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- Bloomberg
O.J., Accounting Fraud, Icahn: The Story of Hertz Going Bust
(Bloomberg) -- The short version of Hertz Global Holdings Inc.’s bankruptcy story goes something like this: Global pandemic obliterates the travel business and lands an iconic 102-year-old company in court to seek protection from creditors.The long version is a fable about what happens when a company relies on accounting and consolidation to keep shareholders happy. It’s a tale of lurching from one CEO to another and management teams failing to stay attuned to consumer tastes.Enterprise Holdings Inc. and Avis Budget Group Inc. are suffering through the same Covid-19 drought, but Hertz’s own bad decisions and hard luck made it vulnerable at the worst time. One former top executive summed up its plight as a slow-moving train wreck.On its Chapter 11 petition, Hertz listed $25.8 billion in assets. It has over $1 billion in cash and $24.4 billion of debt. A company that began with a dozen Ford Model Ts and was taken for a spin by General Motors, Ford Motor and a group of private equity firms as parents over the decades now faces an uncertain fate that will be decided in a Delaware court.O.J., EnterpriseNo telling of Hertz’s history is complete without mention of perhaps the most disastrous end to a major celebrity-endorsement deal of all time.Hertz was owned by Ford in the summer of 1994 when police pursued O.J. Simpson in a white Bronco SUV for the murder of his ex-wife, Nicole Brown Simpson, and her friend Ron Goldman. As a Buffalo Bills running back two decades earlier, Simpson raced through airports and past children screaming “Go, O.J., go!” on his way into the company’s rental cars.The television ads were effective at emphasizing speedy service and boosted business. While the relationship was less beneficial to the company as their 19-year link wore on, Hertz stood by Simpson’s side even after a January 1989 charge for assaulting his wife. She personally convinced then-Chairman Frank Olson to stick with the star, the Washington Post reported.Hertz had some good years after the so-called trial of the century that ended in Simpson’s acquittal. But in November 1994, the same month that the jury was sworn in, the trade publication Auto Rental News ranked Enterprise its new No. 1 by fleet size and number of offices.Private Equity EraWhile Hertz was by some measures slipping in the rental industry pecking order, it was still earning tidy profits for an otherwise struggling Ford. The automaker sold the company in 2005 to two private equity firms and Merrill Lynch & Co.’s buyout unit for about $15 billion.The following year, Hertz poached the top executive at auto-parts maker Tenneco Inc., Mark Frissora, to be CEO and lead the company through a re-listing. Frissora cut costs, eliminated thousands of jobs and was paid handsomely. His $19.2 million compensation package in 2006 was more than Ford awarded its CEO last year.After weathering the global financial crisis, Hertz started pursuing a costly and drawn-out deal for Dollar Thrifty Automotive Group Inc. It tried buying the company for $1.2 billion in 2010 but ultimately paid $2.6 billion after a two-year bidding war with its rival Avis.The deal boosted Hertz’s market share by rounding out its business-traveler stronghold with a greater presence in the budget-minded leisure segment. But the acquisition also added to Hertz’s debt pile, which already was substantial thanks to the earlier leveraged buyout. The company ended 2012 with $20.8 billion in total liabilities.Dollar ShortProblems abounded with integrating the two companies, according to Maryann Keller, a longtime auto-industry consultant who was on Dollar Thrifty’s board at the time of the acquisition.The two had different computer systems that couldn’t talk to each other. Frissora lost some talented executives by moving the two companies, which had been based in New Jersey and Oklahoma, to a new headquarters in Florida.Hertz hoped to combine airport lots for the three brands to save money, but wasn’t able to do so at many locations. The company also found that Dollar Thrifty had let the tires on its cars get thinner than Hertz allowed, and many had to be replaced at a cost of $30 million. Neither problem surfaced during due diligence.In the end, a merger that was supposed to save Hertz about $100 million in the first year ended up costing it another $70 million, two people familiar with the matter said.Accounting IssuesAs expenses related to the acquisition dragged on earnings, Frissora sought other ways to keep profit up.To tamp down on vehicle depreciation, the biggest source of costs for rental companies, Frissora tried keeping cars longer, some for as many as 50,000 miles, long past the industry norm of about 30,000, former executives told Bloomberg News. His plan was to put older vehicles into the fleets of the company’s budget brands: Dollar, Thrifty and Firefly.Because cars depreciate most in their first year, holding on to them longer would slow the rate the company had to show on its books. But