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The European AIG: How Moody's Downgrade Of Greece Can Start The Avalanche
As one so vividly remembers, probably the key catalyst that set off the chain of events last fall following the collapse of Lehman were the closed loop (and much delayed) downgrades of AIG, which in a span of hours went from AAA to much lower, thus springing various collateral requirements which the company could not satisfy, and in turn forcing even more downgrades, until ultimately it became clear that the firm (like most others on Wall Street) is merely a lot of hot air and unjustified valuations. Ironically, the rating agencies, and more specifically Moody's, could once again be the catalyst for the much anticipated collapse of the European house of cards, which as all now know, has Greece as its weakest link. The threat: a Greek downgrade by Moody's from its current rating of A1 to anything with a B handle would make the country's sovereign debt ineligible for ECB collateral in 2011, sparking a sovereign liquidity crisis. Recall that both Fitch and S&P recently downgraded Greece to BBB+, implying that the fate of Greece, and specifically its ability to access cheap and quick capital via the ECB, could be cut off on the whim of the rating agency that Warren Buffett himself can't stop selling enough of.
Goldman's take on this interlinked situation should have investors worldwide very worried:
When S&P downgraded Greece to BBB+ (from A-) yesterday, they de facto handed the critical decision of eligibility for Greek sovereign debt at the ECB over to Moody’s. This is a bizarre and ultimately untenable situation for the ECB. Therefore, unless we get a major improvement in the Greek fiscal outlook during the next few months, the ECB would want to rectify the situation by revising its eligibility criteria for sovereign debt.
The ECB’s rules state that Euro-zone sovereign bonds are eligible for ECB collateral as long as they have at least one A- rating (or better) from one of the three credit rating agencies. (This rule has been temporarily modified for the period until the end of 2010 to a minimum of a BBB- rating, with a 5% haircut if a credit is rated BBB- by all three agencies.) Fitch downgraded Greece to BBB+ on December 8, so when S&P moved to the same rating yesterday, Moody’s became the de facto decision maker on Greek eligibility at the ECB. Currently, Moody’s is a significant outlier in terms of its rating; its A1 rating for Greece is three notches above Baa1 (the equivalent of BBB+) which would cut them off from the ECB’s facility from the beginning of 2011.
The danger, as Goldman highlights, is that the fate of the first domino is in very tenuous hands:
Now, however, the unthinkable - that the ECB would not accept sovereign
securities from a member as collateral - has become a measurable risk,
and one exclusively controlled by Moody’s. Clearly untenable!
What will happen now? This is what Goldman analyst Erik Nielsen believes:
1. If the Greek fiscal outlook improves significantly during the next few months, then the ECB might decide to take the chance that Moody’s won’t downgrade them by three notches (or more). Such an improvement could come via the implementation of the government’s stated program, plus maybe a few more safeguarding measures (after all, Almunia called the present program “steps in the right direction”, which presumably falls short of an assessment of being “sufficient”.) Alternatively – or in addition – the improvement of the outlook could come through a substantial non-commercial financing package, from the EU (which would require some twisting of the rules), bilateral help in the form of lending or guarantees, and/or help from the IMF. (My suggestion would be a European emergency facility, e.g. with a rolling guarantee, as I discussed in “The way forward for Europe post-crisis”, July 28, 2009; Global Economics Paper No 186.)
2. Since the ECB could not be seen to change its rules in reaction to Moody’s (potential) downgrades, they would have to be confident very soon that such downgrades are not forthcoming. If not sufficiently confident, they would want to revise their eligibility criteria very soon, probably within a few months. If so, I think they have two choices: They could announce a further extension beyond 2010 of the present temporary regime, or they could introduce a version of the “conventional warfare threat” that I proposed back in 2005 (second bullet above.)
And so Moody's is once again caught in a vise: if it does the right thing and express an objective opinion it will likely precipitate the next crisis, this time in Europe. If it keeps mum, under the behest of Trichet and Greek politicians, it will lose yet more credibility, without any clear guarantees that the fiscal situation in Greece won't deteriorate sufficient to alone merit a solvency/liquidity crisis. But as everyone knows, in this global push to extend and pretend, the one certain thing is that Moody's will rush to make any decision. After all - 3 years down the road things look so much better, if one simply does the Birinyi approach of extrapolating the market using a ruler as a trendline. And if that doesn't work, Moody's can always just downgrade itself to D sooner or later and end its own misery.
