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Moody's Slaps ESM With Negative Outlook On Day Of Its Official Launch

Tyler Durden's picture




 

Europe just can't catch a break these days. While French Fitch naturally came out earlier with a AAA rating and a stable outlook, it is Moody's, which has yet to follow through in S&P's footsteps 14 months later and tell the truth about America's AAA rating, that moments ago spoiled the ESM "inauguration" party by branding it AAA, but with a Negative outlook. So much for the most 'supersecure' CDO on earth: looks like we are not the only ones to assign comical value to the ESM's €80 billion first loss "Paid-in" tranche. Because that 12% in buffered protection can disappear very quick if and when the central planners lose control.

From Moodys:

Moody's assigns Aaa/Prime-1 rating to European Stability Mechanism (ESM); negative outlook
 
First-time rating assignment
 
Frankfurt am Main, October 08, 2012 -- Moody's Investors Service has today assigned a long-term issuer rating of Aaa and a short-term issuer rating of Prime-1 to the European Stability Mechanism (ESM). The outlook is negative.
 
The Aaa/Prime-1 ratings are based on (i) the ESM's anticipated low leverage, (ii) the creditworthiness of the ESM's members which are also the euro area member states, (iii) the sound liquidity and capital management policy with an Early Warning System (EWS) which ensures that funds will be available on time, and (iv) the ESM's preferred creditor status. The ESM's purpose is to provide an inter-governmental support mechanism which extends financial assistance to members that are either unable to access the capital markets, or able to do so only at very high interest rates.
 
RATINGS RATIONALE
 
The first key rating factor underlying Moody's decision to assign a Aaa rating to the ESM relates to its anticipated low leverage. The ESM has a lending capacity (both loans extended to and purchases of securities issued by supported member states) of EUR500 billion and subscribed capital of EUR700 billion (consisting of EUR80 billion of paid-in capital and EUR620 billion of callable capital). If the ESM's capital is reduced (e.g., due to losses resulting from a borrower default), the leverage ratio -- defined as lending capacity/subscribed capital which must not exceed 71% -- would automatically limit the lending capacity and thereby stabilise the structure of the ESM funding. In such a scenario, loans under existing programmes would continue to be disbursed, but any new lending commitments, which would surpass the lending capacity, would require a simultaneous increase in the ESM's capital.
 
The second key rating factor underpinning the Aaa/P-1 ratings is that the ESM's shareholders are the euro area's member states, which provide capital to the ESM according to the same capital key that is applied to the European Central Bank (ECB). The ESM therefore benefits from the very high credit quality of its shareholders and the very high likelihood that they will be able to comply with their capital-related obligations. The current capital key-weighted median rating is Aaa, with the two main member states in terms of their capital contribution, Germany and France, both holding Aaa ratings.
 
The third key rating factor is the ESM's strong liquidity and capital management policy. In particular, the policy aims to ensure that all payments over the next 12 months are fully covered by the ESM's own liquidity reserves and callable capital to be contributed by Aaa-rated shareholders. An additional credit-enhancing feature is the ESM's Early Warning System (EWS) which, by providing an assessment of borrowers'
repayment capacity well in advance of the repayment date, ensures that capital calls can be made and implemented well in advance of any payment shortfall. The ESM Treaty places a legal obligation on the ESM's Managing Director to call capital if needed, without requiring approval by the Board of Governors or the Board of Directors. With respect to its capital management policy, the ESM invests in liquid Aaa-rated instruments, mainly government securities or equivalent.
 
The fourth key rating factor is the ESM's preferred creditor status that is junior only to that of the International Monetary Fund (IMF). This status differentiates the ESM from its predecessor entity, the European Financial Stability Facility (EFSF), which ranks pari-passu with senior unsecured bondholders.
 
RATIONALE FOR NEGATIVE OUTLOOK
 
The negative outlook on the ESM's Aaa rating reflects the negative outlooks on all but one of its Aaa-rated member states and guarantors. The Aaa-rated member countries that currently have a negative outlook include some that have significant contribution keys, such as Germany (which holds a 27.1% share in the subscribed capital), France (20.4%) and the Netherlands (5.7%). The only Aaa-rated ESM member that has a stable rating outlook is Finland, whose contribution key is 1.8%.
 
