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Preliminary Thoughts On The European Downgrade From Goldman And Morgan Stanley
It has been a busy weekend for Wall Street, which has been doing all it can to spin the S&P downgrade in the best favorable light, although judging by the initial EURUSD and EURJPY reaction, so far not succeeding. Below we present a quick report written by Goldman's Lasse Nielsen on why in Goldman's view the downgrade's "impact is likely to be limited" and also the quick notes from an impromptu call MS organized for institutional clients (which had just two questions in the Q&A section, of which only one was answered - it appears virtually noboby believes that global moral hazard will allow anyone to fail at this point, so why bother even going out of bed).
From Goldman:
European Views: Euro area countries' credit rating downgraded: Impact likely to be limited
On Friday, January 13, S&P downgraded the credit rating of several Euro area countries. The downgrade was broadly anticipated by the market following S&P’s warning on December 5. We expect the direct impact of this downgrade to be limited. As we recently argued (see European Weekly Analyst 12/1, January 6, 2012), further difficult and controversial political decisions are needed in the coming months to stabilise the outlook for Euro financial markets and the Euro area real economy. The signal that Friday’s rating downgrade sends – together with a renewal of financial market tensions in general – may be the necessary catalyst for such an outcome to occur, although with the potential to inflict further damage on Euro area growth (particularly in Q1) in the meantime. Our base case remains that we should see some stabilisation of financial markets in the second half of 2012 as more clarity on the Euro area’s institutional framework emerges.
S&P lowered the long-term rating of Cyprus (to BB+ negative), Italy (BBB+ negative), Portugal (BB negative) and Spain (A negative) by two notches, while Austria (AA+ negative), France (AA+ negative), Malta (A- negative), Slovakia (A stable) and Slovenia (A+ negative) were downgraded one notch. The negative outlook means that there is a 1-in-3 chance that the rating will be moved lower again in the next 24 months. The move to downgrade several Euro area countries was mainly a result of S&P’s view that policy measures taken thus far to address the Euro area debt crisis are insufficient. S&P cited tightening credit conditions, rising sovereign spreads, economic weakness and political disagreement as reasons for the downgrade. Further, it was noted that the European rescue facilities were insufficient and that problems arising from external imbalances and divergence in competitiveness within the Euro area are not sufficiently recognised by recent policy initiatives. We have previously noted that the pressures in Euro area sovereign debt markets can only be tackled by a coordinated approach among member states. We discussed the issue of Euro area rebalancing recently (see European Weekly Analyst 11/39, November 17, 2011 and European Weekly Analyst 11/44, December 21, 2011), and noted that, with respect to external imbalances and total economy indebtedness, Italy and Ireland stand out as facing a relatively smaller challenge than if only public finance variables are considered.
We do not expect last Friday’s rating announcements to have a material impact on market pricing, given that the downgrade was largely expected. Specifically, we would note the following:
- The sovereign yield for France has been well above that of Germany for a while as markets have broadly treated France as a non-AAA sovereign. Friday’s announcement brings little new information in this respect. With only one rating agency downgrading France (and Austria) from their AAA-rating, the technical implications in terms of further increases in yield should be limited for now. We do not expect forced asset allocation flows resulting from this event, although market pressures for a policy response in France may remain in place. Also for this reason, our markets team recommended a week ago holding short positions in French 10-yr bonds against long positions in Italy (see Global Viewpoint 12/01, January 8, 2012).
- The effective EFSF’s lending capacity is currently determined by the amount of guarantees that AAA-rated countries have committed. With the downgrade of France and Austria, about €180bn of guarantees are no longer AAA-rated. This implies that either – if determined by the S&P rating – the capacity falls to about €260bn (in which case, depending on the size of the second Greek bailout, only about €70bn-€120bn of uncommitted funds remain) or the EFSF no longer attains a AAA-rating by S&P.
- What ultimately matters for the EFSF is not so much its rating, but its cost of raising funds. As the EFSF’s funding costs have been close to that of France anyway, the impact on the EFSF financing cost, as in the case of France, would likely be limited, were it not to maintain its AAA-rating by S&P.
- We think it unlikely that Germany would make up the ‘lost’ S&P rated AAA-guarantees of the EFSF. Instead, with the ESM scheduled to become active as soon as by mid-2012 and Germany’s commitment to fully pay in its share of the ESM capital before then, pressure to secure a similar commitment by other Euro area countries would likely occur. With a structure of paid-in capital, the ESM is less sensitive to the rating of its sovereign guarantors. The rating actions will likely further divert investors' attention to the ESM directly. Unless an arrangement to tap the ECB balance sheet is found, plans to ‘leverage’ the EFSF now seem more remote, as we have also commented before.
