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Moody's: "The Probability Of Multiple Defaults By Euro Area Countries Is No Longer Negligible"

Tyler Durden's picture




 

If all it takes for the ES to soar by over 30 points is some propaganda about US consumer spending (pretty much ridiculed by all at this point), and two outright lies about Europe being fixed, the following factual statement by Moody's should certainly send risk soaring now that bizarro mode is fully on: "over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area. The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise." Oddly enough, for once Moody's is not alone. The conclusion: "in the absence of major policy initiatives in the near future which stabilise credit market conditions, or those conditions stabilising for any other reason, the point is likely to be reached where the overall architecture of Moody's ratings within the euro area, and possibly elsewhere within the EU, will need to be revisited."

Full note:

Moody's: Rising Severity of Euro Area Sovereign Crisis Threatens EU Sovereign Ratings

 

The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns, cautions Moody's Investors Service in a new Special Comment. In the absence of policy measures that stabilise market conditions over the short term, or those conditions stabilising for any other reason, credit risk will continue to rise. Moody's new report notes that, amid the increasing pressure on euro area authorities to act quickly to restore credit market confidence, the constraints they face are also rising. While the euro area as a whole possesses tremendous economic and financial strength, institutional weaknesses continue to hinder the resolution of the crisis and weigh on ratings. In terms of the policy framework, the euro area is approaching a junction, leading either to closer integration or greater fragmentation.

 

While Moody's central scenario remains that the euro area will be preserved without further widespread defaults, even this 'positive' scenario carries very negative rating implications in the interim period. The rating agency notes that the political impetus to implement an effective resolution plan may only emerge after a series of shocks, which may lead to more countries losing access to market funding for a sustained period and requiring a support programme. This would very likely cause those countries' ratings to be moved into speculative grade in view of the solvency tests that would likely be required and the burden-sharing that might be imposed if (as is likely) support were to be needed for a sustained period.

 

However, over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area.

  • The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise.
  • A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area. Moody's believes that any multiple-exit scenario -- in other words, a fragmentation of the euro -- would have negative repercussions for the credit standing of all euro area and EU sovereigns.

Moody's notes that the situation is fluid and fast-moving. Policymakers are likely to respond to the escalating risks with new measures, the credit implications of which will require careful consideration. In the meantime, new shocks to financing conditions -- whether the announcement of new programmes or simply a further acceleration in the rise of funding cost across the euro area -- are likely to lead to selective rating changes. More broadly, in the absence of major policy initiatives in the near future which stabilise credit market conditions, or those conditions stabilising for any other reason, the point is likely to be reached where the overall architecture of Moody's ratings within the euro area, and possibly elsewhere within the EU, will need to be revisited. Moody's expects to complete such a repositioning during the first quarter of 2012.

 

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Mon, 11/28/2011 - 09:27 | 1920497 Mugatu
Mugatu's picture

Watch them spin, spin, spin!

 

This will be another week of fake rumor after fake rumor.  Reality is on hold until Wednesday.

Mon, 11/28/2011 - 09:49 | 1920569 CORNGUY
CORNGUY's picture

Volatility is the new reality.

Mon, 11/28/2011 - 09:27 | 1920499 Carlyle Groupie
Carlyle Groupie's picture

The worse it gets, the better it looks.

Plain and simple.

Mon, 11/28/2011 - 09:27 | 1920501 HD
HD's picture

Okay, maybe it's too early for me - or maybe I'm just a moron, but doesn't Moody's contradict itself here? What did I miss?

Mon, 11/28/2011 - 09:27 | 1920503 Snakeeyes
Snakeeyes's picture
The EFSF signing gave temporary relief. But the underlying probem, too much government spending and too much debt, has not been addressed. Sure, there has been a little austerity, but not nearly enough. Eventually, there will have to be massive haircuts to the peripherals to avoid default and German/French/UK banks will take a massive hit ... and get bailed out by taxpayers. And then it begins over again. Moral: no politician will agree to cutting spending in any country (including the US). Monday’s Euro Update: Slight Improvement in Bond Yields

http://confoundedinterest.wordpress.com

 

Mon, 11/28/2011 - 09:28 | 1920504 DocinPA
DocinPA's picture

I'm really impressed with Germans for hanging tough.  The denial of the obvious by our financial overlords and the morons in the press is really starting to piss me off, the obvious being "balance your budgets".

Mon, 11/28/2011 - 10:35 | 1920745 HD
HD's picture

No one pushes around an angry post menopausal German woman. NO ONE.

Mon, 11/28/2011 - 09:28 | 1920505 Ivanovich
Ivanovich's picture

This absurd launch in ES is a QE3 pre-emptive trade based on the article about how the PDs see 600B in mortgage purchases coming shortly from the Fed.  Of course, they don't mention that oil will be back around $110 when that happens.

