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Moody’s Very Late, But Nevertheless Quite Appropriate Greek Downgrade Inches Us Closer To the Rate Volatility Storm
For the past two years, and particularly over the last couple of
months, I have been harping on the coming interest rate volatility
storm. Things are now moving in lockstep, precisely as I have forecast.
In the news this morning from the mainstream media…
Moody’s Downgrades Greek Sovereign Debt by 3 Notches:
Moody’s rating agency downgraded
Greece’s sovereign debt on Monday from B1 to Ba1 and assigned it a
negative outlook, citing significant risks to its fiscal restructuring
program.
Moody’s now has the lowest rating
for Greece of all the major credit agencies and is the first to classify
Greek government debt as ‘highly speculative’.
“The fiscal consolidation measures
and structural reforms that are needed to stabilize the country’s debt
metrics remain very ambitious and are subject to significant
implementation risks,” Moody’s said in a statement. It added that it saw
risks that conditions attached to continuing financial aid after 2013
will reflect solvency criteria that the country may not satisfy, and
result in a restructuring of existing debt.
“At a time when the global economy is
fragile and market sentiment is sensitive, unbalanced and unjustified
rating decisions such as Moody’s today can initiate damaging
self-fulfilling prophecies and certainly strengthen the arguments for
tighter regulation of the rating agencies themselves,” it said.
So, the Greek officials threaten to “regulate” those who FINALLY come
out with the truth. Did you guys ever see that movie called the
“Adjustment Bureau”?
The Greek government wants the truth “Adjusted”,
and will even go so far as to do it themselves – see the Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! excerpt below.
In addition, Moody’s is soooooo late to the party. As illustrated in explicit detail nearly a year ago, this event is practically a foregone conclusion. See What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates and look as Greece’s situation before and after any restructuring after 2013 (Professional and Institutional level subscribers (click here to upgrade) may access the live spreadsheet behind the document by clicking here (scroll down after for full summary, spreadsheet and charts).
… and that is with their “pie in the sky” estimates, as clearly pointed out in Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
…try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post “Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!…
Think about it! With a .5% revisions,
the EC was still 3 full points to the optimistic side on GDP, that puts
the possibility of Greek government forecasts, which are much more
optimistic than both the EU and the slightly more stringent but still
mostly erroneous IMF numbers, being anywhere near realistic somewhere
between zero and no way in hell (tartarus, hades, purgatory…).
Now, if the Greek
government’s macroeconomic assumptions are overstated when compared with
EU estimates, and the EU estimates are overstated when compared to the
IMF estimates, and the IMF estimates are overstated when compared to
reality…. Just who the hell can you trust these days??? Never
fear, Reggie’s here. Download our “unbiased, non-captured, empirically
driven” forecast of the REAL Greek economy – (subscribers only,click here to subscribe) 
Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb.
The Greek Restructuring and Haircut Analysis that
linked to above goes into explicit detail, showing the NPV of cashflows
to investors after a a wide scenario analysis of prospective default
and restructuring scenarios. It ain’t pretty!
We have performed similar analysis for the usual suspects: Portugal,
Spain, Italy and Ireland. Portugal is currently at record high funding
rates – and that’s AFTER the bailout!
This is Portugal’s path as of today.
Even if we add in EU/IMF emergency funding, the inevitability of
restructuring is not altered. As a matter of fact, the scenario gets
worse because the debt is piled on.
Let it be known that there are larger sovereign states that are worse
off. Ireland is a prime example. If one were to look at the cumulated
funding requirement of Ireland over the next 15 years as clearly
illustrated in Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! Monday, November 29th, 2010
There are other states that are not in as bad a shape but are poised
to do much more damage, and then there are a plethora of states that
will get dragged down through contagion. Yet, the natural manner of
pricing risk in the equity markets does not transmit these facts because
of the unprecedented amount of liquidity stemming from central bankers
around the world doing the Bernanke/Japanse QE thing.
Keep in mind that the German’s game plan is to kick this down the road till 2013, at which point it will be unsustainable butthe mechanisms will be in place to force bondholders to take haircuts in front of the tax payers…
Sounds like a plan, doesn’t it? Except for the high probability that
you will probably have a rate storm well before 2013. If rate volatility
and/or levels spike for the more developed nations before then, all
hell breaks loose. In the US, we’re damn near zero now. Hey, what
happens to residential and commercial real estate valuations when rates
spike higher? See 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.
Revisiting the Topic of Haircuts
Now, let’s return to the post “The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults“.