- With several countries being downgraded from already relatively low ratings, the risk of seeing larger haircuts in the ECB’s refinancing operations has increased, should similar downgrades occur by other rating agencies. Similarly, the risk of certain sovereign bonds not being eligible as collateral in the ECB’s refinancing operation has also increased. In such a situation, emergency liquidity assistance (ELA) conducted by the national central banks would likely be needed.
- As noted in European Weekly Analyst 12/1, a key impediment to further progress on the institutional front is France’s reluctance to give up further fiscal sovereignty. As France was downgraded, but Germany was not, on the margin, the cost of delaying agreement has increased, and likely relatively more so for France. As such, other things equal, this should increase the pressure to achieve agreement on further fiscal reform. As increasingly recognised since the start of the crisis, there is a ‘reflexive’ dynamic at play – market pressures or rating actions have generated a policy response and this is our expectation this time around too.
And our notes from the Morgan Stanley call:
Morgan Stanley
1. Impact on govt bond indices – initially trivial. Eligibility shouldn’t change for most. Portugal will be eliminated from several tracking funds.
2. Divergence in AAA space – there will be further divergence within core space in Euro sov market. If Fitch and Moodys follow S&P, average will eliminate France from indices. Possible reallocation out of France and Austria will likely benefit Germany. See further support for Bunds.
3. Selling flows – flows out of passive fund investors will likely be trivial due to limited impact on indices. But investors who follow AAA indices could be more active. Countries on neg outlook by more than two agencies are most of the core European countries.
4. Impact on Repo markets – downgrade will have no effect as all paper remains eligible. Portugal’s sov guaranteed paper will always be eligible as ECB has announced before. If Moody’s or Fitch downgrade Italy below A-, it will have adverse impact on Italian Repo market. Indications for other markets are mixed.
France may not be included any more in AAA benchmark will push Italy even further over AAA benchmark.
S&P’s decision is internally somewhat inconsistent according to MS. Germany is a benchmark and protected per MS: implication is that countries are weak if markets treat them as weak.
On Moodys, expect that rating agency will follow with whole set of downgrade. Believes most AAA govts will be downgrade.
Likelihood that pressure on sov ratings will remain across Europe.
Broad observations:
- Expect two notch downgrade for Italian banks, one notch for Spanish, and on French – SocGen to be downgraded to A from A+. Unicredit expected to be rated BBB- following rating action, but even so will have 8 notches as IG. UniCredit, SocGen and Intessa expected to come out of various tracking indices.
- Believe there should be no forced sellers on back of S&P downgrade ALONE. So once Moody’s joins in forced selling will begin?
- Risk of further downgrades of France will only accelerate.
Trading side observations:
- Italy remains a question mark on funding front following weaker auction last week
- Fitch and Moody’s will be critical: any S&P impact will be magnified. Market will try to predict what the other two will do.
- Germany non-downgrade is concerning as it would have killed AAA benchmarks. That they haven’t may mean some investors will remain in AAA benchmarks, benefit Germany, will lower weighing of France and Austria.
- Critical conclusion - one notch downgrade of France and Germany at AAA is more negative than 2 notch downgrade of France and if Germany had been downgraded by one notch.
Q&A:
Q: Impact on whether EFSF can support and ringfence Spain and Italy, and further concerns going fwd?
A. Thinking to EFSF and ESM, institutions and govts will have to decide whether they believe that they can operate as feasible issuers below AAA rating and raise funding that way, to support these borrowers. Leaving Europe with single pure A benchmark makes it harder as a AA-rated benchmark. Will make it harder for Euro sovs how to tackle this issue in the future, and mkt reaction will define decision to be made by sovereigns.
Q: On EFSF – with bonds trading at similar levels to French bonds, non-AAA entity, will there be a big impact?
A. MS can not answer the question.
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After our downgrade, not much happened. I would guess the same this time as well. And the next time and the next, until it all comes crashing down.
I HATE agreeing with GS and MS on these things (short-term). Makes me feel dirty...
Lasse go home.
Credit Default Swaps died with Greece's 50% haircuts not being a default.
Markets flinched. Interest rates haven't moved much.
1/2 of BIG Europe gets downgraded.
Markets don't even flinch.
97% of the American population is more confident in their fiat currency belief system
than they are in their religion or God.
