You know, timing is everything. If you hit brakes after you pass the red light... Bang! If you pucker up after you press your face against that of your sweetheart's.... You bonk her/him on the forehead. If you downgrade a nation after obvious signs of insolvency... From CNBC today: Moody's Cuts Spain's Debt Rating by One Notch
Ratings agency Moody's cut Spain's sovereign debt rating one notch on Thursday and warned of further cuts due to fears that bank restructuring will likely cost more than twice what the government expects. "(Moody's) believes there is a meaningful risk that the eventual cost of the recapitalization effort could considerably exceed the government's current projections," it said in a statement.
Moody's Investors Service still rates Spain — one of the countries now in the firing line in Europe's debt crisis — as a high grade investment proposition.
By way of comparison, the agency rates Portugal two notches lower and Greece far down with junk status.
The ratings agency said the overall cost of recapitalizing struggling banks was likely to be nearer to 40 billion euros, double the government's estimate.
In a more stressed scenario recapitalization needs could even rise to around 110 to 120 billion euros, it said.
... Moody's also noted that nine of the country's 17 autonomous regions breached budget deficit targets.
Exactly 1 year ago tomorrow, I issued the following report to my subscribers - Spain public finances projections_033010, as excerpted from the first four pages...
To add fuel to the fire, one year before this warning (two years ago) I warned of the real estate based risks of the Spanish banks - starting with BBVA. This is the subscriber report issued last year on the contagion risk to Spain's more vulnerable banks. Nothing much has changed - at least for the positive:
- A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf
- A Review of the Spanish Banks from a Sovereign Risk Perspective – professional
Of course, the cloud over everybody's head is the risk of default/restructuring. If one of the weak or periphery states default, funding costs will skyrocket across the board as will real economic solvency issues due to the levered holding of sovereign bonds that suddenly plummet (even further) in price. The question is not necessarily whether Spain will default or not, but whether Spain, Ireland, Greece, Portugal or Italy will deal with their hiccups via restructuring.
For subscribers, this is a very detailed scenario roadmap of haircuts and NPV of future cash flow reductions upon a wide variety of Spain restructuring options: The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers. For the hopium smoking, ratings agency following crowd who still believe such an event may not take place, reference the new government over in Ireland. Our friends over in Ireland have issued a new roadmap for the country which is not very different from what they can campaigned on when they were running from office. It's good to know politicians can keep their word for more than a few weeks... Check this out though... "Towards Recovery: Programme for a National Government 2011-2016 - as excerpted and annotated (click, then click the image that opens up in new page again to enlarge):
You better get those clippers ready... The new government is gonna' get to cuttin'! Of course, we anticipated this about this time last year as well - a little more than a year ahead of the ratings agencies - remember that timing thing! Subscribers should see Ireland public finances projections.
Professional/institutional subscribers can go through the multitude of haircut scenarios and the economic losses to be taken under each scenario by the respective bondholders here: Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts.
Any non-subscriber who is wondering about the depth and of the haircut analysis that I have posted can peruse the full Portugal analysis online for free - reference The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History as a primer than move on to the article with the embedded online spreadsheet - the entire Portuguese default scenario analysis you will find it nowhere else on the Web: The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog or move directly to the embedded model - Portugal’s Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy – Professional Analysis
The obvious but rarely reported fact...
- ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!!
- The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess
- Is Another Banking Crisis Inevitable?
Please feel free to peruse the entire Pan-European Sovereign Debt Crisis series and/or catch up with my latest musings, opinions and analysis regarding Europe.