ratings

Many local governments across the US face steep budget deficits as they struggle to pay off debts accumulated over years. Increasingly, as a last resort, some have filed for bankruptcy. There have been 26 municipal bankruptcy filings since 2010 and the pace is clustering, as Governing.com is keeping track. As Citi's George Friedlander noted (and we discussed here), technicals (net flows) are still dominant and dragging yields lower and spreads tighter; in spite of contagion fears from cities with clear economic problems (specifically those in CA with severe housing price collapses) and also general fund debt that is not secured by a G.O. pledge. However, with the August 'cliff' in redemptions clearly not priced in yet - as fear has driven momentum into bonds recently - we fear more than a few will be wrong-footed when the net flow shifts.

The importance of the negative credit outlook from Moody’s lies less in the realm of financial markets, given how little investors seem to value the views of the credit rating agencies. Rather the major importance lies in the policy and political reactions to the rating actions. As UBS notes, there is a risk of popular (not political leadership) adverse reaction. The media in Germany (where there is a tradition of media hostility to the Euro periphery) or in the Netherlands (approaching a general election in September) may portray this as "we are being dragged down by the Euro periphery". If that does transpire it could easily fan the flames of populist resentment of the Euro still further. Critically, if the media attribute (or mis-attribute) the blame to the periphery, there could be obstacles to that integrationist momentum. The reality of a common monetary policy and the necessity of some kind of communalized fiscal responsibility are being brought to bear on the Euro area polity - but markets seem confused. CDS markets are pricing Germany's risk as if it was becoming increasingly encumbered to the periphery and yet the FX market is dragging EURUSD lower on expectations of massive upheaval and potential SPexit with no German 'unlimited' support. CDS appears to fit with raters, FX more with haters - or as UBS points out, perhaps all is not well in Germany as it "has demonstrably failed to grow its way out of debt."

It was inevitable and despite all of the usual huffing and puffing on the Continent; the moves are correct. First Egan-Jones and then Moodys and Germany is downgraded or threatened with a downgrade and for sound reasons. The German economy is $3.2 trillion and they are trying to support the Eurozone with an economy of $15.3 trillion that is in recession and rapidly falling off the cliff. Each new European enterprise gives the markets a shorter and shorter bounce as we all watch the yields in Europe rise, the stock market’s fall and the Euro in serious decline against both the Dollar and the Yen. There has been no Lehman Moment to date but moment-by-moment the decline in the fortunes of Europe diminishes. There is almost no historical precedent where debt paid by the addition of more and more debt has been a successful operation. There is always the inevitable wall or walls and the concrete slabs of Greece and Spain fast approach.

The major European bourses are down as US participants come to their desks, volumes still thin but higher than yesterday’s, and underperformance once again observed in the peripheries, with the IBEX down 2.5% and the FTSE MIB down 1.2%. Last night’s outlook changes on German sovereign debt caused a sell-off in the bund futures, with the effect being compounded as Germany comes to market with a 30-year offering tomorrow. The rating agency moves, as well as softer Euro-zone PMIs and reports that Spain is considering requesting a full international bailout have weighed on the riskier asset classes, taking EUR/USD back below the 1.2100 level. Furthermore, with Greece and a potential Greek exit now back in the news, investor caution is rife as the Troika begin their Greek report of the troubled country today.

• Greece now in "Great Depression", PM says (Reuters)
• Geithner "Washington must act to avoid damaging economy" (Reuters)
• Moody’s warns eurozone core (FT)
• Germany Pushes Back After Moody’s Lowers Rating Outlook (Bloomberg)
• Austria's Fekter says Greek euro exit not discussed (Reuters)
• In Greek crisis, lessons in a shrimp farm's travails (Reuters)
• Fed's Raskin: No government backstop for banks that do prop trading (Reuters)
• Campbell Chases Millennials With Lentils Madras Curry (Bloomberg)

In a first for Moody's, the rating agency, traditionally about a month after Egan Jones (whose rationale and burdensharing text was virtually copied by Moody's: here and here), has decided to cut Europe's untouchable core, while still at Aaa, to Outlook negative, in the process implicitly downgrading Germany, Netherlands and Luxembourg, and putting them in line with Austria and France which have been on a negative outlook since February 13, 2012.The only good news goes to Finland, whose outlook is kept at stable for one simple reason: the country's attempts to collateralize its European bailout exposure, a move which will now be copied by all the suddenly more precarious core European countries.

Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?

Updated Executive Summary / Cheat Sheet ...

It's about time for Frances funding rate to feel a little pressure, no?

Because once the dominoes start, they don't stop. Stockton, Mammoth, San Bernardino and now legendary rap and LA riots nexus - the City of Compton. Fear not: the ESM, and the German population whose retirement age will have to be in the quadruple digit range to fund a broke world, has got this, too, covered. Also, only squares don't make fun of Meredith Whitney for saying municipal America is insolvent, so please do.

Two of the three major credit ratings agencies have recently affirmed their outlook on the US sovereign credit rating, but all three continue to hold a negative outlook on the rating. In Goldman's view there is little likelihood that additional ratings actions will be taken this year, but the possibility of a ratings change is another risk posed by the "fiscal cliff," debt limit, and related debate over medium-term fiscal reforms that looks likely in 2013. All three rating agencies look likely to reassess the rating over the next year or so. In light of the recent announcements and upcoming fiscal events that could influence the rating, Goldman Sachs Economics team provides some updated thoughts on the intersection of fiscal policy and the US sovereign rating, in Q&A form.

The decision to downgrade Italy's rating reflects the following key factors:

1. Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base. The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized.

2. Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets. Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.

On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio;  the renaissance of gold in finance;  "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.

This one is tough: Krugman or CNBC... Krugman or CNBC... Hmmm.

The global economy is an entangled affair, make no mistake in your calculation here, and the numbers from around the globe are telling and will affect both the U.S. bond and equity markets. Much of the financing for the Emerging Markets was provided by the European banks and as they pull back and reorganize based not just on Basel III but based upon problems of the sovereign where they are domiciled the situation exacerbates. Two of the world’s financial axises are slowing and troubled and to not think that this will not affect America will lead you to conclusions causing you to play the Great Game badly. What did the meeting of the European Finance Ministers accomplish; not much. They nodded to the Spanish banks and agreed to inject $30 billion by the way of the sovereign, increasing the debt of Spain, with veiled promises of a new ESM fund which would lend money directly to the banks at some point in the future and this point is highly subjective depending upon to whom you listen. The Spanish claim within days or weeks while the Germans indicate it may be sometime next year. There is now a “maybe-maybe” timeline in Europe for almost anything as the weaker nations prod the stronger nations for more money.