Mon, 11/28/2011 - 09:49 | 1920564 Quinvarius
Quinvarius's picture

The Fed needs to buy that garbage, tell the bankers they can no longer use it as a non mark to market asset, and then tell everyone involved they don't have to pay interest on the loans involved.  The housing bubble will continue to deflate no matter what.  But we can stop the human carnage by helping the people as evenly as the banks.  The idea that the Tax payer is already buying these loans via inflation and getting zero benefit from it is absurd.  I am getting sick of this horseshit.  The system will NEVER recover if they insist on making the public buy their houses twice now instead of once!

Mon, 11/28/2011 - 10:10 | 1920648 Boston
Boston's picture

Oil back to $110?

 

WTIC is now $100, already.  If QE3 launches soon, oil "will be back around" $130-$140.

Mon, 11/28/2011 - 09:30 | 1920507 hugovanderbubble
hugovanderbubble's picture

SELL FRENCH BONDS,

SELL GERMAN BONDS

SELL BELGIAN BONDS

SELL ITALIAN BONDS

SELL SPANISH BONDS

SELL FINNISH BONDS

SELL AUSTRIAN BONDS

SELL PAKISTANIAN BONDS

SELL ALL FIATS

Mon, 11/28/2011 - 09:31 | 1920508 GeneMarchbanks
GeneMarchbanks's picture

Moody's = noise.

More buzzing fridge sounds via Moody's. How anyone finds them credible is beyond me.

Mon, 11/28/2011 - 09:34 | 1920518 flanders
flanders's picture

Okily-dokily. Whew, good thing I always keep a Bible with me..

Mon, 11/28/2011 - 09:47 | 1920559 Ponzi Unit
Ponzi Unit's picture

Fully committed to the phys and holding. What a nerve-wracking ride! The Morgue is always ready to jolt the market again, but at some point we will witness a definitive move and the bastards will be forced to retreat: earliest would be December? The train of abuses has made me deeply resentful, yet determined.

Mon, 11/28/2011 - 09:54 | 1920577 Quinvarius
Quinvarius's picture

It is kind of weird.  But looking at the charts after the begining of coming big breakout when gold hit 1900, none of the Morgues other raids even looks like it was tradable.  Relatively, the 10 year chart looks like the calmest uptrend ever.

Mon, 11/28/2011 - 09:48 | 1920563 monopoly
monopoly's picture

Exactly why I do not trade this market anymore. Charts are good for foundations, but when you have nothing but demented children and inmates ruling the planet how do you trade that kind of a market? Yes, the last couple of weeks have been tough with my miners moving lower and lower and gold down, but I hardly touched my mouse. And now, before the market is even open, there we go.

At least the one sector that is up that makes perfect sense, yup, you all got it. Lets get gold over $1,720.00 on a strong close and we may be on to something here.

And can someone explain to me that after years of taking bribes, lying, and being deceitful for their own pockets why the rating agencies suddenly got religion?

Mon, 11/28/2011 - 09:49 | 1920565 Tsar Pointless
Tsar Pointless's picture

What is not negligible: The probability of this not mattering until it does.

Santa Claus has arrived, and as usual, he's brought with him the same annoying stock-exchange stuffer.

Mon, 11/28/2011 - 09:57 | 1920599 Everybodys All ...
Everybodys All American's picture

In other words they would downgrade them now but they are afraid of the political pushback.

Mon, 11/28/2011 - 10:11 | 1920651 Boston
Boston's picture

Meanwhile the Greek gov. 10-year is now yielding 30.9% ..... up a mere 103bps from Friday.

Mon, 11/28/2011 - 10:57 | 1920827 secretargentman
secretargentman's picture

Begging the question right from the start...  The probability of multiple defaults was never negligible.

 

What was negligible was Moody's due diligence.

 

The correct statement would be: "Moody's no longer regards the probability of multiple defaults as negligible."

Mon, 11/28/2011 - 11:08 | 1920861 ded_moroz
ded_moroz's picture

The last paragraph - it means putting 27 EU members on a negative watchlist.

Mon, 11/28/2011 - 11:12 | 1920874 chaartist
chaartist's picture

EU: They will print like hell, they dont know how to handle it and dont have the powers to handle it at the moment. One politician in a small country can change months of negotiations...there is no chance that the small countries will be for more integration because no one has the money to bribe them...so chaos begins. Hope we will have good times here at ZH :)

Mon, 11/28/2011 - 13:23 | 1921390 strongband
strongband's picture

where were these guys back in 05/06 with all their downgrades and comment

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