Rating Agencies

One In Six Banks Expected To Fail EU-Wide Stress Tests

The first piece of red herring news out of Europe is already on the tape, after Reuters reports that 15 out of 91 banks are expected to fail the second round of stress tests: "Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. Euro zone sources said the European Banking Authority is set to announce within weeks that between 10 and 15 of the 91 banks being tested had failed the tests, with casualties expected in Greece, Germany, Portugal and Spain. In the drive to ensure the credibility of the bank assessments, the European Banking Authority (EBA), which runs the tests and the European Central Bank, which sets the macroeconomic scenarios, are pushing for a higher number of banks to fail than last year's seven. "How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source." Of course, the reason why this is total non-news is that while the EBA will huff and puff, the end result, just like last year, will be absolutely no failures, as Europe has no failsafe mechanisms to deal with the aftereffects of a bank failure chain reaction. Expect futures, which dipped briefly on this news to more than rebound, as this merely confirms that the ECB will inject even more money to keep the SS Ponzi afloat for a few more months.

Ceasefire Between Germany And ECB Has Expired: Greek Compromise Plan Now "Off The Table"

The one catalyst which sent the EURUSD (and thus its first derivative, the SPX) surging on Friday was the Guardian story that Germany, Sarkozy and most importantly, the ECB, have reached a consensus over the form of the second Greek bailout. In the immediate aftermath, Greece, sensing European weakness, announced that it would seek to pass the Troica plan however with substantial changes, a development which prompted us to say that "now that Merkel has effectively thrown in the towel to her, and the
CDU's, political reign by agreeing with the ECB's and France's demands,
a move which will be brutalized by Der Spiegel in T minus 5 minutes,
the fact that Europe blinked to Greece's bluff, just may mean that every
demand out of Greece will be met." Well, sure enough here is Der Spiegel, however instead of seen as bending over to Greece, Germany appears to have had a dramatic change of heart, and told not only Greece to take its demands and shove them, but the ECB to go fornicate itself.

Guest Post: Look At Me - I'm A Junk Rated Bank

Everybody hates rating agencies. They missed Enron (balance sheet fraud), the sub-prime crisis (using models provided by banks) and sovereign debt crisis (concealed by foreign currency swaps). They have been wrong – so what? Stock market analysts are wrong all the time, and investors still read their worthless reports. And what would you expect from a stock recommendation if you knew it was paid for by the company the report is about? (People – you really need to switch off that Consumer News and Business Channel and put on your thinking caps.) Anyway. I came across this Weekly Market Outlook from Moody’s Analytics. They do something remarkable. They compare their own ratings with the rating implied by CDS (credit default swaps). Usually the rating agencies are a little bit behind the curve, so the CDS can give more of a “real-time” view of where the rating should be. Look at Bank of America and Merrill Lynch (now, of course, owned by BoA). Their implied rating is junk! JPMorgan Chase, Well Fargo and HSBC Finance Corp are not far behind in the BBB category.

CDS For Doomers, Politicians, And The Media

About the only thing that the doom and gloom crowd, the politicians, and the media all agree on is that credit derivatives are evil, unnecessary, ‘financial weapons of mass destruction’. With the European Sovereign Debt crisis escalating, the CDS market has once again become a topic of conversation. Many of the issues related to CDS that are discussed are old, misleading, or plain wrong. Here is my attempt to address some of the issues that come up most whenever CDS is mentioned: Credit Events; Exposures; Counterparty Risk, and Transparency. These are topics that need to be understood in order for investors to make informed decisions. I am not here to defend CDS as a product, but to try and shed light on the subject so that people don’t react to inaccuracies that cause them to make decisions based on incorrect information. Since so many journalists still feel that the investing public needs to see the boilerplate language ‘when yields go up, bonds prices, which move in the opposite direction, go up’ this may be an uphill struggle. But here is my attempt.