not enough of the older models made it out of Hertz’s fleet, and business travelers were turned off by the aging selection of rides to choose from, Keller said.And according to the Securities and Exchange Commission, the company committed fraud. The regulator said that from February 2012 through March 2014, Hertz materially misstated pretax income due to accounting errors. Investors including billionaire Carl Icahn pushed for Frissora’s ouster in September 2014, and the company restated results the following year.Hertz settled with the SEC for $16 million and Frissora wasn’t charged. A spokesman for the former CEO said he presided over operational improvements during his eight-year tenure. Hertz’s 2015 earnings restatements have no bearing on the company’s current financial situation and Frissora didn’t direct any improper accounting or engage in any wrongdoing, the spokesman said.Still, Hertz sued Frissora and three other ex-senior managers last year, seeking to claw back $70 million in bonuses over the executives’ roles in the accounting scandal. Frissora and the other executives filed their own suits in Delaware Chancery Court seeking to force the company to cover their legal bills in the clawback fight. Judge Kathaleen S. McCormick granted those requests last year. One executive reached a settlement for undisclosed terms.In an amended complaint filed in federal court in New Jersey this month, Hertz demanded that Frissora and former general counsel Jeffrey Zimmerman hand over $56 million in incentive pay because of their involvement in accounting errors that overstated Hertz’s pre-tax income. That led to the $200 million restatement and the duo’s ouster, according to court filings.Icahn EntersIcahn entered the picture after a 2014 dinner in New York that an industry analyst had with Dan Ninivaggi, who was then CEO of Icahn Enterprises. Ninivaggi was told Hertz had a good brand and solid foundation but needed discipline and better management. Icahn was swayed and bought up shares. By year-end, his holding was worth more than $1.13 billion, according to data compiled by Bloomberg.The head of Hertz’s equipment-rental business took over the company for a few months before a fateful decision. Rather than hire former Dollar Thrifty CEO Scott Thompson to run the company, Icahn went with John Tague, an ex-COO of United Airlines.Icahn “didn’t put the best people in place” and “had a revolving door of managers,” said Keller, who believes Hertz would not be in the position it’s in today if it had hired Thompson. Icahn didn’t respond to requests for comment.Tague updated Hertz’s fleet but did so with passenger cars just as U.S. consumers began fleeing sedans for sport-utility vehicles. Consumers went looking to other rental counters for SUVs, and depreciation costs mounted as sedans retained less of their value. He also tried raising prices, figuring the industry’s oligopoly would follow suit. But Enterprise and Avis didn’t and instead picked off more of Hertz’s customers.In an interview Saturday, Tague said growth wasn’t his priority. He started tilting the fleet mix toward SUVs, but had a lot else on his plate: finishing the accounting investigation and restating earnings, integrating Dollar Thrifty, rebuilding the management team hollowed out by the Florida move and spinning off the equipment-rental business.“Upon my arrival, it was clear that many things had to be addressed with a sense of urgency,” he said in a phone interview. “That’s what I undertook.”Future JourneysTague retired at the beginning of 2017 and was replaced by Kathryn Marinello, who had been on the board of GM and truckmaker Volvo AB. The results of her early efforts to shrink the fleet and further the shift toward SUVs were undercut by the emergence of Uber Technologies Inc. and Lyft Inc.Marinello did make progress. Hertz reported nine consecutive quarters of earnings growth and expanded revenue in 10 straight.But when the pandemic decimated the rental industry, Hertz still had too little cash and a mountain of debt. Marinello resigned May 16, less than a week before the bankruptcy filing.“With the severity of the Covid-19 impact on our business and the uncertainty of when travel and the economy will rebound, we need to take further steps to weather a potentially prolonged recovery,” Hertz’s new CEO Paul Stone said in a statement announcing the company’s bankruptcy. “Our loyal customers have made us one of the world’s most iconic brands, and we look forward to serving them now and on their future journeys.”The main bankruptcy case is In RE: The Hertz Corporation, 20-111218, U.S. Bankruptcy Court for the District of Delaware (Wilmington)(Updates with clawback lawsuits against former executives starting in 21st paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Investor's Business DailyDow Jones Futures: Breakouts Slowing In Coronavirus Stock Market Rally, But These Five Titans Are Near Buy Points
Dow Jones futures: The coronavirust stock market rally is roaring on, but breakouts are slowing. Apple, Tesla, Microsoft, Google and AMD are near buy points though.
