Chart Of The Day: The EFSF Is Already Trading As AA+, Or Why The French AAA Rating No Longer Matters

Tyler Durden's picture

Following the S&P "technical glitch" on Thursday which sent out a bizarre notice to a few subscribers notifying that a rating action on France is imminent, FrAAAnce is up in arms and demanding S&P blood. The reason: as everyone knows by now, the sanctity of the Eurozone is now contingent on those three A letters more than any other variable, because without said rating, France becomes ineligible for EFSF funding purposes (at any rating less than AAA), the EFSF's sole 'pristine' backer becomes Germany, and sends the EFSF yield curve into a tailspin, as it glaringly painfully obvious that Germany alone can't fund the trillions needed to preserve the Eurozone and purchase rolling Italian and other PIIGS debt. Yet one look at the yield curve of the EFSF as it already stand confirms that the market is not waiting for S&P, Moody's or any other rating agency, as it is now just a matter of time: after all recall that S&P itself said that it "would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession." Well as of yesterday, the EU itself warned the Eurozone may slump into "a deep and prolonged recession."The result: as of the past few days the EFSF no longer trades with an AAA implied rating. In face as can be seen on the chart below analyzing regression curves for various rating strata, the EFSF is now AA+ at best. Simply said, this means that the bond market has once again voted, and completely oblivious of the noise that is the puppet changes at the top in Italy and Greece, is already preparing for the next contingency casualty, which after France, is just one... at least in Europe.

And here is the salient section from the S&P October 20 Eurozone "Stress Test" - the bolded text is all that matters:

This new stress test updates our scenario analysis published on March 22, 2011. It's split into two parts:

In the first part, we review our base-case projections (very low growth for the European Economic and Monetary Union [eurozone]) and the potential impact on our rated universe of a double-dip recession (Scenario 1) and of a double-dip recession plus an interest rate shock (Scenario 2), with stress intensity ranging from modest to substantial depending on the jurisdictions. With the exception of Greece--where we assume a 60% haircut on sovereign debt, which is consistent with our recovery rating of '4' on the sovereign's debt--we do not assume any other European sovereign debt restructuring to occur under both scenarios.

The key projections from our stress scenarios are that:

  • The impact would be hardest on sovereigns and sectors most closely aligned with the credit fortunes of governments, such as government-related entities, local and regional governments, and banks.
  • Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios.
  • Under Scenario 1, the Tier 1 ratio of 20 banks in our sample of 47 could fall below 6%. (Under Scenario 2, the number of banks affected rises to 21.) We assume that this would require recapitalization by their governments to raise the ratio to 7% for a total cost that we estimate to be about €80 billion (€90 billion). We infer that the overall eurozone-wide recapitalization cost could amount to about €115 billion (€130 billion).
  • Speculative-grade corporate defaults would likely increase to between 9% and 13% under the scenarios, and industrial sectors most exposed to rating downgrades would likely include steel and aluminum, downstream oil and gas, building materials, and forest products.
  • Covered bond programs in Italy, Portugal, and Spain could be lowered by several notches under our criteria, reflecting the potential downgrades of issuing banks.
  • The deterioration of collateral securing structured finance transactions in Italy, Portugal, and Spain could contribute to a downgrade rate of at least 25%-30%, with junior tranches most affected.
  • If all counterparties to structured finance transactions were to be downgraded by one notch and did not replace themselves, we could downgrade the senior notes in approximately 10%-15% of securitizations.
  • Rated insurers in Italy, Spain, and Portugal, or with significant operations in or exposures to these countries, or large U.S. equity portfolios in their life operations, potentially could see rating actions limited to between one and two notches on average.
  • Increased yields under Scenario 2 would actually come as a relief to life insurers with guaranteed yield products.

In the second part of the report, we also assess the funding capacity of the EU and the IMF to support our base-case projections as well as stressed borrowing requirements from Greece, Ireland, Portugal, Italy, and Spain in order to keep borrowing costs at levels that don't exacerbate solvency issues.