That's about all I really need to know.
The next crash will be Biblical.
Don't spend too much more time
serving Mammon,
his power diminishes
daily.
God bless everyone.
To say there's been "no effect" of the downgrades is to ignore that Big Investors (pension funds etc) do not advertise in neon signs outside their conservative office suites their decisions. They're so big they have to act in stealth
The US and various other bankrupt nations losing their AAA status is seismic. Big investors like pension plans sitting on their arses waiting for the next downgrade are going to be stuck (crushed) in the rush for the Exits if they're not already taking action to get out of sovereign debt
There's already panic setting in behind the scenes i can assure you as these big barges divest themselves of crumbling Govt debt. Over the next 2 years there will be a fuking stampede (note already banks are muting they're not holding the shakiest Govts bonds to 'calm' their own investors)
Govt debt is a 'beauty parade' of village idiot uglies
There is going to be a massive transfer of wealth soon.. out of dead beat nation States to much healthier private corporate debt ...and of course that other safe haven, Gold
Govts are spent diseased nags awaiting their turn outside the glue factory.. anyone dumb enough to hold the bags of the walking dead (politicians) is going to get torched (and deserves to be)
Goldmans is talking shit ...well they would do wouldn't they having just bought into a tanker/Titanic load of toxic sovereign debt ...silly NY village idiots
Another well deserved + 1 NewThor for perspective.
You too Zero Govt, + 1 nice comment.
Time to fire up the inflationary engines Ben. Time to print. You know you want to do it. Come on, what are you waiting for?
"Fire up the engines. I shall crash this masquerade. The Savior is coming down."
- Lyrics from the song 'Your sister' I wrote in 2006.
Whoa. The lyrics really do fit this whole situation...
"She's always lonely, but
she's never waiting.
Look, their auras are clear.
I have discovered undercover lovers,
and no, you're not safe here."
No point feeling emotional about it one way or the other. The fact that your opinion coincides with theirs on this occasion is irrelevant. They do not care about your view, I suggest you extend them the same courtesy...
+ 1 They sure as hell don't care about me...
You are, of course, completely correct about not getting all emotional about agreeing with squids. So, if I am not supposed to feel dirty, what is that nasty sticky stuff doing all over my keyboard? Eew...
Yep, they are right. It doesn't matter. None of the rules matter to these guys. Mark-to-market accounting? Fuck that. Throw it out the window. Being forced to file bankruptcy when you are insolvent? Fuck that. They can just push a button and get bailed out by The Fed. Insider trading rules? Fuck that. They own the regulators and the regulators' bosses. There is no fucking insider trading law that applies to these jackals.
We are supposed to be afraid of Ron Paul supporters and the occupiers of Zuccotti Park. It was a scary sight yesterday. There were probably 50 people in the park. They even had a chess board set up. That must have some significance. Get out your batons, boys. And then there is that guy with his little cat tucked in his jacket. Start cracking heads.
These "occupiers" are scary. They are anarchists. Oh, wait, the guys just a few blocks over don't believe in any rules or laws. Doesn't that make them anarchists? That's right, they have an army to protect them. They have a praetorian of NYPD to look after their safety and well being. As long as you are an anarchist with a well armed group of thugs to protect you everything is okay. If you are an unarmed anarchist you should expect to be ridiculed, and beaten, if necesary.
The true anarchists are in charge. And don't you forget it. They have the full force of the government, military and police force to protect their anarchy. You, you have no rights and their puppet Obama is doing his best to remind you of this every day. Now, shut the fuck up and eat your motherfucking peas.
+1 WFI
Yeah, the two most reviled firms.
Suddenly, their opinion is now "gospel".
LOL....
Robo has been degraded to junk. You're not even trying anymore, and lay off the nitrous oxide you're constantly LOLing at nothing...
Don't be too rough on Robot. He does his best while typing with one hand.
Are you trying to say that Robo has one hand under the table playing with himself???
i thought he typed with his nose
US Govt Bonds are at an all-time high, interest almost negative, time to buy Robbo?
German Bunds truly are in negative yield territory. Should we buy those first?
Playing in himself. There fixed it for ya.
http://www.infogrip.com/product_view.asp?RecordNumber=12
Nothing is going to happen untill they want it to .
The politicians and bankers would like to control the printing press for eternity. Unfortunately for them, the end of fiat is inevitable and they'll no longer be able to suck out the resources of the world through the printing press. This is all happening with out without the permission of the printers.