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ECB decisions of this import should not depend on the decisions of a private rating agency. That is a fundamental problem with this scheme.
Maybe they should just rate themselves, and that will be so much better...
Your days are numbered, you stupid bulls. Your Satanic enablers' Witching hour is winding down. The cognoscente know what will happen in Q1 10. I can't wait. The pleasure of seeing you pigs slaughtered will bring tremendous joy to me.
Remain calm. All is well.
http://www.youtube.com/watch?v=zDAmPIq29ro
The greatest movie ever made.
Knowledge is good.
hopefully Greece defaults soon
A full blown EU crisis is now becoming more and more possible. The spreads on the 10 yr Bunds and 10 yr GGB are instructive. We saw an initial widening on the downgrade, a consolidation, and now the spreads are widening again. Same thing is happenin with the Euro as CB's, corporates and investors generally are dumping Euro positions as they are hugely underweight the dollar. The next derivative we be the european banks and insurance companies. If they start gapping down, the crisis game-on....
It's like a greek tragedy...
No, it is a world tragedy as this has the potential to bring the whole system down as a large sovereign default would set off an enormous chain reaction which the world will have little or no way of dealing with...
I think he meant greek tragedy literally as in literature. We already know the tragedy but follow it anyway to see how it unfolds.
See here:
http://www.forexlive.com/72410/all/ecb-says-will-not-change-collateral-tightening-plans-to-suit-greece
Seems like the ECB will hold true to its course on collateral, in spite of GS whining.
The ECB doesn't even know what it is holding as collateral.
You can look it up!
http://www.zerohedge.com/article/federal-reserve-balance-sheet-update-we... , no charge.
"The bank “will require at least two ratings from an accepted external credit assessment institution for all” asset- backed securities issued from March 1, 2010, the Frankfurt-based central bank said today in an e-mailed statement. In January, the ECB said it required a rating from one credit assessor."
Yes, well, GS have good reasons for supporting the Greeks.
They could not leave their little brothers behind...
Greece has been a welfare child for 30 years , a rebel faction , perhaps the EU wants this little tale known now, so to raise the dollar value in a crisis and keep industry?
Deep Shah starring in Greek Downgrade.
As usual, ZH is right on the money. Moody's and SnP are essentially shills for the government and the squid, but this will work against the market as everyone will be slow to react..again.
bah greece will get papered over like USA, Dubai, japan, etc. Nothing to see here folks other than wheatpasted dollars and euros
Not this time.
Paper in short supply...
Greece has cheated itself in the EU and now we have to pay for the concequences.
No follin'....greece in the grease!! And we fry for their irresponsible behaviour. Lowering tax rates at this point is useless on BB. No one should wish for a default, and add to this, the garbage in IRAN and you have a hell of a weekend, pre-holiday!
And the reason the ECB cannot do its own ratings evaluation would be?????
The process would be even more hopelessly politicised than the existing travesty. The EU can't even consistently enforce the Eurozone's anti-deficit treaty provisions, never mind objectively rate the Eurozone members' sovereign debts.
Then there's the fact that for the last year, the ECB hasn't really wanted to know what the collateral it's been accepting is actually worth. It's much less embarrassing to outsource the fuzzy math to the private ratings industry:
"The bank “will require at least two ratings from an accepted external credit assessment institution for all” asset- backed securities issued from March 1, 2010, the Frankfurt-based central bank said today in an e-mailed statement. In January, the ECB said it required a rating from one credit assessor."
http://www.zerohedge.com/article/federal-reserve-balance-sheet-update-we...
<The ECB’s rules state that Euro-zone sovereign bonds are eligible for ECB collateral as long as they have at least one A- rating (or better) from one of the three credit rating agencies.>
It must be nice when one's company is written into the laws and regulations of a country. It must be nice as a country to be able to write laws and regulations that incorporate corrupt, pliant corporations that are willing to cover for government failures.
For the rest of us, this sucks total donkeyballs. Go DARPA and a pox on the ratings agencies.
A Greek default will undermine the Euro and set back the drive for a one-world currency. This is beneficial to the rest of humanity. The more one-world currency methods collapse the better. Local economy, local currency = more sovereign people.
You are absolutely correct in that. Why shouldn't people be able to determine their future by themselves, instead of depending upon or being weighed down by another?
Besides, it would make the 4X game much more lucrative!