WHAT COULD MOVE THE RATING DOWN
 
Although the ESM compares favourably to other Aaa-rated Multilateral Development Banks (MDBs) in terms of members creditworthiness, there are several key differences in how the ESM's own creditworthiness could be weakened:
 
1.) A deterioration in the creditworthiness of the euro area member states (as reflected by a change in Moody's ratings for these states) would weigh on the combined ability to provide support, and consequently have a negative effect on the creditworthiness of the ESM. In light of the correlation of euro area member states' creditworthiness, the ESM is more susceptible to movements in the creditworthiness of its individual members than are many other MDBs, as reflected by the sensitivity of the ESM's rating to changes in the ratings of Aaa countries with large ESM contribution keys, i.e. Germany, France and the Netherlands.
 
2.) A weakening in the political commitment among euro area member states to the ESM could have negative rating implications. The ESM's policy mandate is related to the preservation of the euro area and is therefore more narrowly defined compared to other MDBs. This could potentially affect the willingness to offer support in a scenario that includes a euro area break-up, although this is not currently Moody's central assumption.
 
3.) The ESM's asset side points to significant correlation risks, which weaken the intrinsic strength of the ESM and make it potentially more dependent on members' support. By comparison, MDBs usually have a relatively diversified asset structure.
 
4.) Although the ESM ensures that all payments due over the next 12 months are fully covered by its own liquidity reserves and by callable capital to be contributed by Aaa-rated shareholders, the inclusion of callable capital in the calculation separates the ESM from other MDBs, which often have one year of coverage based only on their own liquidity reserves. This reinforces the correlation of the ESM's rating with the rating of its largest Aaa contributors.
 
5.) Since the ESM's Aaa rating is based on the assumption of superior financial-management capabilities, transition/downgrade risks could also arise from a potential erosion of those capabilities. An inappropriate skill transfer or skill acquisition would therefore adversely affect the ESM's governance and risk management practice.
 
Conversely, Moody's would consider moving the outlook for the ESM's ratings to stable if the rating agency decided to change to stable the outlooks on the ratings of those Aaa member states with key contributions to the ESM's capital.

 

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Mon, 10/08/2012 - 17:13 | 2869145 Mongo
Mongo's picture

This is funny shit!

Mon, 10/08/2012 - 17:17 | 2869152 Ahmeexnal
Ahmeexnal's picture

The "Turd Reich" is a failed empire.
Time to unleash black plague 2012.

Mon, 10/08/2012 - 17:25 | 2869164 Zero Govt
Zero Govt's picture

wait a few more years for the Black Plague, this is our grey period ...boring innit?

Mon, 10/08/2012 - 17:36 | 2869195 Mark Carney
Mark Carney's picture

LOL Moodys....you're doing it wrong!

Mon, 10/08/2012 - 19:33 | 2869431 The Alarmist
The Alarmist's picture

"We won't be fooled again!"

Ok, wishful thinking. The ESM does not fulfill the role of sucking up wealth from the rest of the world and transferring it to the US, so there really is little reason for the ESM to be rated triple-A.

Mon, 10/08/2012 - 22:31 | 2869739 markmotive
markmotive's picture

Of course it has a negative outlook. It's just the ponzi-participates creating a side-ponzi scheme to pay for the first ponzi scheme.

We are fast-approaching the complete breakdown. The collapse is accellerating.

http://www.planbeconomics.com/2012/10/08/developing-breakdown-dmitry-orlov/

Mon, 10/08/2012 - 17:28 | 2869173 vast-dom
vast-dom's picture

the MSM is celebrating the AAA rating, but downplaying the outlook. what a fucking farce. 

Mon, 10/08/2012 - 17:31 | 2869183 SHEEPFUKKER
SHEEPFUKKER's picture

Uncle Warren's Moody's squeezing the Euros, but coddling the Ameri-cants. Shocking.  /sarc

Mon, 10/08/2012 - 17:36 | 2869192 ebworthen
ebworthen's picture

Central Banks are the black plague, most folks just haven't noticed the pustulent boils yet.