MarketWatchStashing some gold? Here’s why that could soon be illegal, according to one notable hedge-fund bear
Crispin Odey explained in a note posted on Bloomberg News Wednesday why he believes that private gold ownership could be banned if/when the government loses control of inflation.
Investor's Business DailyRecession Ahead? Time To Shift Your Stock Mutual Funds To Cash?
Experts say a recession has begun. Is now the time to go to cash in stock mutual funds in your retirement savings accounts?
- Scroll to continue with content
MarketWatchForget bonds — here are 5 safe tech stocks offering dividends and growth
These established, well-known technology leaders boast staying power in all markets, writes Michael Brush.
MarketWatchThese 4 stocks are investment pros’ favorites — and not one is a ‘FAANG’ stock
It takes guts to be a value investor these days. According to a recent analysis from Research Affiliates, value has lagged growth now for more than 13 years — the longest stretch in recorded U.S. market history. This has led to a seemingly-endless series of pronouncements in recent years that value investing is dead.
BloombergAlibaba Drops After Projecting Slowing Growth in Uncertain Times
(Bloomberg) -- Alibaba Group Holding Ltd. slid after projecting revenue growth will slow this year, reflecting post-Covid 19 economic uncertainty at home as well as the potential for U.S.-Chinese tensions to disrupt its business.Its stock slid as much as 4% in Hong Kong Monday, after a drop of almost 6% in New York before the weekend. The e-commerce giant forecast sales growth this year of at least 27.5% to more than 650 billion yuan ($91 billion), down from 35% previously and slightly below analysts’ estimates. While it posted a better-than-expected 22% rise in March quarter revenue of 114.3 billion yuan, that marked its slowest pace of expansion on record.Online shopping began to bounce back from March, executives said Friday. But the tepid outlook demonstrates the world’s second-largest economy has yet to fully shake off Covid-19, with consumers still hesitant about spending on big-ticket items. Asia’s most valuable corporation is tackling also the rise of rivals such as ByteDance Ltd. and Pinduoduo Inc. And the Tmall operator is going head-to-head with Tencent Holdings Ltd. for internet leadership in everything from online media to payments and cloud computing. JD.com Inc., the No. 2 Chinese online retailer, forecast better-than-expected revenue this quarter.“The market is a bit disappointed despite the strength given 2Q guidance of 20-30% YoY growth for JD and 99% GMV growth in 1Q20 for PDD,” CICC analyst Natalie Wu wrote. “We regard Alibaba’s advantage as a market leader as intact and unchanged in the longer run, though it may take several quarters for market sentiment to swing back.”Read more: Alibaba Sales Growth Plumbs New Lows While Uncertainty EscalatesAlibaba has lost more than $70 billion of market value since the coronavirus first erupted in January, and now has to grapple with not just an uncertain global economic environment but also any potential fallout from U.S.-Chinese financial tensions. On Friday, executives sought to assuage concerns about a U.S. bill that mandates much closer accounting scrutiny of U.S.-listed Chinese companies and may bar them from American bourses.Chief Financial Officer Maggie Wu said Friday Alibaba’s financial statements have been consistently prepared in accordance with U.S. GAAP accounting measures and were beyond reproach. “The integrity of Alibaba’s financial statements speak for itself, we have been an SEC filer since 2014 and hold ourselves to the highest standard,” she told analysts on a conference call. “We will endeavor to comply with any legislation whose aim is to protect and bring transparency to investors who buy securities on U.S. stock exchanges.”The bigger short-term challenge is in reviving growth: Alibaba’s bread-and-butter customer