Rating Agencies

Frontrunning: July 27

  • IMF Chief Raises Idea of Seeking More Cash (WSJ)
  • US Money Market Funds Build Liquidity (FT)
  • Interbank Loan Probe Focuses on Yen Rates (FT)
  • Watchdog Sees Financial Weak Spots (WSJ)
  • China’s 29% Jump in Industrial Profit to Spur Growth by Fueling Investment (Bloomberg)
  • Shanghai to Step Up Probes of Home Prices (Bloomberg)
  • Lessons From the Malaise (NYT)
  • Hurtling toward economic chaos (LA Times)
  • Who Elected the Rating Agencies? (WSJ)

Gold New Record Nominal Highs ($1,625.70) As CDS Traders Start Positioning For U.S. Downgrade(s)

Gold is trading at USD 1,620.40, EUR 1,120.50 and GBP 989.08 and CHF 1,298.50 per ounce. Both the dollar and the euro are under pressure again today and gold has reached another new record nominal high of $1,625.70/oz in early European trading. Economists in the U.S. believe that the U.S. will lose its vanguard AAA credit rating according to a recent poll conducted by Reuters. A survey of 53 economists showed 30 believed that one of the three leading credit rating agencies will downgrade US debt. The economists do not believe that the U.S. will default. A downgrading of the U.S. is inevitable given its very poor fiscal position – the question is by how much the U.S. is downgraded and AA looks possible in the coming months. The widening in U.S. CDS has so far been modest but the bond vigilantes may be awakening from their slumber as net notional CDS on US debt has risen above that of Greece and Italy. They either believe that the U.S. government will default on its debt or are taking out insurance against of this happening. Investors internationally -- including everyone from individual consumers in their pension funds, to hedge funds, to the Chinese government -- currently hold $9.3 trillion (with a T!) in Treasury bonds, and they're counting on Uncle Sam paying up when those contracts mature. The U.S. government will have a three-business-day grace period to make good on any default before credit default swaps are triggered, the International Swaps and Derivatives Association said Tuesday.

ISDA, Which Refuses To Declare Greece In Default, Has Given The US A 3 Day Grace Period Before A CDS Trigger

ISDA is rapidly deteriorating to rating agency status when it comes to credibility. After it made it all too clear in the past few weeks that no matter what happens it would never "determine" Greece (or any other European insolvent country) to have breached a CDS trigger (as that would apparently destroy the world), the same trade association (logically enough comprised of the same firms that make up the heart of the status quo) has joined the rating agencies, and as of last night the CME, in making it all too clear that a debt ceiling plan (preferably Reid's because it achieves absolutely nothing) has to pass, or else, after it earlier announced that the US has precisely 3 days to cure any missed debt payment before US CDS are triggered. Obviously this can not be allowed to happen, so expect this latest development to be used by the president in his nighlty scaremongering session.

Summarizing Boehner's Latest TV Appearance

Less than an hour ago, Boehner had another TV appearance discussing his proposed plan. Judging by the networks' reaction even the general population is getting exhausted with this neverending soap. So here, courtesy of Bloomberg All, are the summary points he touched on. Nothing notable except for his assumption that the plan has a chance of passing both the House and the Senate, and that the house may vote on his plan as soon as Wednesday.

CME Celebrates America's Ever Nearer Date With Insolvency By Raising Collateral Haircut On Treasurys

We just heard two very useless speeches by two very useless Wall Street muppets. Both were, naturally, completely irrelevant. Now comes the important stuff, courtesy of a press release a few hours ago from the CME. Up until today, the collateral haircut on a T-Bill was 0.0%. Beginning Thursday it will be 0.5%. All other classes of Bonds, Notes and Strips will see their haircuts raised by 1% across the board. Same with Agency debt. Only foreign debt will see an increase of 2% in the Bill space, and 0.5% in Notes and Bonds. Translation: the CME just telegraphed what the rating agencies are terrified to do - keep up the charade, and the haircut will keep rising by 1% until it hits 100%. Give or take.

And The Kickers In Reid's Proposed "Deficit Cutting" Plan Are...

Following hot on the heels of the proposed Boehner rehashed plan, we get the first details of where the bulk of the $2.7 trillion in proposed savings will come from. Are you ready for this? REID PLAN SAID TO HAVE $1 TRLN SAVINGS FROM WINDING DOWN WARS. That's right. In some parallel galaxy far, far away, lack of expenditures, on America's 6 front wars to be sure, is now considered a "saving"? Front lobe hemorrhage to commence in 5 seconds. And the other migraine-inducing details of the Reiid plan are...

