Arrium v banks. Arrium, the country’s biggest steelmaker and a big employer in South Australia (and remember this an election year), is in the midst of a life-or-death battle with the banks after they rejected a near $1 billion bailout offer from US company GSO, the credit arm of the gigantic Blackstone Group. With shares last trading a 2.2 cents a share, investors reckon Arrium is a shot duck, with no hope of living in its current form, or at all. Just the thing to concentrate the mind in this an election year (and a possible replay of what is happening in Britain, where the Conservative Cameron government has been hit by Indian group Tata to shut most of its UK steel operations). GSO’s proposed bailout would have caused the banks (around 24 of them, including our big four) to lose around 45 cents in the dollar — collectively that could be close to $1 billion. So it was no wonder then that ANZ lifted its bad debt provisions almost two weeks ago by $100 million, blaming exposures to resources companies, one of which was soon identified as Arrium.

There are media reports that GSO is thinking of lifting its offer to give the banks a bit more (five to 10 cents a share?). But the media reports say the banks, especially the big four, are very upset at Arrium’s management for not talking to them before dealing with GSO. But the banks face the big problem best expressed in the old banking adage: “If you owe a bank $1 you have a problem, but if you owe it $10 million, the bank has a problem.” Arrium’s total debts are around $2.3 billion to $2.4 billion, and the banking groups debt is said to total $2 billion. If the banks go feral and bring in an administrator, then they may very well get more money, but it will take longer, and the list of buyers for steel assets is not long (even for Arrium’s steel consumables business, which is very profitable and keeping the whole group alive). There is, in fact, every chance the banks could end up with losses of more than 45 cents in the dollar, which would make them a bunch of dills and deadheads for crunching a struggling business that came up with at least one offer that gave it a chance of living longer than with the current support from the banks. — Glenn Dyer

Inversions out. It’s not linked to the Panama Papers, but the timing was exquisite with the US government cracking down on what are called “tax inversions” — that’s where US companies take over companies in a similar part of their business in another country with a lower tax regime and less intrusive regulators, such as Ireland — the black hole of the eurozone. Hungry Jack’s did a US$11.4 billion one with Tim Horton’s, a Canadian coffee and fast food group in 2014, and the biggest current one was US drug giant Pfizer offering to buy Ireland-based Allergan — a deal with a value of a ridiculous US$160 billion (A$213 billion). Pfizer strongly defends the deal — no wonder, seeing its US tax bill will fall to 17% from 26% in 2014, a big win for shareholders and management and the board and all their fat bonuses and share rights and options. While technically not an inversion, the combined entity was expected to benefit from Allergan’s Ireland domicile and that country’s low tax and compliant regulatory regime.

But this morning the US Treasury announced it would take measures against inversions and especially intra-company loans, in which a company’s foreign office lends money to a US-based subsidiary in a process called “earnings-stripping”, which reduces its US tax burden.The companies use the interest payment on the inter-company loan to reduce their US tax bill, effectively transferring earnings to the lower taxing regime. Similar arrangements have been mentioned in the Australian tax debate involving foreign companies and their local arms. US Treasury Secretary Jack Lew also had harsh words on inversions, bagging companies that use the measure for taking advantage of the benefits of US labour and infrastructure “while shifting a greater tax burden to other businesses and American families”. The news stunned investors and Allergan shares slid nearly 20% in afterhours trading. — Glenn Dyer

US jobs. It is a commonly held belief in the American economic commentariat that the current recovery in the US economy has been weak and slow to build — and it is true that rather than being a V-shaped rebound from the depths of the recession in 2008-09, the recovery has been more like a flattened-out W. But that is to deny the depths of the recession (the worst since the 1930s Depression) and its impact on the US economy. Friday’s jobs report showed there were 215,000 new jobs in March and a rise in the jobless rate to 5% as more people came into the workforce. But Friday was the 70th month in a row that US payrolls have grown. Over that time, 14.5 million new private sector jobs have been created, or 198,000 on average for each of those 70 months. And Marketwatch.com reported that the US labour force (which consists of everyone who holds a job plus everyone who is actively searching for work) has grown by 2.4 million. And almost all of them are finding work with employment increasing by the same amount in the same time.

And like in Australia, the jobs growth has been achieved without any wage pressures or higher inflation. Inflation hasn’t reached the Fed’s 2% target range for four years — it is close at the moment, around 1.7%. But like the Reserve Bank, the Fed is probably wishing secretly for a burst of inflation to inject some fizz into their economies, currencies and markets, and consumer spending. Perhaps Donald Dumpf could be encouraged to read some of this data after his stupid claim at the weekend that the US faces an enormous recession. — Glenn Dyer

Peter Fray

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