Our key projections from these tests are that:

  • The current arrangements likely would be sufficient under our base-case projections if the EU and International Monetary Fund (IMF) were to support 100% of the borrowing requirements for Greece, Portugal, and Ireland, and up to 10% of the borrowing requirements for Spain and Italy.
  • These arrangements likely would be insufficient under a double-dip recession scenario to support 100% of the stressed borrowing requirements for Greece, Portugal, and Ireland, and up to 30% of those for Spain and Italy.
  • Under such highly stressed conditions, we calculate that there would be a shortfall of €287 billion between the joint lending capacity of the EU support mechanism and the IMF, representing about 2.7% of the aggregate 2010 GDP for eurozone member states.

Tabular summary:

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Fips_OnTheSpot's picture

The only remaining triple-A is:

AAAnd it's gone!

topcallingtroll's picture

It is possible that europe pulls through, but france and flanders sure need a dose of that free market religion and reduction in structural barriers they are forcing on italy and greece.

WestVillageIdiot's picture

What the hell-diddly-ell does Ned Flanders have to do with the mess in Europe?  This is more of a Homer Simpson type situation. 

knukles's picture

Europe is not gonna "pull through".
It's over the great experiment has failed.

Go write shit for Goldman.

WonderDawg's picture

The Euro is dead. Right now, the paramedics are frantically administering CPR and firing off the defibrilator, but a couple of the seasoned veterans are looking at each other and shaking their heads.

Careless Whisper's picture

The Careless Whisper Saturday Update


GM Refuses Haircut, Forces SAAB To Liquidate

Matt Taibbi: Judge Rakoff Says Citi Must Admit Wrongful Acts

VIDEO: Senator Introduces Bill To Restore States Rights To Set Usury

MLB Rookie (.267) Rescued By Venuzuelan Commandos After Kidnapping

Mexican Drug Czar Killed In Chopaa Crash; Previous Drug Czar Killed In Plane Crash (Twice Is Coincidence, Three Times Enemy Action)

Katy Perry Makes You Cry; New VIDEO: The One That Got Away


Sudden Debt's picture

Good move from gm, otherwise the technology goes to china.

I also have a friend of mine who is going to be disptched to china for 9 months to oversee the construction of a new VOLVO plan. The S60.... The car they said would always be build in europe... NOT!

They buy the stuff, break it down, take the technology and boom we lose again.

disabledvet's picture

"Volvo monetization." it's all long as everyone understands it's being given away.

I am more equal than others's picture

The (retail) market always wants lower prices so Volvo moves to China and makes customers happy for a while.  As income contiinue to fall in the West demand for lower prices will grow.  Corporations are only doing what the masses want - they want luxury at Wal-Mart everyday low prices.  When luxury became a commodity the laws of unintended consequences kick in and it is now on display.  The motto the 'customer is always right' is wrong. 

whoisjohngalt11's picture

Yea i think buying American products is cheaper than paying American unemployment huh ???

jonjon831983's picture

Lots to make you cry with the Katy Perry video.

Loss of a classic Ford car

Johnny Cash?

Losing a loved one?

lolmao500's picture

When do they downgrade Switzerland again? The banks are way too big for the GDP and since they own a boatload of European debt...

disabledvet's picture

That would be "the end" if that happened.

topcallingtroll's picture

Switzerland is third in total liabilities, sovereign plus banking, in relation to gdp, right after Iceland and Ireland.

Just saying.

United states is about number 14.

The Limerick King's picture



The EFSF is a sham

A ponzi wrapped up in a scam

It's loaded with honey

To lure some dumb money

But there's no getting out of this jam

kaiserhoff's picture

Very nice.  The meter even works, but for this crowd you could probably just start out -

There was an old whore from Nantucket...;)

knukles's picture

Whose ESEF he wanted eveyone suck it...
He said with a grin...
I won't default on your chin...
When doing so said , ah fuck ya...

WestVillageIdiot's picture

I remember seeing that the Swiss banks had assets equal to 2,300% of their GDP.  What a potential disaster. 

