Rating Agencies

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?

A Quick Take On The European "Marshall Plan"

So far all the news out of Europe is based on changes to EFSF. Greece will be able to borrow for 15 years at 3.5%. French bonds with a 15 year maturity trade at 3.8%. So the EFSF will have to pay more on its debt than it receives? Interesting. Have the rating agencies signed up to rate the new EFSF as AAA? From deals I've worked on, things that always hurt ratings were i) extending maturity, ii) including banks in addition to sovereigns, iii) allowing trading, iv) vague rules as opposed to written rules. The headlines all indicate the new EFSF has all of these components. I am sure the agencies have been involved in these discussions, but I remain dubious how happy the market will be to finance the EFSF at rates that are remotely in line with the rates the EFSF plans to provide financing at. Lots more details likely to come out during the day, but watch for the details. The headlines sound great, but can they be executed. I also noticed somewhere that new lending would be collateralized. If that is true, has anyone asked the borrowers if that makes sense for them?

Latest Update On Debt Ceiling Melodrama

Time for the hourly update on the Congressional soap. The Hill reports that "Congressional Democratic leaders are headed back to the White House on Wednesday for more talks on raising the debt ceiling. White House press secretary Jay Carney announced House and Senate Democratic would meet with Obama at the White House at 2:50 p.m. Obama called Senate Majority Leader Harry Reid (D-Nev.), Senate GOP Leader Mitch McConnell (Ky.), Speaker John Boehner (R-Ohio) and House Minority Leader Nancy Pelosi (D-Calif.) on Tuesday night." It adds that after the release of a new proposal Tuesday by the bipartisan Senate Gang of Six, Obama told reporters it was time for leaders to "talk turkey" and work to reach a deal. And while there has been a recent increase in voices against the $3.7 trillion "plan", the fate of the McConnell fall back plan, which as expected is the most likely to pass as it is completely toothless, is also looking shaky:"House Democratic leaders are attacking Senate Minority Leader Mitch McConnell’s (R-Ky.) debt-ceiling fallback plan, characterizing it as a political ruse intended to scapegoat Democrats and taint them at the polls. “I’m not a fan of the McConnell proposal,” Rep. Chris Van Hollen (Md.), the senior Democrat on the House Budget Committee, said Tuesday during a press briefing in the Capitol. “It’s designed to protect mostly Republican members of Congress from taking responsibility for votes that they’ve already made." How this plan makes sense in light of Obama's earlier statement that the House would not compromise a debt ceiling plan based on one time increases to the limit, without a long-term debt ceiling extension is unclear, nor is it clear how any of these plans which are simply window dressing will pass muster from the rating agencies, where even Fitch earlier announced any plan would have to be comprehensive for no downgrade of the US to occur. Translated: the CRAs need more stuffing for the Christmas stockings.

Guest Post: ESFS - Has Europe Finally Discovered Alchemy

Markets are better this morning, at least in part because there is renewed hope that Europe will band together and create a new and improved EFSF. This EFSF V3.0 will, allegedly, finally solve the European debt problem. It sounds great on the surface, but is it possible? I think there are problems with virtually every step in the process. The ability for EFSF to retain a AAA rating is dubious, and the willingness of investors to buy an expanded mandate EFSF may not be as great as the politicians believe. Here is a quick summary of many of the problems facing the new EFSF in reality as opposed to in a quick and optimistic press release. Just like the “rollovers” that were announced, the details will prove to be unworkable and will not provide the benefits expected. The last round of EFSF had the Over-Guarantee Percentage increase from 120% to 165%. Italy is the 3rd largest guarantor at 18%, just below France’s 20%. Italy is Aa2 on negative watch at Moody’s and negative outlook at S&P. Spain is the 4th largest guarantor at 12%. It is Aa2/AA on negative outlook at both agencies. So 30% of the guarantees are coming from 2 countries that are rated less than AAA, are on negative outlook, and will likely draw on the EFSF funds? Even the rating agencies must be scratching their head wondering how to let AA entities guarantee themselves and still provide a AAA rating.

Guest Post: Iran Opens Oil Bourse - Harbinger Of Trouble For New York And London?

The last three years of global recession have dealt a major blow to American capitalist ideas trumpeted throughout the world on the value of “free markets.” Wall St has been revealed as a form of casino economy, with the bankster insiders gambling with other people’s, and eventually, the government’s money in the form of bailouts. As the Republicans in Congress, scenting victory in the 2012 presidential elections, hold a gun to the Obama administration’s head and rating agencies consider downgrading U.S. government bonds in light of Washington’s possible defaulting, many ideas around the world that previously seemed implausible because of the dominance of the U.S. economy are garnering renewed interest.