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What if we get further Credit Downgrades?-and Implications for the EFSF
By thetrader.se
With S&P downgrading Italy, the MIB in positive territory, somebody is starting to price in Berlusconi’s resignation. But before we get the limit ups hitting the wires let’s reconsider some of the problems if other countries start loosing their credit ratings.
The EFSF (supposed to save the Eurozone) is currently top rated, but that could change quickly, if realists at S&P start downgrading other countries within the Eurozone group. If that starts happening, the EFSF will loose it’s credibility in it’s current form, and will need some adjustments. Then the savior of Europe won’t be as strong as people perceive it to be.
Below some points worth reading regarding the possible outcomes on the EFSF if we get more downgrades. By FT/CSFB, earlier this summer;
1) The EFSF’s credit rating is downgraded, but the facility continues to operate as before, with higher funding costs (we estimate around 100bps, which corresponds to the gap between yields on French and Belgian debt). We think this is the most likely option.We note that after a French downgrade none of the three biggest sovereign borrowers globally would have a AAA-rating (Japan, US and France) – i.e. many other sovereign borrowers are funding themselves without problems in spite of the absence of a AAA-rating.
2) The ECB buys more peripheral European debt. The ECB makes up for the reduced lending capacity of the EFSF by increasing its purchases of peripheral European sovereign debt in the secondary market (having bought an estimated €80bn so far). This would amount to a form of soft QE (as its would lead to a deterioration of the quality of the ECB’s balance sheet) – or even hard QE (if the purchases are not sterilized, thus leading to an increase in the size of the ECB balance sheet). We note that this scenario could occur in combination with scenario 4 above. The only problem is that this would require the ECB to give up another one of its principles (as they would have to concede that their buying is not just “temporary”, i.e. only in place as long as the EFSF is not fully operational).
3) The EFSF retains its AAA-rating in spite of the French downgrade with no impact on its lending capacity and cost of funding (low probability)
4) The EFSF reduces its lending capacity in order to retain its AAA-rating… low probability, given the perceived need to increase the size of the EFSF to ensure that Spanish and Italian funding needs could be met. On our calculations, the EFSF would require an effective lending capacity of around €1tn to avoid contagion
5) Germany and the other AAA Euro-area countries (Holland, Finland, Austria, Luxemburg) increase their contribution to the EFSF to ensure the AAA-rating is maintained without a reduction in the lending capacity… low probability, given political resistance in these countries to increase their burden in the bail-out efforts
6) Core Europe stop supporting the periphery – the main risk is that the remaining AAA-rated countries in the Euro-area would worry about the risk to their own credit rating – and would decide that it is no longer in their interest to support the periphery (or that the domestic political situation makes it preferable to stop doing so). Without support from core Europe, we think a break-up of the euro would be inevitable. We continue to think this is unlikely – but the chances of it happening would surely increase if France were to lose its AAA-rating.
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[KR186] Keiser Report – Dollar-Trapped!
Posted on September 20, 2011 by stacyherbert| 23 Comments
Stacy Summary: We interview Bill Still.
When zee Germans said that they will not expand the ESFS it gave the green light to the FED for Wednesday. Geithner's lectures were dog and pony, IMHO.
If you can chase zee Germans out of gold and CHF and back into Germany in the pathetic repetition of the same RISK ON trade, that will do the trick. If that is not the trick, then armageddon. However much I stand incredulous, that's the FED's play book. Rosenberg will probably be proved correct once again.
Italy smitaly, until such time as the juice runs out of the latest liquidity pump and once again we start to dump.
Frankie, when interest rates are low, stocks will grow.. Maybe equities are starting to act as safe havens? After all holding $ or US bonds isnt exactly 'safety with income'. Just a thought.
I stand corrected. Dow futures now at +90. The BS off the Bloomberg wire is that a pre-QE III circlejerk is unfolding.
Housing data continues to suck balls even though there has never been a recovery where housing did not lead: Bullish
Seimens moves half a billion Euro into the ECB: Bullish.
Italy can't pay its bills: Bullish.
Leading economic indicators show strong potential for Q3-Q4 recession: Bullish.
The First of Seven Seals is cracked this morning: Bullish, good for +200 on the DOW overnight futures.
It's FOMC Day, where the ghost of John D. Rockefeller is about to hand out shiny dimes to everyone on The Street: Hyperbullish.
Fuck it. I give up. Futures now accelerating at nearly pi/2.
As long as the trend is up, the market is deemed "rational" by Bernanke and cohorts. This "rationality" and the associated collective confidence must be maintained at all costs by the powers-that-be lest humanity discover it's completely insane.
Gold inclusion as Tier 1 asset would be huge: LBMAinteresting
The markets are so thrilled about this news, specifically the Italian downgrade, that they did one of their magical 2am-4am, pi over 4 rampjobs, going from -90 in DOW futures to +30 while everyone's asleep.
Hmm, why is it that every morning when I wake up that I check the 2-4am window on the futures, particularly if they were red the night before and ESPECIALLY if on bad news to see if they rallied when the Western Hemisphere was all fucking asleep?
you said it right there : fukking sends the Dow futures up into the air after each night of thrills...don't ask me why as markets are irrational like all human desire. Karma, life urge, buy the dip or fukk the deep underworld; its all greek to me. But its living life to the market. The Italians are old hands at it so I wouldn't worry about their Poors downgrade. They'll find a way of making bunga bunga material event out of a down grade. Its called calling the shots on a hot declining slope. Watch them slalom between the poles like Alberto Tomba.