TheSilverJournal.com
I think you have too much faith in TPTB. Personally, I believe they're shitting in their drawers because they know the gig is just about up and they don't have a fucking clue what's going to happen when lack of confidence reaches critical mass. I think they're in acute panic mode as we type.
'Our base case remains that we should see some stabilisation of financial markets in the second half of 2012 as more clarity on the Euro area’s institutional framework emerges'
Clarity ? These guys should write comedy.
Clarity.
Hows abouts the Eurotechnogeeks just admit the fucking problem is that they're broke and forget the shenanigans. Drop the denial crap, the imaginary problems being other than reality.
Jesus.
Take a lesson from the cruise ship sinking.
Somebody wake up Bismarck and tell him that his welfare state / warfare state idea was a fucking abomination to humanity. Too bad the assholes in the U.S. had to try it to find out for themselves.
I blame Hitler myself.
It is like pretending you can`t feel the tumor under your arm pit, growing. You have a million rational reasons why you can`t go to the doctor. Why the tumor isn`t growing.
And one day you wake up and realize you can`t catch your breath. Now you can`t rationalize and longer.....welcome to stage 4 metastasizing breast cancer.
So for now nobody seems to be paying particular attention to what is going on in Europe. Doesn`t mean the tumor isn`t growing. Doesn`t mean with each day that goes by it isn`t more dangerous. Just that group think, and sheeple, can rationalize doing nothing until they have nothing left to do.
Geez Liz..., couldn't you come up with another analogy?
Overkill bitcheez...
I like Lizzie's analogy, think it's quite apropo.
Say Lizzie, if they dig it out, can I keep it?
Chicken fried tumor, um, um good !!!
Yow!
I use a similar analogy when trying to talk some sense to people in my inner circle. When they're talking about wedge issues, and bantering about who is the better candidate, Romney or Newt, I mention that their concerns are similar to doctors collaborating on how to treat a hangnail while ignoring that the patient is dying of cancer.
I thought my balls were just getting bigger because I was so macho.
http://www.lyricsfreak.com/f/frank+zappa/why+does+it+hurt+when+i+pee_20056747.html
Pretending will end when the big money is faced with a loss. We may be getting close to that point with banks and hedge funds balking at Greek bond haircuts Friday.
Those expected haircuts helped markets end 2011 on a calm note. Now the entire agreement is in jeopary.
Events that do not matter much:
Individual depositor and brokerage account withdrawals. A central bank band-aid can print over this light bleeding.
Events that do matter:
Banks, central banks, and large hedge funds that can not agree amongst themselves who will take a haircut. Once the big boys begin to exit to preserve capital, look out.
A loss of political will or power to transfer private debts to public instruments.
Realization that the unregulated derivatives market is not insurance, but rather just a super-leveraged tool to allow even lower capital reserves while reporting a solid balance sheet. $180 billion for AIG was just a trailer. Stay tuned for the full feature.
Excellent post. Dead on the money.
"So for now nobody seems to be paying particular attention to what is going on in Europe." wtf? do you mean in the overnight markets? or do you mena in the context tha thte deficit of the US is bigger than double the whole of europe combined and bettwen japan and the us they will be borrowing some stupid multiple like 5 time the whoke of europe combined? or do you mean that the US deficit of 9% of GDP is better than Spains 8% of GDP? I think Europe has been enjoying its day in the partly built greek hotel in the sun for the last year and it will be the turn if the US in nevada very shortly
Country 2012 Bond, Bill Redemptions ($) Coupon Payments Japan 3000 billion 117 billion U.S. 2783 billion 212 billion Italy 428 billion 72 billion France 367 billion 54 billion Germany 285 billion 45 billion Canada 221 billion 14 billion Brazil 169 billion 31 billion U.K. 165 billion 67 billion China 121 billion 41 billion India 57 billion 39 billionfrom here..(which could be crap but hey..never let the facts get in the way of a good story)
http://globaleconomicanalysis.blogspot.com/2012/01/japans-prime-minister-seeks-doubling.html
"key impediment to further progress on the institutional front is France’s reluctance to give up further fiscal sovereignty. As France was downgraded, but Germany was not, on the margin, the cost of delaying agreement has increased, and likely relatively more so for France. "
Thought this was quite halarious, bad France for not going deeper into the ponzi!
La France was always happy to be Deutschelands mistress. Even when the Nazis stripped her to the bone, shamelessly.
so.....everything is gonna to buy !! buy ! buy !!!.....bullshit !!i dont believe any word of this report !!
the question its not what is gonna change with the downgrade of their ratings !!
the question is the cconsequence to real economy !!!
bullshit !