management or marketing business grew just 3% in the March quarter. Much of that stems from weaker consumer sentiment during the coronavirus-stricken quarter, when total Chinese e-commerce rose just 5.9% or at less than a third of 2019’s pace, according to government data. Jefferies analysts led by Thomas Chong wrote that Alibaba’s guidance was in fact a positive when viewed against an array of uncertainties gripping the post-Covid 19 global economic environment.What Bloomberg Intelligence SaysUser engagement and transaction volume have rebounded in April and May to precrisis levels, which bodes well for normalized sales growth ahead, especially as merchant-support measures are gradually rolled back.\- Vey-Sern Ling and Tiffany Tam, analystsClick here for the research.Rival PDD posted a revenue rise of 44% on Friday, down sharply from 91% in the previous quarter but ahead of expectations. Its sales and marketing expenses jumped 49%. PDD’s shares climbed 15% Friday.Alibaba’s March-quarter net income was 3.2 billion yuan, down 88% from a year ago when it booked an 18.7 billion yuan one-time gain on investments. In February, Alibaba declared a waiver of some service fees for merchants struggling financially during the outbreak on its main direct-to-consumer Tmall platform. In April, the company rolled out a new 10-billion-yuan subsidy program for Tmall users to buy electronics, encroaching on JD.com’s traditional turf. These initiatives may further compress margins for the June quarter.“The challenging part is for them to achieve the same amount of growth this year,” said Steven Zhu, a Shanghai-based analyst with Pacific Epoch. “Just because they are too big, for the same amount of growth, they need to spend much more effort.”But executives were confident in a gradual e-commerce recovery over the year. Beyond its main business, younger divisions such as its cloud computing arm should buoy the bottom line. That division’s revenue jumped 58% in the quarter.“Despite a challenging quarter due to reduced economic activities in light of the COVID-19 pandemic in China, we achieved our annual revenue guidance,” Wu said in a statement. “Although the pandemic negatively impacted most of our domestic core commerce businesses starting in late January, we have seen a steady recovery since March.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
MarketWatchDon’t even think of owning stocks unless you’re willing to buy and hold for at least 10 years
If you want a 95% probability of stocks outperforming bonds, you better plan on 20 years, writes Mark Hulbert.
MarketWatchMortgage rates fall to near-historic low on concerns about coronavirus pandemic
Mortgage rates fell to near-record lows — and there’s reason to think they will drop even lower in the future. The 30-year fixed-rate mortgage averaged 3.24% for the week ending May 21, down four basis points from a week ago, Freddie Mac (FMCC) reported Thursday. For the 15-year fixed-rate mortgage, the average rate dropped two basis points to 2.7%.
MarketWatchPalo Alto Networks stock surges as earnings, outlook boosted by work-from-home
Palo Alto Networks Inc. shares surged in the extended session Thursday after the cybersecurity company’s quarterly results and outlook topped Wall Street estimates as its product portfolio benefits from the COVID-19 pandemic.
MarketWatchPrepare for the post-coronavirus-vaccine world by selling stocks that are hot today but will lose earnings momentum
Now investors should look ahead to the post-vaccine world: Sell stocks that are hot today but will experience deteriorating earnings momentum after a vaccine comes out and buy quality stocks with good balance sheets that will experience positive earnings momentum in that new era. This chart compares the Dow Jones Industrial Average ETF (DIA) to seven stocks that I am using to illustrate shifts in money flows. • Zoom Video (ZM) has been one of the biggest beneficiaries of coronavirus.