It is funny how many cities, and even countries, now have economies solely driven by financial voodoo.  Yesterday somebody was on here from Luxembourg saying how wealthy Luxembourg is.  I looked up Luxembourg and saw that one of the first things that it stated was that it has replaced almost all of its industry with "financial exports".  Is it a landlocked Cayman Islands? 

Everywhere we look are potential sources of disaster that are masquerading as "islands of prosperity". 

Future Tense's picture

Nothing matters until the ECB announces the debts purchased will not be sterilized.  Until then, it is a slow motion (deflationary) train wreck.  Total credit supply continues to contract globally, especially when looking at the shadow markets.

disabledvet's picture

I agree. The phony war ended in the Spring but up until now it's behaved more like WW I than WW II. That's about to change as the reality that the ECB can purchase but not print sinks in. All debt will be downgraded throughout the entirety of the EU and while the euro will remain the common currency (and remain hopelessly over valued) the ability to finance even a dog catcher in Stuttgart will prove insurmountable. It's a classic "I'm rich but don't have any money" moment. In short the irrational fear of "inflation" will lead to a litany of actual defaults of a massive number of "regions" and their respective financial entities simultaneously. Next stop: the IMF.

WestVillageIdiot's picture

West Texas crude is already trading at $99 / barrel.  Food prices, education and medical are skyrocketing.  I don't know if I would call the fear of inflation as irrational. 

I have been following this mess for about 6 years now and I still don't feel that anybody has a firm grasp on what's going on.  That is not a shot at you.  That is just to say that there is as much uncertainty now as there was in the fall of 2005 or 2008.  Of course in the fall of 2005 those of us that were questioning the housing bubble, and the impact it would have on the economy, were few and far between. 

TJ00's picture

Well if it keeps going all assets -> 0 all things that keep you alive -> INFINITY.

ArkansasAngie's picture

The question has always been ... who is going to buy the debt.

The printing press will work until it doesn't.  And then answer to the question will be ... nobody will buy.

disabledvet's picture

No. We already know the ECB is buying the debt. The question is "who prints the money?" that appears also to be "nobody but the corrupt Austrians" right now (that's a joke. They were money laundering it! Hahahahaha! Get it!) the fact is there is a massive shortage of cash in Europe. That can be maintained for a LONG time as "who doesn't lack money"?

Irish66's picture

OT  That Citi court case has maybe 9 days left, thats gonna blow them up

DeadFred's picture

What are the intrade odds on the judge still being alive and sitting on the bench in nine days?

DormRoom's picture

dear, GErman leaders/people, look @ the Ireland use case.  They got f---ked over by the bankers.  Do not listen to bankers or their apply their EFSF.  follow logic.  do not let the Bankers leveragicide GErmany.  Harming taxpayers, but protecting bond holders (banks) in the process.



larynx's picture

Only problem is if bonds go bust, than also most bank account savings are gone phoof, too.

So currently its the question who looses. Darwin says it must be the unproductive.

Bam_Man's picture

Further evidence that "you can fool some of the people some of the time..."

Now that we have seen that investors can be forced to take 50% "voluntary" haircuts - oh, and by the way your CDS "protection" is completely worthless - who is going to be dumb enough to buy this AAA-rated ponzi paper? Not even the Chinese will touch it.

WestVillageIdiot's picture

You got that right, Bam Man.  How long will the market be willing to play Charlie Brown to the system's Lucy?  Something tells me that bond buyers will stop caring whether or not they can kick the football long before Charlie Brown did.  Then that little bitch Lucy will have no other option but go have a lezbo fest with that nasty little skank Peppermint Patty. 

boom goes the dynamite's picture

Peppermint Patty is a man baby! yeah

lincolnsteffens's picture

Oooooooo you get a C- 

You can fool some of the people all of the time and all of the people some of the time but you can't fool all of the people all of the time.

Was that an Honest Abe saying?