The Greek Bankruptcy Case Study Is Now A Cartoon

With the Greek crisis approaching surreal proportions, now that everything from this point on is a carbon copy of events from May 2010 onward, and the only question is whether Europe will succeed in kicking the can down the road for another year (not with the 2 Year at 28% it won't and the 30 Year priced at 40 cents on the dollar) all one can do at this point is laugh at the daily dose of denial at the Keynesian-cum-monetarist experiment. Alas, one also has to be dead serious about this stuff because it just may usher the eventual implosion of capitalism once again, since many (us among them), believe that the downstream effects from the bankruptcy of Greece, and thus the ECB, and thus Europe, will make Lehman seem like a walk in the park (and the only reason Greece hasn't blown up yet, of course, is that Greece does not have a profitable fixed income trading desk that Goldman would love to gets its tentacles around). So in reporting on today's events we combine the hysterical with the  somber. First, we present the latest NMA cartoon summarizing the Greek fiasco in only a way that NMA can. We also share the latest Greek summary piece from SocGen (which itself will be downgraded substantially when Greece folds). It should serve sufficiently well to defuse any left over levity: "This looks like a last ditch effort from Papandreou to save the
situation as his Parliamentary majority is eroded, and the opposition
threatens to renege on the conditions adhered to when the IMF Stand-By
Arrangement was originally signed back in May 2010. Meeting these
programme requirements is a binding condition for a continuation of the
EU/IMF quarterly disbursements, which are necessary to plug Greece’s
funding gap. Greece’s situation, and the euro area’s sovereign crisis, have reached a new level of uncertainty."

Daily US Opening News And Market Re-Cap: June 15

  • Enhanced uncertainty surrounding Greek debt situation promoted risk-averse trade today
  • Moody’s placed France’s top three banks, BNP Paribas, Societe Generale, and Credit Agricole, on review for a possible downgrade
  • It is expected that UK’s Chancellor Osborne will endorse plans to “ring fence” retail banking businesses of UK banks today in his Mansion House speech
  • ECB’s Stark and Liikanen supported private sector involvement in Greek debt, as long as it is voluntary.
  • However, Fitch said an announcement of Vienna type initiative would likely trigger Greek ratings downgrade to 'C'

The Unwind Begins: Eurogroup President Juncker Redirects From A Broke Europe By Throwing US And Japan Under The Insolvency Bus: "The Debt Level Of The USA Is Disastrous"

The first rule of media (especially when dealing with an idiot audience that has a 7 second attention span): when all else fails, redirect. That's precisely what Eurogroup president, and certified, sanctimonious, pompous liar, Jean-Claude Juncker just did today, as it is becoming increasingly clear that nobody in Europe has any clue just what the Greek bailout #2 will look like now that the ECB and Germany are at polar opposites on how to proceed, the ECB thinks it is a rating agency and can dictate what an Event of Default is, and German bankers are willing to cede to private involvement in the bailout, but in a way that is voluntary. The problem is that these three are very much mutually exclusive. So what does Juncker go ahead and do - he redirects to highlighting the problems of the US: "The debt level of the USA is disastrous," Mr. Juncker said. "The real problem is that no one can explain well why the euro zone is in the epicenter of a global financial challenge at a moment, at which the fundamental indicators of the euro zone are substantially better than those of the U.S. or Japanese economy." That may well be the defining moment: by now everyone knows that the global economy is a massive pyramid scheme. Yet to this point, those in control have at least kept their mouths shut. However, when in order to explain one's insolvency, those at the very top of the control pyramid have no other choice than to point out just how broke others are (when in reality it is all one big, interconnected, "globalized" and truly insolvent Ponzi), then the unwind has begin.

Follow The ECB's 2;30pm CET Press Conference Live

The ECB's press conference, which lately has been seeing rather aggressive questions from the press corps (especially if the Finns are present like last time) and very rambling non-answers from Trichet can be followed live below. Expect to see some volatility in the EUR as a result of Trichet's carefully chosen words. Once again, the keyword of note is "vigilance."

Guest Post: Stock Futures Up A Touch, But European Credit Very Weak

European CDS is wider across the board. SOVX is 203 which is 4 wider on the day, and liquidity seems to have broken down completely as I'm seeing 3 bp bid/offer spreads rather than the more customary 2 bps. That is after it widened 10 bps yesterday. Fins at 163 (+4 on day) and Fin Subs 279 (+12 on the day) are also trading extremely poorly. Fin Subs, although fairly illiquid deserve special mention. They were 15 wider yesterday and although it is hard to tell with the rolls, it looks like they are almost at the widest levels of last March at the height of the first time the market noticed the sovereign debt crisis. The sovereign bond market looks to be in rough shape as well. Greek 10 year bonds are back below 54 on a price basis (16.35% yield). They have given up most of the late May gains. It rallied on the comments that the EU wanted a plan to bailout Greece again. It is fading on the fact that in spite of wanting a plan, it seems very difficult to come up with a workable plan.