BloombergStocks Trade Mixed Amid Mounting China Tensions: Markets Wrap
(Bloomberg) -- Asian stocks began the week in mixed fashion as traders weighed more signs of economies reopening around the world against the rise in U.S.-China tensions.Hong Kong shares extended Friday’s slide, following police clashes with protesters marching against China’s move to crack down on dissent. Stocks climbed in Tokyo, Sydney and Seoul, and fluctuated in Shanghai. S&P 500 futures nudged higher, building on a rally from late in the Friday session. Oil traded near $33 a barrel in New York. Volumes may be light with holidays in the U.S., U.K. and Singapore. China set its daily yuan reference rate at the weakest level since 2008 after the increasing tensions drove the currency to a seven-month low.On the virus front, Japan’s government is expected to lift the state of emergency in Tokyo and its surrounding regions later Monday, while more Australian children returned to schools and a hard-hit region in northern Italy reported zero fatalities for the first time. Still, the U.S. is considering restricting travel from Brazil, which now has the second-highest number of cases.Fresh turmoil in Hong Kong that spilled over into street protests at the weekend is threatening to damage an already souring Sino-U.S. relationship. The U.S. should give up its “wishful thinking” of changing China, Chinese Foreign Minister Wang Yi said, warning that American leaders are potentially pushing toward a new Cold War. Bullish sentiment is prevailing for now and global equities remain about 30% higher than the March lows, spurred by stimulus measures and optimism for a swift rebound from the virus.“One big threat to the recovery in markets is the escalating war of words between the U.S. and China,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. “The main focus will likely remain on continuing evidence that the number of new Covid-19 cases is slowing in developed countries, progress towards medical solutions, the reopening of economies and signs that economic activity is picking up.”Here are some key events coming up:U.S. markets are closed Monday for Memorial Day holiday, while the U.K. is shut for the Spring bank holiday.Earnings continue with companies including Nissan Motor, British Land, Royal Bank of Canada and HP Inc.Singapore’s parliament on Tuesday is expected to announce another stimulus package.Thursday brings the U.S. jobless claims reading for the week ended May 23.Federal Reserve Chairman Jerome Powell participates in a virtual discussion on Friday.These are the main moves in markets:StocksFutures on the S&P 500 rose 0.3% as of 1 p.m. in Tokyo. The gauge rose 0.2% on Friday.Japan’s Topix index advanced 1.2%.Hong Kong’s Hang Seng slid 1%.Shanghai Composite was little changed.Australia’s S&P/ASX 200 Index added 1.5%.South Korea’s Kospi Index gained 0.7%.Euro Stoxx 50 futures rose 0.6%.CurrenciesThe yen was little changed at 107.73 per dollar.The offshore yuan held at 7.1520 per dollar.The euro bought $1.0889, down 0.1%.The Aussie dipped 0.1% to 65.34 U.S. cents.BondsThe yield on 10-year Treasuries fell one basis point to 0.66% on Friday. Futures traded flat.Australian 10-year yields were steady at 0.87%.CommoditiesWest Texas Intermediate crude added 1% to $33.58 a barrel.Gold dipped 0.4% to $1,728.52 an ounce.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
BenzingaNotable Insider Buys This Past Week: Berkshire Hathaway, Sysco And More
* Insider buying can be an encouraging signal for potential investors. * Directors stepped up to make sizable share purchases last week. * Some of those transaction came in the wake of earnings reports.Conventional wisdom says that insiders and 10% owners really only buy shares of a company for one reason -- they believe the stock price will rise and they want to profit. So insider buying can be an encouraging signal for potential investors, particularly during periods of uncertainty.Insiders continued to add shares despite overall market volatility and global economic gloom. Here are some of the most noteworthy insider purchases reported in the past week.Sysco Activist investor Nelson Peltz and one other SYSCO Corporation (NYSE: SYY) director each indirectly added 103,700 shares of this food services giant to their stakes. At per-share prices ranging from $50.29 to $52.27, that totaled more than $10.74 million altogether. Note that these two directors also purchased 600,000 shares each in the previous week.Sysco's disappointing fiscal third-quarter earnings posted earlier this month were followed by lowered price targets. The stock ended last