All readers should open this link in a new window, scroll down to the
spreadsheet at the bottom of the post, and reference the first column
with the cell labeled “Decline in present value of cash flow for
creditors” under the label “Haircut in the principal amount”. Now,
scroll over the to the column labeled “Restructuring by Maturity
Extension & Coupon Reduction w/Haircut”, which is the second to last
column in blue highlight and carefully read the figure for the “Decline
in present value of cash flow for creditors”. Booyah! And
that’s the unlevered losses. 5x leverage wipes you out several times
over. It is rumored that the ECB is levered over 90x, just for the sake
of discussion. I strongly suggest anyone interested in this
space study this spreadsheet very closely. This level of analysis is
probably not available anywhere else on the free Web.
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Hope you are right, Reggie. Some of us have been waiting for this for a long time.
No great mystery with the Euro. They will raise rates first. Everything now is super short term.
Haircuts are the key. They have to happen, but when they start it will be awfully hard to deny that the banks are toast.
UK's Cameron was quoted this morning as saying monetary policy cannot be loosened any further........No More QE.......is that the message from the PM?
Sold the FTSE100 at 5985 with stop above the wick high at 6115 on that news.......also sold Spain's ESP35 at 10,505 on reading about Irish and Portuguese bond yields exploding to EZ records......... If the ESP35 rallies back towards 11,000 I will sell into the rallies and add to the short position.
Like almost everything else, all of this is seems to be following Reggie's predictions with erie precision. Almost as if he was pulling the strings, himself . . .
Time for a new conspiracy thory!
Reggie as Emperor Palpatine: "Everything is coming to pass according to my plan. Eeehehehehee . . "
Portugal has €4.342 billion in bond redemptions coming in April and Greece has €8.22 billion due on the 20th of April.
From an old refugee of the Bronx, great work as usual Reggie! The euro climb is interesting, mostly a denial of what to me also looks inevitable for the west. Leery of the machinations, I have watched the current rally go by- which is tough, but at least I'll be here when the shtf...
As I've been saying for almost a year, Greece will default this year. Will it be before or after Easter. I would say after Easter. If they default before then it'll get real interesting.
At what point will USA get downgraded.
Didn't S&P say they were no longer going to rate the US due to "lack of interest"?
that's the 14 trillion dollar question-well Reggie, what do you think?-20
When bond rates rise
Yep, the only way the U.S. can continue to fund its deficit is if interest rates stay at their current low level. Assuming the rating agencies are doing their job (a big assumption), they have to downgrade the U.S. if rates rise.
We have a big difference between the ECB and the Fed. Indeed, our monetary policies have axes as opposed to Europe if Trichet has to fight inflation with the price stability in Euroland, the U.S. Bernanke is by culture of doing everything for growth: thus, all these programs QE (quantitative easing) established by the Federal Reserve creates inflation in the world with mechanical ... but Uncle Sam is happy because he has his priorities in its GDP and economic recovery (lower unemployment) ... while in Europe, we are forced to think up the refi to combat high prices.
"there's no such thing as a free lunch." dates me as an 80's guy fer sure but "you're gettin' that in spades" in the USA. the idea that "we can raise prices to cure our problems" is a recipe for social unrest on a grand scale and the greenback can't get out of it's own way because of it. trichet is doing the right thing--but how many countries can you throw under the bus before someone says "we never wanted to be in this club in the first place!"
any ECB rate hike will send Portugal, Greece, Spain and Italy to the center of the planet.
No way they can survive this.
And if Spain doesn't get their bonb rate below 4,3% anytime soon it's also over for them.
http://www.bloomberg.com/apps/quote?ticker=GSPG10YR:IND
What I cant understand is the Euros climb high over the dollar when it looks like they are going to hit the bottom of the cliff first . The markets seem to be trading in some inverse of reality because rates should be rising on US bonds would say that is indeed the case and rates on EU country bonds would be dropping (they are not)
actually the euro's rise could be considered perfectly and harrowingly rational if seen in the light of "buy on the rumor sell on the fact." in short you buy the euro based on the rumor that Reggie will be wrong but then start selling on the obvious truth that Reggie has been right all along. Harrowing because basically you're talking about "taking out a Union" now.
The $$ is rockin' & rollin' in FX today. Seems the majority were short. It's all rigged, which explains the counter intuitive/market behaviour. In the end though the market will win. Free money is faking out the markets for now but it won't last forever.