Michael Babad

Globe and Mail Update

14:49 EST Thursday, January 27, 2011

These are stories Report on Business is following today. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

The politician and the banker

French President Nicolas Sarkozy had it out today with the chief executive officer of JPMorgan Chase & Co. in the public forum at Davos.

Mr. Sarkozy lit into Jamie Dimon at the World Economic Forum after the Wall Street chief said it was time to stop picking on the banks over the financial crisis, calling the constant bashing "unproductive and unfair." As for more regulation, Mr. Dimon said, according to Reuters, "too much is too much."

Later, Mr. Sarkozy shot back, telling Mr. Dimon: "The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything. It caused a lot of anger."

At a plenary session, Mr. Sarkozy added that "the world was stupefied to see one of the five biggest U.S. banks collapse like a house of cards.

“We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That’s what happened.”

Mr. Dimon wasn't ungrateful for how governments acted during the crisis, saying the situation would have been even worse without their intervention. And unlike some other bankers, he's in a better position to speak out, given how formidably he brought his institution through the troubles.

Mr. Dimon did not have the opportunity to respond to Mr. Sarkozy.

Report says crisis could have been averted

A highly divided panel struck to probe the financial crisis handed down a report today that says the meltdown could have been avoided, and it spreads the blame among Wall Street, regulators and others.

But in the panel's quest to ensure such a crisis is never repeated, one might wonder about the impact given the political nature of the report. Four Republican members of the Financial Crisis Inquiry Commission plan to issue two dissenting reports.

• Crisis panel raps Greenspan, Wall Street

France, Germany pledge euro support

Mr. Sarkozy, who appears to have become fast friends with his German counterpart Angela Merkel, warned currency speculators today to watch their backs. A bet against the euro, he said in a speech at the World Economic Forum in Davos, would not be smart.

Mr. Sarkozy said he and Ms. Merkel "will never let the euro down, never," saying a collapse of the currency shared by 17 countries would be "so cataclysmic that we can't even entertain the idea."

• Euro's death would be 'cataclysmic'

S&P hits Japan

It was only a matter of time before the credit rating agencies turned their focus from Europe to Japan.

Standard & Poor’s today cut the sovereign debt rating of the developed world’s most indebted economy by one notch to AA minus, sending the yen reeling. It’s the first cut by S&P to the rating since 2002.

Japan’s debt load is so hefty that investors will probably soon have to get used to the term quadrillion, which follows trillion and where the outstanding long-term government debt of the world’s third-largest economy is heading.

Outstanding long-term debt is projected to hit ¥869-trillion - that's almost $11-trillion U.S. - by the end of March, according to reports today. As a percentage of GDP, that will be a whopping 181 per cent. By next year, it could reach 210 per cent.

“The downgrade reflects our appraisal that Japan's government debt ratios - already among the highest for rated sovereigns - will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s,” S&P said, adding that Prime Minister Naoto Kan’s government “lacks a coherent strategy” to deal with the problem.

Unlike the European countries that are struggling, Japan has not been hostage to the bond markets because most of the debt is held internally by its own investors, with less than 5 per cent in the hands of foreigners. There are fears, though, according to the New York Time, that Japan could be forced to look to global markets if retirees start to cash in.

Reuters, meanwhile, reported yesterday that estimates by Japan's finance ministry, which the news agency obtained, indicated Japan's issue of new bonds could reach ¥54.2-trillion by the beginning of the fiscal year that begins in April, 2014.

While the S&P downgrade may not be all that much of a surprise, given the country's tattered books, it's a big blow to the government.

"The reasons for the downgrade are a timely reminder of the huge economic and financial challenges facing the Japanese government, which may simply not be up to the job," said Julian Jessop, chief international economist at Capital Economics in London, adding that gross debt is headed for about 250 per cent of GDP in 2015, and net debt of about 150 per cent.

"But even this number is exceptionally high and the difference between gross and net is largely accounted for by assets held by social security funds that will soon be needed to help pay for the retirement of the post-war 'baby boom' generation, many of whom turn 65 in 2012.

Japan's rating, Mr. Jessop noted, is a notch above Italy's, three above Portugal's and seven above Greece. It has a large and diversified economy, with years of current account surpluses. But these factors, along with the reliance on domestic investors, can also be considered weaknesses, he said, as they have "encouraged complacency."

And the challenges going forward are huge. Japan will now have to take those tough measures and, Mr. Jessop said, raised the low consumption tax of 5 per cent. A fiscal strategy is due in the summer.

"The scope for a policy mistake is huge," he added. "If the government tightens fiscal policy too quickly, the economy will tip back into a deeper recession and the debt cynamics could be even worse. If the government delays too long, the markets will lose patience and surging bond yields could drag the economy down anyway."

• S&P cuts Japan's debt rating

Why Japan is a warning

The S&P downgrade isn't just a blow to Japan, but also a warning to the world's rich countries. To date, the markets have targeted the periphery countries of Europe, and this is the first to really move outside of that in any meaningful way.

"Just when you thought it was safe to be a developed economy sovereign fixed income investor, S&P decides to remind the market that the major economies do not walk on water, and that one does not need to be a euro zone member to see its credit rating slashed," said Scotia Capital currency strategist Sacha Tihanyi.

"This serves to underscore the fact that the post 'great recession' era is one in which certain emerging markets can look more attractive from a forward-looking fiscal perspective than many developed nations. The Japanese credit downgrade shows what happens when a nation does not do enough to establish a credible plan on fiscal consolidation."

As Mr. Tihanyi notes today, Japan has "blazed a path that the U.S. is now slowly walking down."

The United States enjoys the implicit protection of the U.S. dollar, and the focus, until Japan today, had been on Europe. But, Mr. Tihanyi warned, markets should fear what could happen should the world's reserve currency lose its Triple-A status.

President Barack Obama says the U.S. is committed to deficit reduction. But yesterday, the Congressional Budget Office, a non-partisan agency, said the U.S. deficit will reach almost $1.5-trillion (U.S.), or 9.8 per cent of gross domestic product, this year.

• U.S., Japan must tighten budgets: IMF
• Innovate or be left behind, Obama warns