Rating Agencies

Daily US Opening News And Market Re-Cap: July 6

Moody's downgraded Portugal's sovereign rating to "junk" status yesterday (Ba2 from Baa1; outlook negative), which promoted risk-aversion during the European session, and weighed on EUR and equities. Bunds traded higher and record widening was observed in the Portuguese/German 10-year government bond yield spread. Meanwhile, the German deputy finance minister said that Germany will put the idea of a bond swap in Greek debt deal back on the table, adding that all options should be considered as rating agencies have signalled that the French model will lead to a selective default. Risk-appetite was further dented after the PBOC raised its one-year benchmark lending and deposit rates by 25 basis points each, effective from July 7th. Moving into the North American open, markets look ahead to Challenger job cuts data from the US, and building permits figures from Canada. In fixed income, Fed's Outright Treasury Coupon Purchase operation in the maturity range of Jan'14-Jun'15, with a purchase target of USD 2.5-3.5bln, is scheduled for later in the session. Markets will keep a close eye on any development with respect to Greek or Portuguese economies.

Generali - Still The Best Way To Hedge For The Upcoming Italian, And European, Contagion

Back in December, when noting the first material blow out in PIIGS spreads following the first Greek bailout 6 months earlier, we touched upon Italy, and specifically looked at a way to best play the coming shift in Eurozone contagion from the periphery to the core, coming up with one unique corporate name. Back then we said: "We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world." In a nutshell, Assecurazioni Generali, one of Italy's largest insurers, is a highly levered windsock for Italian and other PIIGS stress, and better yet, can be played in either equity or CDS. Now that the European bond vigilantes are once again looking beyond Greece and focusing particularly on Italy (especially based on recent Sigma X trading), none other than JP Morgan (which just cut its estimates on GASI.MI, a very appropriate equity ticker) validates the thesis that Generali (or ASSGEN per its memorable corporate/CDS ticker) is the best proxy for contagion: "Generali is one of the most sensitive stocks to both the sovereign debt crisis and the implications for the financial sector through both its government, corporate and equity investment portfolios...Generali’s sovereign exposure is mainly concentrated in Europe with Italy accounting for the largest share (37%; home market bias)."

Daily US Opening News And Market Re-Cap: July 5

Markets witnessed risk-averse sentiment in early European trade partly on the back of comments from Moody's that China's local government debt may be USD 540bln larger than auditors estimated, which could endanger Chinese banks' credit ratings. Lower than expected services PMI data from China, and core Eurozone countries dented risk-appetite further, which in turn resulted in weakness in EUR and equities. However, as the session progressed equities gradually came off their earlier lows, and the oil & gas sector received some support after the UK Treasury announced tax support for North Sea oil companies. Elsewhere, GBP/USD gained strength following better than expected services PMI data from the UK. Moving forward, the economic calendar remains thin, however markets look ahead to economic data from the US in the form of durable goods revision and factory orders figures.

Moody's July 4 Bomb: Rating Agency Finds 10% Of Chinese GDP Is Bad Debt, Claims "China Debt Problem Bigger Than Stated"

The timing on the earlier pronouncement that rating agencies may have found religion could not have been better. Not even an hour later, here comes Moody's with a blockbuster which may put China's "White Knight" status, at least as ar as Europe is concerned, in grave danger. In a report just released, the rating agency not only warns that China's debt problem is "bigger than stated" (i.e., China is hiding a ton of ugly stuff off the books), but goes ahead to quantify it: "Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report....we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." Naturally, the implication is that this is an absolutely willing "omission" (thank you central planning), which means that of China's $5.8 trillion GDP (or whatever imaginary number the Polit Bureau is happy with throwing around for mass consumption), $540 billion is debt that is "unaccounted for", most likely due to being, well, bad. That would be equivalent to saying that $1.4 trillion of US corporate debt is delinquent. And lest anything is lost in translation, Moody's drives the steak through the Dragon's heart: "Since these loans to local governments are not covered by the NAO
report, this means they are not considered by the audit agency as real
claims on local governments. This indicates that these loans are most
likely poorly documented and may pose the greatest risk of delinquency.
" So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3...

