Moody’s Tardily Cuts Spain’s Rating After Greece Gets Put In The Trash Bin, All The While Ireland Plainly States That It Will Default!

Reggie Middleton's picture

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 - File Icon 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:

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 File Icon 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: or move directly to the embedded model - Portugal’s Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy – Professional Analysis

More reading on Greece: Moody’s Very Late, But Nevertheless Quite Appropriate Greek Downgrade Inches Us Closer To the Rate Volatility Storm

The obvious but rarely reported fact...

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.

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GFORCE's picture

What we're talking about is market timing. Reggie's research has been solid and he has called out many countries ahead of the market.

Reggie didn't tell people to play the market in any way. There has been plenty money to be made on the short side anyway. This is a dead cat bounce for europe, which has been swept under the rug.

The european union has a date with destiny and it will be found out. The actions over the last few months have been desperate by the eurocrats, willing to save their system (and their jobs) at all costs.

People like Reggie called out the hopium of countries like Greece who said they could grow out of this. This week we heard that unemployment is still rising there and so tax receipts can't meet the massive obligations. This will happen in Ireland also. Ireland's boom was built on easy debt and property construction. The Tiger is a dead cat and it's not coming back.

The optimism of the market ignored the sovereign debt issue but Spain's downgrade starts a whole new ball game. Spain cannot be bailed out.







Jack Sheet's picture

Reggie, as usual an interesting and  insightful analysis- but please, what the f*** does it mean for my investments?

THE DORK OF CORK's picture

The central problem in the Euro zone is that the ECB refuses to expand their balance sheet much beyond 2 trillion.

This act would knock the dollar reserve for six as Gold would explode - however Europe needs America to defend its interests to the south and east.

The dollar is needed to pay the US troops / equipment and gasoline.

IQ 145's picture

 I tend to regard the "central problem" as the Biblical case of the horse and the mule yoked together; and neither one can work properly. Different member states chaffing under the yoke of the Euro; for different reasons.

THE DORK OF CORK's picture

If Germany really owned its Gold reserves there would be no problem as a euro devaluation would still give the Germans the bulk of the wealth withen the eurozone.


However the Bundesbank unlike some other central banks withen Europe is officially a private operation and its gold seems to be outside Germany's jurisdiction.

deepsouthdoug's picture

NO Man - Dogs and Cats living together.

Xkwisetly Paneful's picture

Pay no mind, this is an excellent entry.

Maybe next ck out that the latest Illinois bond muni issuance was sold with yields two points higher than most munis and near corporate junk. Moodys didn't lower the state's rating till after the sale and the money is being spent on the same exact crappolla Spain is spending their money on.

Spalding_Smailes's picture



You had been dead wrong for months on the Euro • Pigs, as the markets climbed. You talked about all the same issues then boom everything went up for 14 weeks costing many traders money if they followed your advice.


Now things get hot in Europe and you crowing about your old post ? 

Reggie Middleton's picture

What do you mean dead wrong. I have been absolutley correct - on the banks, on the state of indebtedness...

I don't know what your level of sophistication is, but the price of the market does not dictate whether someone is right or not. If I say you have jalopy with a radioctive spore growing out of the seat and it will kill the next 5 people it touches, yet you manage to sell it to some sucker 14 weeks ago for $80,000 does that mean I was wrong or the the price of the car divereged from the fundamental value of the car.

You will probably learn over the next year or so (if you haven't learend over the last 4 eyars) that price does not necessarily = value and the prices in low volume market does not necessarily reveal the "truth" as you were taught in efficient market hypothesis class in college.

doggings's picture

Reggie man, show some dignity and dont rise to paid trolls.

this is called a "justification bite" and is exactly what he is aiming for.


IQ 145's picture

 You did your homework; you did the research; your conclusions are reasonable; that's about all anyone can ask of another person. I haven't met anybody yet who was always right on the market and the timing; not planning to either.

cvivet's picture


You still do not understand the political mind behind the euro. Any german with any common sense would agree that leaving the euro would kill german's economy.

The EZ can still aford to provide help to Spain. And that's where all the contagion stops. There are no other places that can reasonably cause any threat to the EZ.

Don't forget that as a whole the EZ does not have a current accound deficit. It is not much dependant on foreigners to finance itself (removing current inward foreign financial flow would bring back EZ originated flow from outside). 

Spalding_Smailes's picture

Just sayn'


Followed your work for 5-6 years on the old shitty boom bust blog ( all green - I sent Tyler a link so he could find your blog - Your macro stuff is great, but ...).... Great insight on the issues with the banks derivative issues ect ..... But look what happened, bailouts, mbs swept under the rug. I recall a post about the massive issues with all the mid-sized banks in the USA. Fifth Third ect .... Now look at the stock prices of all those mid sized banks up hundreds of percent.


