To anyone who doubted that the gloves are now fully off between France and Britain, we bring you exhibit A: Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Bank of France head and ECB member Christian Noyer said that a downgrade of France's AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics and questioned whether the use of ratings agencies to guide investors was still valid. "In the arguments they (ratings agencies) present, there are more political arguments than economic ones," said Noyer, the head of the Bank of France and a member of the ECB's governing council. "The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping." The bolded sentence confirms two things: i) that the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that's pretty much game (theory) over; and ii) when he said that "the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid." it proves that this amateur has no more understanding of basic finance than your generic Reuters blogger, both of whom apparently fail to comprehend that there are several hundred thousand bond and loan indentures in the real world, not the world of "S&P has no credibility so ignore it", which are loaded with covenants discussing springing liens, rating indexed interest levels and collateral thresholds, all of which are based on a sovereign and corporate rating, and all come into play in a completely unpredictable way (hint AIG - the reason why AIG imploded was because a rating agency downgrade unleashed a terminal margin call) when there is a rating downgrade. Such as that of France in a few hours to days top.
What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!Submitted by Reggie Middleton on 12/09/2011 11:28 -0500
Follow Europe, banks or corporates? You're out of your damn mind if you subscribe to rating agencies over Blog based independent research!!! Don't believe me? I'll walk you through the evidence, step by step!
Grandma said, "There is never just one roach". What damning characteristics does MF Global, Goldman Sachs, and JP Morgan have in common? Yes, I mean besides common CEOs and an auditor that gives the green flag months before historically record setting bankruptcies due to inadequate controls...
Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody?Submitted by Reggie Middleton on 11/30/2011 12:25 -0500
I'm calling the ratings agencies on this...
As the hopes of an IMF bazooka fades, Market News is reporting that the ever-ready-to-print-a-story European newspaper Die Welt says Germany and the other 5 AAA-rated nations of Europe are discussing jointly issuing 'Elite' bonds. We assume the borrowings could be used to fund the less-well-rated nations and avoid a true Euro-bond joint-and-several issuance which Merkel and other have been so opposed to. For now, it is clear that the 'Have's and the 'Have-Not's are becoming increasingly divided and this - much like our earlier discussion of the recap section of the EFSF draft - seems to be further from a fiscally united Europe and any inevitable endgame. We wonder what will happen when Austria gets downgraded? It certainly seems that the much-ridiculed ratings agencies are now playing an even more important role?
It is increasingly clear that Europe is bifurcating in many ways - High-grade and everyone else - and it appears the preparation is beginning. Is Germany becoming the mercantilist vendor-financier to its hugely imbalanced European trade partners?
The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.
Arguably the least biased (or perhaps least cognitively dissonant) of the major ratings agencies, China's Dagong has just moved Portugal's rating to junk (BB+) from comfortably investment grade (BBB+) - a 3 notch drop. The rating agency also left the peripheral nation on negative watch. This action follows Monday's Greek downgrade from C to CCC. Is this a ploy for better entry levels when they save the world with their EFSF-buying bazooka? Or more likely a more honest reflection of a debt-laden, slow-growing, austerity-facing nation burdened with inadequate leadership and an inability to control its own fate?
Something tells us that Mohamed El-Erian is aware of the bulls' last bastion of "growth" and "decoupling"- the dip in Initial Claims below 400K. Even so, his appearance on Bloomberg TV was full of sound and fury, and some quite memorable soundbites, starting with this one: "Let me tell ou what I find most terrifying: we’re having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time when the fiscal deficit is 9%, a time when interest rates are at zero. These are all conditions coming out of a recession, not going into a recession." The Newport Beach dweller is spot on: the situation is getting worse by the day, and the only option left is to do more of what has already failed so many times, and which only makes non-dilutable transitory monetary equivalents that much more attractive (with the mandatory liquidation which may bring them to triple digits first of course).
Sovereign credit issues have been front-and-center in terms of recent headlines as cost of funds and the balance between growth and austerity becomes unhinged among the once-upon-a-time risk-free entities. What has had less play very recently is the crisis that is going in the banking systems of the world as investors are as loathed to take any exposure to an opaque and clearly insolvent group of organizations. Credit (and to a lesser degree - equity) markets have shown their disapproval as spreads are as bad (if not worse) than at any time before, and yet the ratings agencies have yet to act decisively - especially in the US. All that is about to change as Reuters gently reminds us that S&P is about to update it bank credit ratings framework. The model is complex by nature but as we have seen time and time again, the agencies tend to lag prices (spreads) and in that case, we can expect downgrades as an early Christmas present. The impact of a downgrade can be very significant - aside from simply reducing investor appetite for risk (in its simplest form), it can trigger collateral calls and in a world where liquidity is hard to come by, and with the magnitude of funding (and rolling maturing debt) due over the next few quarters, we suspect this will be the catalyst for another leg down in equity prices as they snap back to credit's reality.
I add some real BoomBustBlog style meat to an already interesting Bloomberg piece that poses the question, "Can Goldman or JPM start a worldwide bank run?" Well, I think you all know my stance on this.
A Customer and Creditor's Guide to the MF Global Bankruptcy; Background & What Needs to Be Done, ProntoSubmitted by EB on 11/10/2011 09:37 -0500
Missing customer funds might be those of MF Global itself. Also, JPM gets to keep any and all collateral and cash it seized in return for $8 million?
While the soap opera in Europe lurches from one extreme to another, in the process creating substantial market knee jerk reactions, even though the final outcome is quite clear to most with cognitive bias blinders, the next major catalyst in the macro spectacle will come not from across the Atlantic, but from these here United States, in the form of the Super Duper Committee tasked with finding the $1.2 trillion in deficit cuts needed in order to make the August debt ceiling hike legitimate. As a reminder the debt back then was $14.4 trillion - tomorrow it will officially surpass $15 trillion for the first time ever, meaning that even as the Super Committee squabbles, half the benefit from its "successful" conclusion has already been implemented. And here is where Morgan Stanley's David Greenlaw comes in with a piece in which he makes it all too clear that the Super Committee may be Clark Kent, but it sure is no Superman. "Press reports continue to suggest that the so-called Super Committee, established as part of the compromise agreement to hike the debt ceiling, is foundering. In recent days, Democrats and Republicans have offered competing plans that have little common ground. Republican members appear to remain committed to a no new taxes pledge, which will make it very difficult for the Committee to come anywhere close to its $1.2 trillion target." In other words, just as nothing material or actionable (suffice for some grandiose delusions) came out of Europe, precisely the same will happen in the US, after our own dire fiscal situation is exposed for the naked emperor it is.
On Challenges To The Mainstream Financial Channels, BofA's (In)Solvency, CDS and Long-Only Pundits Dominating the MSMSubmitted by Reggie Middleton on 10/28/2011 09:14 -0500
Lauren Lyster, the enticing Russian TV/Capital Accounts host gave me the rare opportunity yesterday to sit down & run my mouth for 15 minutes straight. This format's most conducive to true conveyance of knowledge and information, at least in my not very humble opinion. I'm just not the 8 second soundbite type. Plus, I'm sure I pissed many long-only guys off...