week's trading at $51.75 per share, still within the above purchase price range. The share price is up more than 47% since its year-to-date low in March.Berkshire Hathaway Berkshire Hathaway Inc. (NYSE: BRK-B) saw a director purchase nearly 1,000 shares of this Omaha-based conglomerate last week at $173.30 per share. The same director also bought eight of the class A shares via family trust. Those cost $261,002.63 apiece. The total for these transactions was more than $2.26 million.CEO Warren Buffett has been uncharacteristically cautious so far this year. The B shares ended last week up about 3% to $175.07, while the A shares were last seen trading at $263,094.00 apiece. The timing of that director's purchases seems fortunate.Mercury General Mercury General Corporation (NYSE: MCY) founder and board chair George Joseph stepped up to the buy window again last week. He bought more than 84,000 shares for $38.72 to $38.86 apiece, which totaled almost $3.28 million. Joseph also purchased over 447,000 shares in the previous week.Shares of this Los Angeles-based insurer closed most recently at $39.24 a share. That is above the most recent purchase price range. It is also more than 10% higher than the year-to-date low during the pandemic panic selling back in March, and the analysts' consensus price target is up at $44.See also: Activist Investor Nelson Peltz Says He Is Putting New Capital To WorkIn addition, note that there was some amount of insider buying at Arch Capital Group Ltd. (NASDAQ: ACGL), Arconic Corp (NYSE: ARNC), Carrier Global Corp (NYSE: CARR) and Green Dot Corporation (NYSE: GDOT) last week as well.At the time of this writing, the author had no position in the mentioned equities.Keep up with all the latest breaking news and trading ideas by following Benzinga on Twitter.See more from Benzinga * Barron's Picks And Pans: Berkshire Hathaway, Carvana, Madison Square Garden And More * Bulls And Bears Of The Week: Caterpillar, Facebook, Microsoft And More * Barron's Picks And Pans: Berkshire Hathaway, Disney, SoftBank And More(C) 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
MarketWatchAn emerging market debt crisis could be the next front in U.S.-China conflict
Rising tensions between the U.S. and China over coronavirus culpability have helped reignite trade and economic debates, but the next front in the conflict between the world’s two largest economies could be over a brewing emerging-market debt crisis
MarketWatchAre stock investors too complacent about a full-scale blowup between China and the U.S.? Here’s what Wall Street experts say
China and the U.S. are back in the headlines — but are investors paying sufficient attention to the risks of a geopolitical clash?
MarketWatchOver 4 million Americans are now skipping their mortgage payments
The pace of homeowners requesting mortgage relief because of the coronavirus pandemic has slowed considerably.
TechCrunchChina Roundup: A blow to US-listed Chinese firms and TikTok's new global face
Hello and welcome back to TechCrunch’s China Roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world. It's been a tumultuous week for Chinese tech firms abroad: Huawei's mounting pressure from the U.S., a big blow to U.S.-listed Chinese firms, and TikTok's high-profile new boss. Over the years, American investors have been pumping billions of dollars into Chinese firms listed in the U.S., from giants like Alibaba and Baidu to emerging players like Pinduoduo and Bilibili.
Investor's Business DailyIs The Stock Market Closed On Memorial Day?
Is the stock market closed on Memorial Day? It is. The New York Stock Exchange, Nasdaq and bond markets will be fully closed on Memorial Day, which lands on Monday May 25 this year. Stock market futures will trade as usual, starting at 6 p.
- Financial Times
UK court orders Anil Ambani to pay $717m to Chinese banks
Anil Ambani has been ordered to pay more than $700m to his Chinese creditors in the culmination of a case that has laid bare the dramatic financial decline of one of the world’s richest tycoons. A High Court judge in London gave Mr Ambani 21 days to make an interim payment of $717m owed to a consortium of Chinese creditors led by the Industrial and Commercial Bank of China, the world’s largest bank by assets. ICBC, along with China Development Bank and Export-Import Bank of China, lent almost $1bn to Mr Ambani’s now bankrupt telecoms company Reliance Communications in 2012.
QuartzA Taiwanese semiconductor titan is at the heart of the US-China tech fight
The world's largest semiconductor foundry is finding it hard to stay neutral between the two superpowers.