The EU will sweep this shit under said rug and in 3 months everything will be fine. Don't trade the charts • macro insight unless you are a day trader ....

Reggie Middleton's picture

Well, my friend, I'm not a trader and you will definitely need a horizon longer than 14 weeks to capitalize off of anything that I do. I'm not always right, but I'm seldom TOTALLY wrong as well. Partially wrong yes, totally wrong not that often.

It took longer than 14 weeks for the bubble to bust, longer than that for the housing and credit bubble, and you can bet it will take longer than that for the sovereign debt bubble as well.

Spalding_Smailes's picture


I came off as a dick, sorry. Like I said, I have followed you a very long time and you taught me a ton about securitization ect .... ( for free - thats the best thing about your blog post, even if you don't pay for the insider information packages. )

My real point being its hard to trade macro information, the timing of the rubber hitting the pavement.


Jasper M's picture

Did you just apolagize?!? WHO Are You? And What have you Done with SPAULDING?

One of the problems trying to trade macro is the very things that destroy fundamental value (collectivist influences) tend to skew and divert where the costs of those land. Our mega-banks ruined themselves, should be out of business – but our government is laboring mightily (at the cost of the taxpayers) to prevent that. It's only a stall, and that bill Will come due (on the banks, and so many more), but for the moment, it does make te trade harder. 

   I recommend patience. Not because it is a sovereign remedy in itself, but because the alternative is ruinous. 

RockyRacoon's picture

Hey, Smiley, how do I get one of these • on my keyboard?  This is the coolest thing about your comments.   The only cool thing in fact. •••

Spalding_Smailes's picture

Not sure † I don't know what's going on.

The only cool thing ? I gave Tyler the heads up on Reggie ...

Also, everything I post can be backed up by other sources, maybe you should step up and debate me on issues I post about if you don't like my groove .... I'm all ears. Many posters talk about China dumping treasuries ( not going to happen because the yuan would sky rocket crushing exports - massive unemployment ). But morons keep post lies like this without thinking things through .... Everyday they post China's ready to dump ect ....

Mindless crap like this is spilled out in many threads, I do my best setting the record straight ....

RockyRacoon's picture

Huh?  What?  Sorry, wasn't paying attention.  I'm trying to find that • on my keyboard...

THE DORK OF CORK's picture

On his trip to Helsinki before becoming prime minister it was leaked to the press that there would be no renegotiation of the deal.

He needs some sop to give to the Irish gombeens but they will instigate a famine before they will change substantially the terms of the bailout .

There has been a element of Irish society that is directly dependent on the EU structure remaining as it is - they will not jeopardize this revenue stream for a few peasants.

Remember the deposits in Ireland are still very substantial as they are the result of the credit hyperinflation of the last decade.

There is simply too much to lose for the more connected elements of Ireland although the dynamics may change if the majority of deposits disappears into other banking jurisdictions as seems to be happening.

This dog and pony show could go on for some time to come.

Meanwhile it seems we may overtake Germany soon in Trade surplus statistics IN NOMINAL TERMS.

This will be a truely astounding figure and difficult to hide from even the slowest of Irish.

Ireland is the most extreme example of the banking / corporate matrix - the distortions in the global economy are of elephant man type mutations.

There is a huge effort going on behind the scenes to quarantine the European banking debacle in ireland -  as Brian lenihan so quaintly put it we are a island.

They will follow the fucking orders.


IQ 145's picture

 There is a huge effort to quarantine the banking debacle in Ireland; I bet there is. Appreciate your posts.

Sudden Debt's picture

they did a pole over here about how many people think Ireland, Spain and Portugal will default and fridays EU vote won't get through.


78% say they'll fail

21% live on another planet

1% weren't able to press 1 button...



IQ 145's picture

 A "poll"; they did a poll. They did a Pole, is a whole nother thing. Something that an old SS  man might have been interested in.

Xkwisetly Paneful's picture

But raising taxes is the solution to the US debt problems?

afterall can't cut government in good times and can't cut government in bad time according to the neo marxists.

Fact that Europe taxes the shit out of their people and most of it is broke anyway,  shows every form of government will outspend their means no matter how regressive and oppressive the taxtion scheme happens to be.

Fred Hayek's picture

If Enda Kelly does not try to negotiate that "bailout" debt down to nothing, then he is a fool.

If, upon choosing to try to do so he cannot, then he is the worst negotiator in the history of man.


equity_momo's picture

Agreed - however , what if its a case of "the King is dead , long live the King".   Given VIP access to the big boys club might change his mind. He is afterall , a career politician.

I wouldnt hold my breath - if it wasnt for the Icelandic people turning up with fish-hooks and the message "we will keep voting you out till you listen to us OR we lose our patience" then you can betchya life that Icelands politburo would have played ball with the banksters and Eurocrats.

sunkeye's picture

@eq_mo re your comment stamped 0953: well said you nailed it buddy