Mon, 10/08/2012 - 17:19 | 2869154 LawsofPhysics
LawsofPhysics's picture

Bunch of criminals calling each other out, halarious.  LoP says, "Just put that guillotine right over there, I can wait until they are both done arguing."

Mon, 10/08/2012 - 17:21 | 2869158 Zero Govt
Zero Govt's picture

"Moody's Slaps ESM With Negative Outlook.."

not sharp enough boys, a Death Warrant would be more apt/accurate

Mon, 10/08/2012 - 17:35 | 2869188 max2205
max2205's picture

Means nothing.

Mon, 10/08/2012 - 18:01 | 2869232 Rainman
Rainman's picture

it shoulda been rated CCCP

Mon, 10/08/2012 - 18:39 | 2869309 knukles
knukles's picture

++++++++++++++++++++++

Bond Humor!!!!!

Mon, 10/08/2012 - 18:41 | 2869315 Chief_Illiniwek
Chief_Illiniwek's picture

...which, then, raises the question: Will Egan-Jones even bother?

Mon, 10/08/2012 - 17:28 | 2869175 vote_libertaria...
vote_libertarian_party's picture

Its faaaaaaan-tastic (unless somebody uses it)

Mon, 10/08/2012 - 17:31 | 2869181 BandGap
BandGap's picture

I thought they'd be taking Moody's to the woodshed by now. 

When does this shit become every man for himself? Who the fuck believes this -  "based on the assumption of superior financial-management capabilities"? Seriously, aren't these the same assholes that got them into this mess? It's like the Obumma campaign - "let me finish the job". Man, this is surreal.

Mon, 10/08/2012 - 17:34 | 2869184 ebworthen
ebworthen's picture

Moody's ratings of famous people:

 

Steve Jobs:  Tripple AAA but with a negative outlook.

Michael Jackson:  BBB but positive outlook.

Warren Buffet:  AAA and will never be wrong or die.

Mon, 10/08/2012 - 19:34 | 2869432 The Alarmist
The Alarmist's picture

Warren Buffet ... human, or zombie?

Mon, 10/08/2012 - 17:33 | 2869185 Joebloinvestor
Joebloinvestor's picture

Bailing a sinking boat with a Dixie cup that has a hole in it.

Mon, 10/08/2012 - 17:37 | 2869198 ThirdWorldDude
ThirdWorldDude's picture

But, but, but I thought rating agencies were banished from Europe by the Brussels Inquisition...

Mon, 10/08/2012 - 17:37 | 2869199 phoolish
phoolish's picture

What's the GDP of this "ESM"?

Mon, 10/08/2012 - 18:05 | 2869242 Cojones
Cojones's picture

Zero unemployment and infinite jobs growth, still a negative outlook. 

Nuff said.

Mon, 10/08/2012 - 17:37 | 2869200 booboo
booboo's picture

Still born soon to be zombie love child of Draghi and Frau Merkel, quick, lop off it's head.

Mon, 10/08/2012 - 18:04 | 2869239 Boilermaker
Boilermaker's picture

Sensationalized

Mon, 10/08/2012 - 18:05 | 2869240 Boilermaker
Boilermaker's picture

Sensationalized

Mon, 10/08/2012 - 18:35 | 2869305 GreatUncle
GreatUncle's picture

Think the rating is wrong myself, it is on the wrong side it should be AAA+.

Why? You just know the real backstop in all this is the taxpayer what more can you ask for besides the shirt off somebodys back. The real question now it is up and running, who is getting first dibs?

Get in there quick it's free before it's all gone!

Mon, 10/08/2012 - 19:32 | 2869425 Dareconomics
Dareconomics's picture

The PIIGS plus Cyprus actually have to pay €37bn to their own bailout fund! It gets better. These same countries are on the hook for a total of €259bn. Greece and Portugal are already being bailed out, which means that they are being loaned the money to place into the ESM increasing their indebtedness. Isn't a bailout supposed to reduce debt? If millions of people weren't suffering from the social effects of an economic depression, this might be funny.

Both Fitch and Moody's gave the ESM AAA credit ratings. Only 6 of the 17 ESM members have AAA credit rating, so they must be using their old subprime models to assess the creditworthiness of this fund. If your broker tries to sell you ESM bonds, make sure he does it in person so you can punch him in the face. 

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