As ECB Finds Rating Agencies Have Suddenly Found Religion, It Prepares To Flip Flop On Accepting Greek Bond Collateral

Well this was unexpected: the rating agencies, for years and years patsies of their highest paying clients, have suddenly found their conscience, if not religion, and adamantly refuse to bend long-standing rules which qualify the proposed Greek MLEC/CDO type rescue as an event of default. Per Bloomberg: "The rating companies have signaled the plan would trigger because it is being done to avoid default, so couldn’t be considered voluntary, and because investors would be worse off than by holding the new securities." The ECB is so confused by this intransigence and unwillingness to bend to the will of the criminal cartel that earlier today the ECB's Novotny was complaining to Austrian TV about this unexpected demonstration of independence: "Debt rating agencies are being much tougher on potential private-sector contributions to Greece's debt woes than in past bailouts, European Central Bank Governing Council member Ewald Nowotny said on Monday. "We are conducting a very difficult conversation with the ratings agencies," he said."This is what we have to try to find: a way that on the one hand certainly involves banks without having this lead to a default as a consequence," he added. "I also must say it strikes me that the ratings agencies are being much stricter and more aggressive in this European matter than they were, for example, in similar cases in South America. I think this is something we will have to think over." As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said Dimitris Drakopoulos, an economist at Nomura. “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?” he added."

Guest Post: Making Sense Of The French Rollover Plan

Confusion continues to reign supreme over what the French rollover plan does for the various entities. The details and mechanics are a bit sketchy, but I have attached the proposal that I found, and will use that as a basis for the analysis. As I go through the details, and incorporate the latest rating agency comments, the conclusion remains the same – this is a good deal for the Participants, a mediocre deal for the Troika, and punitive to Greece.

Back To The Drawing Board: S&P Says Greek Rollover Debt Plan "Would Likely Amount To A Default Under Our Citeria"

Last Wednesday we cited from a Reuters report, according to which the last ditch Greek MLEC/CDO rescue operation, would be welcome to S&P and Moody's as "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." Because absent a decree of no EOD, the whole thing is pointless. Well, as often turns out, this was yet more wishful thinking on behalf of some bureaucrat, masked as fact. S&P has just come out with the following: "In recent weeks, a number of proposals relating to this  topic have surfaced, and the particulars in some cases are evidently still  in flux. This credit comment looks at the most prominent of the recent proposals, put forward by the Fédération Bancaire Française (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, it is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria" and specifically: "we believe that both options represent (i) a "similar restructuring"
(ii) are "distressed" and (iii) offer "less value than the promise of
the original securities" under our criteria. Consequently, if either
option were implemented in its current form, absent other mitigating
information, we would likely view it as constituting a default under our
Goodbye MLEC 2 - as expected you were just as useless as your first iteration back in 2007.

Wolfgang Munchau On How The Greek Rollover "Deal" Is A Toxic CDO

A week ago, Zero Hedge penned "An MLEC In PIIGS' Clothing: The Latest Greek Bailout Proposal Picks Up Where the Super SIV Failed" in which we explained how the current fatally flawed proposal for a Greek bailout is nothing more than a structured vehicle, expected to remain off the books, and much more importantly, expected to not trigger rating agency ire, and kill the entire extend and pretend game: remember - an Event of Default by a rating agency, even a Technical one (completely irrelevant of what ISDA does with Greek CDS) means game over for the European Central Bank and its €2 trillion in "assets", not to mention the western financial system. Now, a week later, the FT's own Wolfgang Munchau explains why our observation of how toxic the "bailout plan" is was rather accurate: "This structure is still not quite so complex as some of the more elaborate CDOs we have encountered in the global financial crisis. If you take some time to work through the arrows and boxes, you see relatively quickly that this complex structure is not a private sector participation at all. Rather it is a private sector bail-out... I have no space for a large drawing with lots of boxes and arrows to explain the complexity of the vehicle, through which eurozone governments want to involve the private-sector banks in its next loan package." Munchau's conclusion: "If this was any other field of human activity, you would go to jail if you accepted, let alone made such an indecent offer." On the other hand, all is fair in love and perpetuating the ponzi Status QuoTM. Our follow-on observation that "The two things that are keeping the Eurozone afloat: an SPV and a CDO" alas appears also to be rather in line. And before the entire financial system collapses upon itself like a cheap lawnchair, this will be fondly remembered as one of the more prudent "rescue" mechanisms enacted to delay the inevitable.