Great! We need more people like you saying it out loud. Now take the paper bag off and assume at least a pseudonym. Soon enough you may have to man up a machine gun to protect your sovereignty.
Wasn't it just about 10 weeks ago that people were talking about the Chinese moving a bunch of dollar reserves into the Euro? Oooopss...was when the dollar was bottoming? Ah, well, that too shall pass.
Diogenes went to the Oracle at Delphi to ask for its advice, and was told that he should "deface the currency," and Diogenes, realizing that the oracle meant that he should deface the political currency rather than actual coins, travelled to Athens and made it his life's goal to deface established customs and values. -- Diogenes Laërtius, vi. 20, 21
Now we have central bankers and irresponsible governments who manage to debase (deface) monetary currency and politcal currency.
Diogenes è un grande!!
Good stuff!
Regional and local currency problems support the one world currency concept, not the other way around. The problem, you see, is this tribal currency concept. If we could all just get along through one currency, you'd never have these massive collapse issues, don't you see?
False Iranian flags in Iraq?
http://english.aljazeera.net/news/middleeast/2009/12/2009121816934643863...
Are we having fun yet?
-MobBarley
Long souvlaki, Short tacos
But pink tacos make me long.......
Means more Greeks fleeing to australia. So they can sprerad the word how wonderful socialism is to the rest of the world. I heard thegreek prime minister say last night they will reduce the levels of government from 5 to 4. Greece needs one mayor and a 5% sales tax. Thats it. And no more welfare from germans and austrians. They can work in the german countryside planting wheat but no freebies anymore.
Means more Greeks fleeing to australia. So they can sprerad the word how wonderful socialism is to the rest of the world. I heard thegreek prime minister say last night they will reduce the levels of government from 5 to 4. Greece needs one mayor and a 5% sales tax. Thats it. And no more welfare from germans and austrians. They can work in the german countryside planting wheat but no freebies anymore.
Means more Greeks fleeing to australia. So they can sprerad the word how wonderful socialism is to the rest of the world. I heard thegreek prime minister say last night they will reduce the levels of government from 5 to 4. Greece needs one mayor and a 5% sales tax. Thats it. And no more welfare from germans and austrians. They can work in the german countryside planting wheat but no freebies anymore.
Am I missing something? Why can't Greece's Central Bank just borrow (as many foreign banks have to stay afloat) from uncle Ben at .2% and promise to buy our bonds with the funds and make 3% in the process. Hell, a check is probably in the mail right now. Those bonds show up on their balance sheets as a major asset. The US will be able to forgive the debt 5-10yrs down the line and all will be well.
Am I missing something? Why can't Greece's Central Bank just borrow (as many foreign banks have to stay afloat) from uncle Ben at .2% and promise to buy our bonds with the funds and make 3% in the process. Hell, a check is probably in the mail right now. Those bonds show up on their balance sheets as a major asset. The US will be able to forgive the debt 5-10yrs down the line and all will be well.
Overheard in Moody's executive washroom...
"So where you going for the Christmas/New Years vacation?"
"The Greek Isles"
"How nice!"
"Yeah, we have some REALLY, REALLY good friends there."
These guys point out that the size of Greece's sovereign debt is puny compared to that of the US or the UK, and even that of California.
...
But with a country producing 2.5% of the Eurozone’s GDP (and 1.9% of the EU’s) we are far from a dangerous situation weighing on the single European currency and the Eurozone. By way of example, the California’s default (12% of US GDP) entails far more risks of destablisation of the Dollar and the American economy. Moreover, since the same analysts usually like to make lists of all the Eurozone countries facing up to a serious crisis in their public finances (Spain, Ireland, Portugal, to which we can add France and Germany), for the sake of completeness it should be pointed out that in the United States, besides the fact that the Federal State would be technically bankrupt (11) if the Fed weren’t printing Dollars in unlimited quantities for the purpose of buying, directly or indirectly, Treasury Bonds for an equal value, and besides California (the richest state in the Union teetering on the edge of the abyss for months), there are altogether 48 States out of 50 with growing budget deficits now (12).
...
http://www.leap2020.eu/geab-n-40-is-available!-spring-2010-a-new-tipping-point-of-the-global-systemic-crisis-when-the-slip-knot-around-public_a4093.html
They have already lost 99 of 100 points of their credibility, so losing another .1 is not a problem. All that matters is that they keep some credibility.
death spiral coming, mot, till then ngda