Greek CDS Surges To All Time Record On Talk Accord For Greek Bailout Faces Major Obstacles

Nobody could have seen this coming. According to RanSquawk, there is "Market talk that accord on new Greek bailout faces major obstacles." Whether true or not is irrelevant: the market sells first. Greek CDS just hit 1,474, +63 bps and an all time record high. Elsewhere, the EURUSD is dropping as the house of cards appears to be finally on the edge. Per Market News: "Despite public declarations last Friday that an agreement in principle had been reached, two major problems threaten to block a deal, the sources said. One is the highly sensitive issue of private sector contribution. The other is the insistence of European officials and the International Monetary Fund that the Greek parliament pass significant new deficit-cutting measures before EU leaders meet at the end of June as a condition for new money. That task appears Herculean, given the rapidly growing domestic political and social resistance. "

Guest Post: Keep The Faith....

What happens if energy and food prices keep going up? Can we be sure that this won’t happen? No of course not so these markets are far too complacent in my view and are not pricing enough risk premium. I am not even convinced that a lot of higher input prices have been passed on yet so the consumer will either face higher prices or the producer will see margins collapse and neither is good for equities. Europe is in a mess and it looks increasingly likely that a restructuring WILL happen somewhere at some point, whilst Trichet seems determined to jack up rates on principle. Don’t forget that even though European politicians want to help for fear of the consequences, ultimately the outcome will be decided by backbench politicians in PM Papandreou's parliamentary party. If austerity measures are not approved by parliament on Jun 28, then all hell could break loose. And just look at the EUR; what’s it doing up here? There is little risk priced here it seems and yet the risks are huge. Central banks are sucking volatility from these markets in a bid to create a false sense of security. This covert intervention is very clever as it’s tough to fight. Without doubt G20 is behind this and the accord is strong. They need a stable equity markets and stable FX markets to help buy time. Very clever.

IMF Says Is Open To Delaying Greek Bailout Loan Repayments

The soap opera begins early today (at least in the US), after the Irish Times reports that the IMF is open to delaying Greece's repayment of its international loans but believes a major restructuring of its debt would create untold problems in the euro zone, a senior IMF official said today. "Athens has made progress in tackling its debt crisis but cannot afford to relax the pace of reforms, Bob Traa, the International Monetary Fund's senior representative in Greece, told a banking conference. "If you want a debt restructuring that will really make a difference, it will need to be very large. Such a large debt restructuring would create untold problems not just in Greece, but also in the euro zone," Mr Traa said. But he did hint that the IMF was open to other solutions. "Stretching out payment terms, for instance in loans from euro area partners and the IMF, is a reasonable thing to think about because we have amortisation right at the end of the programme. This is a technical issue we can think about," he said." Unfortunately, as the rating agencies have made clear by now, such a move would be considered a technical default, and thus is unworkable as the very simple matter at the heart of the whole eurozone crisis is the forced marking of debt from mythical par levels (where the ECB has it) to market values (around half): a development which would lead to the insolvency of the ECB, something discussed minutes ago. All Europe wants is a phase transition that allows it to keep marking Greek bonds at par, and how this is achieved is irrelevant.

Guest Post: A First In History: The Coming Simultaneous European Banking Collapse

Watching international financial policy persisting on a concept to fight debt with more debt in an environment where official GDP growth rates only remain positive because of ridiculously low deflators, while interest rates apart from those central bank help for banks via laughingly low interest rates begin to surge everywhere else, this observer begins to wonder if one can expect anything else than a fast-rolling, simultaneous European banking collapse. Engulfed in more exponentially rising debt on public and private levels than ever before there simply cannot be another end of the longest growth cycle in history than a simultaneous collapse of international banking when lending freezes up due to fears about the real creditworthiness of the respective counter party. Globalization will have made it possible.

Fitch Blows At Greek Bailout House Of Cards, Says On Closing Of Distressed Debt Exchange Will Place Sovereign Rating Into Default

As we speculated yesterday...

  • If in Fitch's opinion, an announced exchange offer constitutes a DDE,
    the sovereign issuer rating will be lowered to 'C', indicating that
    default is highly likely in the near term
  • Fitch will place the issuer rating of the sovereign into default, specifically 'Restricted Default' (RD) upon closing of a distrssed debt exchange.
  • Fitch says a potential Greek debt exchange if voluntary, could still be considered a default event
  • Fitch says Greek debt exchange would be a default if bondholders terms were worse than original terms
  • Fitch says stressed sovereign debt exchange with worse terms is a technical default even if deemed voluntary

The gist is clear: the great unknown of how the rating agencies will treat even a "voluntary" restructuring is still in the closet.