We're paid by investors, we have to earn our keep every single year. S&P and Moody's are being paid by the issuers of debt
While we await the Moody's downgrade of the Spanish banking system, which we can only attribute to a lack of outsourced Indian talent, since three banks are now rated higher than the sovereign, Moody's decided to give a little present to our Dutch readers by downgrading 5 of their biggest banks: Rabobank Nederland, (2 notches to A2) for ING Bank N.V., (2 notches to A2) for ABN AMRO Bank N.V. (2 notches to A2), and for LeasePlan Corporation N.V. (2 notches to Baa2). The long-term debt and deposit ratings for SNS Bank N.V. were downgraded by one notch to Baa2. And yes, this means that the US banks (looking at your Margin Stanley) are likely next.
The most effective response for Spain would be to de-link sovereigns and their banks, following recent steady accumulation of sovereign debt by peripheral banks, in our view. Reducing the link between Spanish banks and the sovereign remains one of the key aspects for relieving pressure on Spain, whether this be by removing sovereign debt from balance sheets or ensuring sufficient capitalization to absorb losses. Unemployment out this morning at 24.4% shows the fragile state the economy is in, which is likely to keep pressure on Spanish yields. Against this backdrop the effect on the asset side of balance sheets is concerning, with expected weakness in non-core government bond prices coupled with a weak economy decreasing individuals' and corporates' ability to repay
Giddens ought to approach the bankruptcy judge and suggest that they both apply to Judge Rakoff for the appointment of a receiver in the MF Global bankruptcy.
As Many Have Predicted for Years
And just as ISDA was starting to become somewhat credible again, we get this from Bloomberg:
- Spanish CDS Trigger Unlikely on Subordination, Says ISDA *Dow Jones
So..... Subordination? Thank you ISDA for confirming that the true reason of today's sell off has now been enacted.
And another bank does a book report on our Saturday post explaining the Spanish bank bail out. At this point, it should be all too clear how Spain's only solution to being in a very deep hole is to keep on digging.
So far we have yet to read even one analyst commentary on the Spanish bailout that sees it as favorable on the margin. The following note from SocGen's Ciaran O'Hagan is no exception: "Will this be good enough to immunise Spain over the Greek elections and fend off more rating downgrades, on the back of greater subordination and moral hazard? Probably not."
Gradually, the key open items from yesterday's Spanish bailout are getting some closure. First, we learned that Ireland, as speculated, will demand a comparable retroactive bailout renegotiation, an act which also puts the Greek elections a week from today in play. Then, we got definitive confirmation that the Spanish loan, coming at ~3% or half Spanish GGBs, is a priming loan, subordinating existing creditors. Finally, we learn that the ESM - the bailout mechanism at the heart of all current and future European bailout plans, and which still has not been ratified by Germany, is in danger of being scuttled by none other than the German opposition. The reason? According to a Reuters report, "A [Spiegel] report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact... The Social Democrats (SPD) and Greens are insisting on a plan for a transaction tax and measures to boost growth."
Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade.
Subordination is a four letter word to bondholders.
While details are largely missing in the aftermath of yesterday's historic announcement from Spain, the one thing that we did catch inbetween the various conferences and announcements, and probably the most important thing, is that the ESM/EFSF funded bailout loan, whose use of proceeds will go to fund the FROB, not one which will rank pari passu with the FROB, will have "terms better than market" - always a code word for priming and cramdown of other debt classes. Today, we learn that this is precisely the case, and the worst case outcome from Spain's pre-primed sovereign creditors.
At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen. Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to. Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices.
After two years of denials, we finally have the right answer: Spain IS Greece. Only much bigger (it is also the US, although while the US TARP was $700 billion or 5% of then GDP, the just announced Spanish tarp is 10% of Spanish GDP, so technically Spain is 2x the US). So now that the European bailout has moved from Greece, Ireland and Portugal on to the big one, Spain, here are the key outstanding questions.
First we got Spain miraculously announcing late at night local time, but certainly after close of market US time, that the bailout so many algorithms had taken for granted in ramping stocks into the close may not be coming, because, picture this, Germany may have conditions when bailing the broke country's banks out, and Spain is just not cool with that, and now, after the close of FX and futures trading, we get Moody's giving us the warning the after Egan-Jones, S&P, and Fitch, it is now its turn to cut the Spanish A3 rating."As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country's creditors may prompt further rating actions. The official estimates of recapitalising Spain's banking system have risen significantly and the country's indirect reliance on European Central Bank (ECB) funding via its banks has been growing. Moody's is assessing the implications of these increased pressures and will take any rating actions necessary to reflect the risk to Spanish government creditors. Moody's rating on Spain is currently A3 with a negative outlook." Moody's also warns, what everyone has known for about 2 years now, that Italy could be next: "However, Spain's banking problem is largely specific to the country and is not likely to be a major source of contagion to other euro area countries, except for Italy, which likewise has a growing funding reliance on the ECB through its banks." Of course none of this is unexpected. What will be, however, to the market, is when all 3 rating agencies have Spain at BBB+ or below, which as ZH first pointed out at the end of April will result in a 5% increase in repo haircuts on Spanish Government Bonds, resulting in yet another epic collateral squeeze for the country which already is forced to pledge Spiderman towels to the central bank.