The Rating Agencies Have Now Been Silenced: Off Balance Sheet MLEC-Style Debt Rollover Plan Will Not Trigger Events Of Default

A few days ago, when we explained that the current iteration of the European bailout plan is nothing but a repeat of the failed MLEC off-balance sheet plan, which was supposed to prevent the subprime bubble from exploding, we wondered just why Europe has settled on this plan. Now we know: it appears that it was the rating agencies, arguably well-padded with $100 bills to compensate their collective conscience, who suggested that this is the only format of perpetuating the global ponzi without Greece being declared an Event of Dafault. Per Reuters: "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." There it is: expect headlines to slowly start leaking from S&P et al that the MLEC part deux will actually not be an Event of Default, and so Europe has the all clear to continue kicking the can down the road for several more years courtesy of money that is literally created out of thin air, and pledged by assets that no longer generate virtually any cash flows.

Daily US Opening News And Market Re-Cap: June 29

  • Greek opposition lawmaker Papadimitriou as well as the Socialist Party dissenter Robopoulos said they will vote for the fiscal plan
  • ECB's Stark said that a "Brady Bond" style solution would be in violation of the EU's no bailout clause, and rejected the idea that banks could exchange the Greek debt for paper guaranteed by the EU states
  • Bank of Spain reiterated ECB's Trichet comment on strong vigilance
  • EBA’s chairman said speculation that up to 15 banks failed stress tests were unfounded, adding that results are not finalised yet

Guest Post: Greek Debt Rollover - Who Is Getting Rolled Over?

Over the weekend the French announced the outlines of a rollover plan to “help” Greece.  This morning the German banks seem to be on board with the plan.  According to the headlines, this should be good news for Greece.  But is it?  Working through the details as best possible shows it strengthens the positions of the banks and weakens the IMF/EU/ECB (“Troika”) and is expensive for Greece.  The consequences of the rollover plan are that:

  • The Troika has to provide more money up-front without being able to enforce austerity compliance
  • The Troika is more likely to continue to fund Greece longer than it would otherwise because of the additional up-front payment and the moral suasion the banks will use to encourage further use of public funds
  • Greek interest payments will go up, and with the GDP kicker, will be almost 2.5 times what they are currently scheduled to be and are in line with existing Greek long bond yields

The analysis clearly demonstrates that the Troika is put into more risk sooner, and with less control than it would be without the rollover.

What The First Greek Bailout Can Predict About Market's Direction Over The Next Few Days

In days when vacuum tubes control the market with a sub-millisecond attention span, and contextual memory is irrelevant, the speculative audience may be forgiven if it has forgotten that the foregone conclusion of tomorrow's second Greek bailout (which will pass) is in any way unique. It isn't: it was just over a year ago today, on May 9, 2010 that Europe's Finance Ministers approved a trillion dollar rescue package aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility. As part of the first bailout Greece got a €110 billion loan. One year later, and about 50% lower on Greek bonds, we are back, with Greece about to get a second, €120 billion+ (does anyone even know how big it is?) bailout, and there is not even one person alive who believes that within a year the third bailout of the insolvent Greek country (with even more stringent austerity measures) won't be on the table (even as the rating agencies are defending themselves in the Hague tribunal for crimes against humanity for their decision to proclaim the Greek bankruptcy as an "Event of Default'). But by then everyone will have printed another cool trillion or two, so who cares. It is all about the short-term. The expectation there is that the market will surge, surge, surge, once the event that has been priced in, gets repriced in over and over again, or something. Well, if history is any indication, as the chart below shows, those hoping for protracted market jump on tomorrow's vote will be disappointed.