Tommy5454's picture

Once you realize that the goal is world government and one currency, that the facilitators are central banks which are private, that the people behind the puppets control the money and therefore can buy any materialistic thing on this earth that they want, you then realize that there is but one situation in which the markets will tank: an nationalist government willing to gum up the works or "pull an Iceland" within the EU or the USA. You have to be willing to watch them crash the system in order to get back to freedom which includes free markets. Other than that ZH and the like are just pessimism porn (not that I don't love it).

WestVillageIdiot's picture

Why couldn't Iran be that spark? 

Tommy5454's picture

I suppose it could be if it caused gas to go up to 5 or 7 dollars a gallon, the american people seem to become enraged enough with that prospect....that and football being canceled. I just fear that the result here will be a return to the other party. How many times can one party screw you and then you put your hope in the party that screwed you four years ago in the same exact way. At least in Europe their parliamentary system allows for new parties based on real populism and nationalism. Look at the Netherlands where Geert Wilders' party is in the coalition but because they will vote anti-EU every time, for all EU votes the other parties in the ruling coalition just have the Socialists for it. I would expect that as more and more people there have beef with the EU (how could they not with more and more printing and bailouts) Geert will get even more votes eventually preventing a government from doing that without stopping all votes. Here's to hoping, but honestly the only way I see anything happening is if Germans decimate the ruling parties in the next vote, even then though, they don't have an opposition that is large enough and organized enough and is anti-EU. Unlike Austria, they are starting from scratch with that. Their options might as well be D and R.

TJ00's picture

Attacking Iran means cutting off it's oil to China, essentially cutting the Chinese economic throat, enjoy the 2 million degree heat of their thermonuclear weapons because 1 billion Chinese are not going to die without taking their attacker with them as that would be the ultimate loss of face.

oogs66's picture

ECB will buy it...push rates to zero :D

Freegold's picture

Or the Euro can just bid for gold, physical only and problem solved. The gold is there and some other entitys may have to audit ;-)

Youri Carma's picture

ECB bond buys will go as far as needed: Kranjec

ahahaahahahaahah the market will surely call his bluff and one other slight problem: He’s not in charge the Gemans are!

He’s just a nobody with a big mouth.

Justaman's picture

When did we start caring what the rating agencies thought?  Look at the ramp ups, it doesn't matter what any entity says, it matters who is in charge of the fiat supply.  Look at the US downgrade, it doesn't matter. 

The ECB is taking the FR manipulation textbook to the next level.  Have fun Europe, you are going to go through the same thing just like the US over and over again.  Structural reform will be very painful. 

BarryG's picture

A great article from today's Express, about the German roots of the Euro....

Tom Green Swedish's picture

All I have to say about the rating agencies is that they are inherently corrupt. I watched a Frontline episode on their shady practices.  You might have a better chance rolling a dice with the ratings on it than listening to the ratings agencies. That being said do your own research. Too many people follow the herd. Too many people get burned that way.  People will probably ultimately get burned with gold too.  Its called a bubble, It starts off small and you don't know its forming but it keeps getting bigger until it bursts.

Now as for Europe.  Unfortunately, France, Germany and Austrian banks, along with the so called PIIGS ones and any other holding bad debt are going to have to get a haircut.  When you make a bad loan (asset to a bank), you lose money. The German and France banks are overleveraged and the Spain and Italian ones have decent leverage, which makes me wonder what the French and Germans were thinking and likewise about the Spanish and Italians were thinking. The banking people should know there business better, they are supposed to allocate capital, not give it away. Bankers should not be protected, anymore than the ones who don't pay their debts.  If everybody had no integrity like the bankers we would all be a bunch of crybabies ripping each other off.

Some new, if not old revelations will come out of the problem. First, don't give money to people who can't pay it back. Doesn't matter which currency it is.  Fortunately for Germany / France they can repossess cars and houses possibly, because there should be collaterel. Obviously debt is not a concern to the PIIGS countries.  

I believe the reason why the ECB is stalling is so the German and French banks can unwind some of their garbage, and to really stick it to the PIIGS.  I can only speculate though.