Summarizing The Various Debt Plans And What Happens After The Now Assured US Downgrade

For those confused by the cornucopia of assorted debt ceiling "plans" out in circulation, Citi's Amitabh Arora has released the definitive guide for what plan does what in terms of proposed deficit reduction, probability of passage of the Congress, Senate and the President, and likely outcome to the US rating. As table 1 below shows, UBS' prescient call from last Thursday that a US downgrade is inevitable, was spot on. It also explains why the entire sellside industry, and media, have been in damage control over what now appears to be an inevitable AA rating of the world's reserve currency. Alas, just like with Lehman, nobody really has any idea what will happen to capital markets once the Poor Standards or Moody's headline of a AA cut hits the tape: one thing is certain - there are trillions in US invested money market funds, structured finance debt and munis that have rating mandates and demand a super secure (AAA) threshold, and especially an A-1+ short-term rating. Should there be a massive flow out of these securities and into other asset classes, the outcome is absolutely unpredictable. More importantly, Citi touches on a topic that has not seen prominent mention anywhere else: namely the acceleration of the GSEs status from conservatorship to receivership should there be no prompt resolution on the debt ceiling. For agency paper holders this may be a topic that merits much more diligence.

Projected Treasury August Daily Cash Sweep Balance

We posted this on Friday, but with the Norway news and all the headline distractions from Congress, many may have missed it, so here it is again. Stone McCarthy (one of the very best rates shops on Wall Street) has compiled the daily projected cash flow balances for the US Treasury. Here it is.

rcwhalen's picture

The debt ceiling debate that has dominated the headlines over the past month has been thoroughly infused with a string of unfortunate misconceptions and a number of blatant deceptions. As a result, the entire process has been mostly hot air. While a recitation of all the errors would be better attempted by a novelist rather than a weekly columnist, I’ll offer my short list. 

Guest Post: Greece - Two Bail-outs and a Funeral

Here we go again. Another bail-out. [Sigh.]

I’ll try to make this as entertaining and easily readable as possible – but first the details of the bail-out agreed on July 21st:

  • Fresh EUR 109bn EFSF/IMF loans until mid-2014
  • Private sector (read: banks) participation of EUR 37bn
  • EUR 12.6bn from bond repurchases at below par (100%)
  • All EFSF loans extended to 15-30 years with interest rate cut to 3.5% (same relief granted for Portugal and Ireland)
  • EFSF re-tooled: flexible credit lines, purchase of bonds in secondary market, recapitalizing banks
  • “Marshall Plan” for Greece (increased investments by EU)

My Comments...

Republican Kevin McCarthy Says No Debt Deal Likely Today, Or Over Weekend: Treasury Now Projected To Have -$15.5BN Cash Balance On August 15 $31BN Coupon Date

Well, it looks like there will be no debt ceiling hike enacted prior to August 2 at which point the money really does run out. From The Hill: "The No. 3 Republican in the House said Thursday night that he didn’t expect any surprises in the deficit debate over the weekend. “I do not see something springing this weekend,” Republican Whip Kevin McCarthy (Calif.) told conservative radio host Hugh Hewitt. McCarthy pooh-poohed reports that the White House and Republican leadership are closing fast on a deal on the budget deficit and raising the debt ceiling. “There is no deal,” McCarthy said, using the same phrase used by the White House and House Speaker John Boehner (R-Ohio) following reports they were nearing a deal on Thursday. McCarthy said Republicans would not rush to push a bill through in order to meet the Treasury Department’s Aug. 2 deadline. According to McCarthy, House Republicans will seek to follow their own “three-day rule” in order to allow members of Congress to debate the plan. Now the reason why this is bad is because as Stone McCarthy calculates, "we expect Treasury to have less cash in early August than we thought previously." And here is where it gets very tricky since the money generating machinery won't be in place on time: "we now show Treasury with a negative cash balance of $15.5 billion on August 15, which implies that Treasury wouldn't have the resources to pay $30.6 billion in interest on that day." Translation: the money runs out, and the US is in default. Not selective. Not transitory. The real deal.

The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP

Wouldn't you be angry if you woke up to realize that Europe's bureaucrats have pledged between a third and a half of your GDP to continue providing lavish socialist entitlement benefits to the citizens of peripheral European countries who have for years lied about their deficit, not paid taxes, and levered themselves into fiscal oblivion?