.U. phosphorous imports are Chinese.

European officials say the export restrictions increased the global price for the raw materials, and gave Chinese companies a clear commercial advantage which, in effect, constitutes a hidden subsidy. They also made it harder for non-Chinese companies to source the raw materials by making them less readily available on the global market.

The impact can be to increase the price of some products by as much as 100 percent, according to E.U. officials.

The ruling was welcomed by BusinessEurope, the lobbying group. “The W.T.O. panel decision clearly stipulates that almost all export duties and restrictions imposed by China are incompatible with W.T.O. rules,” it said in a statement. “If confirmed, this decision will require China to remove all unjustified restrictive measures on raw materials.”

Certainly won't help the price of rare earth (not raw earth as stated in the article) companies which have been getting whacked over the last few sessions.  That said, I will believe it when I see it.

The EU - Part Problem Part Solution - Or Just FUBAR?

And you seriously thought it was getting better?

Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011.

The following drivers prompted Moody's decision to downgrade and assign a negative outlook:

1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.

2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund (IMF) due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

RATINGS RATIONALE

The first driver informing today's downgrade of Portugal's sovereign rating is the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter. Such a scenario would necessitate further rounds of official financing, and this may require the participation of existing investors in proportion to the size of their holdings of debt that will become due.

Moody's notes that European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector. Should a Greek restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors. To offset this risk, some policymakers have proposed that private sector participation should be a precondition for additional rounds of official lending to Greece.

Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

The second driver of today's rating action is Moody's concern that Portugal will not achieve the deficit reduction target -- to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme -- due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system. As a result, the country may be unable to stabilise its debt/GDP ratio by 2013.

In other words, as the EU is increasingly looking for the private sector to share in the pain, we are going to help make sure it happens.  Over?  Not by a long shot.  Better?  No, but the direction is becoming clearer.

Greece - Balance Sheet is Unsustainable

In the news:

(Reuters) - Long-term investors standing aloof from the Greek debt crisis want holders of its government bonds to take a loss big enough to slash the country's debt to sustainable levels before they consider returning.

Greece is still expected to default at some point and for most investors who have dumped bonds over the past two years and who are crucial to put the ailing economy back on its feet, the longer that is delayed, the longer it will be before they consider looking at Greek assets again.

A likely second bailout -- currently under tortuous negotiation -- is seen only as a means to buy time for euro zone banks to provision for eventual losses and protect the bloc's larger economies from contamination, while the reforms attached to the package will be hard to implement in the face of deepening public resentment.

 Friends, Greece is not viable without a major restructuring of its debt.  Tax collections are laughable, tourism can only get you so far (see tax collections) and olives grow elsewhere.  This country cannot support the debt it has, will not support the debt its and any temporary fix is just that - temporary.  Debt needs to be almost halved in order for the country to make a go of it.  Propping up European banks and trying to keep the problem localized is not a strategy nor a solution.  Sometimes it just makes sense to mail the keys back.

Yasou!

New Issue Hype - Buyside Gets the Pipe

On the tape (Reuters):

LONDON, July 5 (IFR) - Rising disquiet over new issue bond market practices has prompted a rethink among debt syndicate officials regarding the processes they employ and the manner in which they transmit information to investors, bankers said.     Underwriters have been discussing ways to fairly provide investors with information on price and the size of order books.     So-called price whispers, where dealers float a level with a small group of investors could be a thing of the past, for instance.     Another practice that is about to change is regular updates on the size of order books and the controversial, some would say cavalier, use of internal tickets to inflate the magnitude of investor interest. 

Investors routinely overstate their true interest in order to receive a larger allocation of bonds at pricing.     "I think both sides need to be careful. The world has changed - all the clients we deal with are trying to operate higher standards," said the syndicate official.

 This has been the buy/sell side conundrum forever.  If the deal looks hot (and you know it was -as it always is - pre-shopped to the big guys) you have to double or triple what you want to end up with.  Then, god forbid, it falls apart you end up with an over allocation.  The street knows the chronic padders, but this crap inflates the book to monstrous proportions.  I can't think of a way around this.  Blame it on the street for hyping, blame it on the buyside for padding - whatever.  This is the way it is.  It also allows the street to reduce pricing due to demand and see how many people drop from a deal or increase the size of the deal to meet demand.  Accrues to the issuers benefit either way.  Who wins:  street gets underwriting commission and follow on trades, issuer gets lower rates and more money, and the buyside?  Well, someone has to be left holding the bag.