BloombergEurope’s Debt Reckoning May Mean Tough Choices on Who to Tax
(Bloomberg) -- Europe’s leaders may be united on the need to throw money at economies during the coronavirus crisis, but they have yet to confront how to pay for it all.That reckoning could force governments across the region into tough choices about where to lay the burden among voters already disillusioned with political establishments -- a decade after the global financial crisis presented them with previous bills to settle.Europe’s austerity experiments since then, from Greece to the U.K., provide cautionary tales of either the economic damage or electoral fatigue that spending cuts can cause. With those bitter experiences in mind, politicians are already fielding questions about tax hikes on either wealth or income -- even if they too might threaten to hurt growth.Alternatives include tolerating higher debts such as Japan does, or perhaps trying to inflict a dose of inflation to erode them away -- itself a tax of sorts. With sovereign borrowing costs historically low, such approaches may look tempting as the bills rack up fast. Debt ratios in the euro area and U.K. may top the 100% milestone this year.“There are very few easy or politically attractive ways to deal with this,” said James Athey, a money manager at Aberdeen Standard Investments. “The ideal way to pay for this is to generate growth that’s higher than your cost of funding. Unfortunately, I think that’s going to be very difficult.”As European governments rapidly ramp up borrowing to aid economies, the region’s experience of austerity is framing the debate on how to tackle debt. Applying such medicine too forcefully in Greece in 2010 led the International Monetary Fund to conclude that it had caused more harm than good to public finances and growth.In the U.K., whose 2010 deficit also ballooned to a Greek-like level, austerity under former Prime Minister David Cameron coincided with years of negligible growth. Whether or not that followed from spending cuts, it did fuel discontent that contributed to his political demise when the country voted to leave the European Union.“European governments got worried about the large increase in debt and shifted to fiscal austerity, probably excessively slowing the recovery,” said former IMF Chief Economist Olivier Blanchard.One discussion in Europe is whether taxes should rise when the recovery takes hold. Switzerland’s Social Democrats want higher income taxes, and the U.K. media is also awash with speculation about potential tax increases.A further argument is focused on wealth taxes. The minority partner in Spain’s coalition is mulling such a proposal, while in France, where the government recently reduced wealth tax, economist Thomas Piketty says history shows such measures are the best way of bringing down huge public debt. Camille Landais, a professor of economics at the London School of Economics, even suggests a time-limited, Europe-wide wealth tax.“If there needs to be some form of mild rebalancing of public finances it must be in a way that is fair, and essentially targets individuals that are most able to weather this,” said Landais.German Chancellor Angela Merkel has already been forced to deny any plans for higher taxes for now, while French Finance Minister Bruno Le Maire said he doesn’t want to reapply the country’s levy on wealth. Athey says such reactions are understandable.“The notion of raising taxes that don’t retard growth is very difficult,” he said.The crisis may also reignite calls to change the mindset in the euro zone at least, where German-stipulated limits on deficits and debt were cemented into its monetary union. In Japan and the U.S., higher outright debt loads are accepted for longer while governments stabilize spending and curb borrowings through economic growth, conveniently shifting some of the burden to future generations of politicians too.Helping governments to keep debt costs under control are the actions of central banks. Their hoovering up of bonds has largely removed concerns over spiralling borrowing costs which dominated the early 2010s, and provide a foundation for public finances to start fixing themselves.“The only sensible way out of over-indebtedness or high debts is more economic dynamism,” Marcel Fratzscher, President of DIW German Institute for Economic Research, said this month. “That’s the lesson after the global financial crisis.”Central banks may also face pressure from governments to keep monetary policy loose for longer, tolerating inflation that erodes the value of government debts -- a tactic that helped the U.K. to bring its borrowings under control in the era after World War II.Inflation, while long craved by monetary authorities since the financial crisis, would also hurt savings and evoke painful memories for some countries, from Germany in the 1930s to the U.K. in the 1970s. Fratzscher says that as a policy to reduce debt, it’s “damaging.”But what if debt just can’t be brought under control? William White, a senior fellow at the C.D. Howe Institute in Toronto and a former chief economist at the Bank for International Settlements, says that outcome is a real possibility.“We’re on a bad path here of debt accumulation,” he said. “Thinking much more seriously about debt restructuring in an orderly way is required.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
MarketWatchCoronavirus update: U.S. death toll approaches 100,000 as CDC’s testing practices are criticized by health experts
The U.S. death toll from the coronavirus that causes COVID-19 edged closer to 100,000 on Friday, as the news emerged that the Centers for Disease Control and Prevention has been combining the results of two different types of tests for the illness in a move that has been sharply criticized by health experts.
MarketWatchStock-market traders brace for ‘dogfight’ as S&P 500 lingers below its 200-day moving average
This is the level everyone is watching — but getting above the 200-day moving average doesn’t mean the stock market will be zooming back to the highs, chart watchers say.
MarketWatch‘It’s time for China to blink first,’ says Rep. Sherman, who leads the drive to delist China stocks
Sherman says that the time has long passed for Washington to force Chinese companies to provide the same investor protections that U.S. companies have for decades.
MarketWatchAsian markets mixed as U.S.-China tensions heat up
Hong Kong stocks fall as demonstrators take to the streets to protest proposal by China to supercede city government’s authority.