Thank God they downgraded the bitches! Monster rally now.
"Ringfence"
I hate that term.
NO, you cannot "ringfence" water, nor molten lava.
The CONfidence game will continue until minutes before announcements of default or insolvency/bankruptcy.
Perhaps they really meant "rim job". Every time I think of the system that they have created I think of the term rim job. No lubrication.
La France giving their German masters a trip around the world. You are disgusting, but correct.
If Goldman says its up, it's down, if Goldman says to jump, sit down! If their lips are moving they are fucking lying!
So, nothing to see here, move on? I don't buy it. The proof will be in all the rollovers coming up.
I would love to know what Fitch and Moody's are thinking about right now?
Fucking goats. That is what they are thinking about. I know a rising star at one of these firms and trust me, their thoughts are about fucking goats. That is what sociopaths do. They think of farmyard fornication.
+++++
That the Texans won't beat the Ravens.
OOOOOOOOOOOOOOOOOOOOOOh God.
Do these people think that Pension funds and Retail investors could be sucked in again? How about zero zilch nada lending amongst european banks? Somebody has to collapse in order to unclog the system and pretty soon. Unicredit could be the Lehman that unclogged the system for Europe.
These people are psychopaths. GS, MS, particularly BAC have to be closed down or chopped in pieces.
BAC chopping off Countrywide would be like the world's largest ever mastectomy.
Funny shit, lol.
Yup.
Or...a complete sex change operation after giving every bad or questionable Countrywide mortgage to Fannie/Freddie and keeping the roses.
You knew it was fatal when the skin turned orange....
I love how according to Wall Street bad news is always priced-into the market but good news is somehow always unexpected and cause for moving market prices higher.
judging by the initial EURUSD and EURJPY reaction, so far not succeeding.
Interesting.
Cue music from that favorite children's rhyme...
The wheels on the economies go round and round….
The wheels on the economies go round and round….
The wheels on the economies go round and round….
Until they fly-off-in-an-uncontrolled-derivative-meltdown-of-biblical-proportions-and-crash-into-every-bank-in-the-known-world
The wheels on the economies go round and round….
The wheels on the economies go round and round….
The wheels on the economies go round and round….
Until they go-off-like-a-July-4th-fireworks-show-in-Hell-and-implode-thereby-sucking-in-every-form-of-financial-paper-ever-conceived-of
reference
let's be crystal clear: the iikes of Goldman and other Big Banks across Europe, Japan and America, and the Govts of said bankrupt nations CAUSED this Depression
the last buck rests at the doors of the corrupt/crony monopoly-on-money central banks
the bwankers created the credit (debt) bubbles and balloons blown over the past 40 years and not a player/fucker amongst them did or said a word against this suicidal pathalogically deranged debt and leverage system.
Each and every banking Director, every political party and all their crones (regulators, accountants, Non-Exec boards, risk officers, consultants etc) are directly responsible for the fuking disaster we're experiencing
And what is Blankfein and Dimons advise?
"Oooh Benny please keep blowing us bubbles.. Oooh Benny don't take our super leverage away... Oooh Benny let us shag the economy one more time, for old times sake"
Go fuk yourself Goldman SUCKS
I don't know about that last part, ZG. I think Blankfein and Dimon TELL Benny what to do, rather than begging him to do this or that. Publicly, maybe they appear to be appealing to him, but behind the scenes, they're saying, "Look, bitch, this is what you're go to do, and this is what you're going to say."
Yes agreed... Benny wouldn't be the Feds sock puppet unless he took plenty of fingers up his **cencored**
+ 1 to you both for total agreement.
Volumes are beginning to worry the Wall Streeters as they will continue to trade only with each until only Goldman and JP Morgan are left.
Hence, a barrell without a bottom. Who's going to buy when they sell? How low is low?
Hey, you can wear a barrel without a bottom if you've got no clothes.
Look, these guys are not going to say the sky will be falling. The truth - we don't know what is going to happen on Monday. But in the meantime - keep an eye on what is going on vis-a-vis trade:
http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
Risk-Weighting of Mortgage-Backed Securities and Sovereign Debt Under Financial Regulations - Brookings Institution
here we see how banks which are "healthy" when sovereign debt is reckoned as zer0 risk to hold are actually severely undercapitalized when the debt is viewed and accounted for more realistically...
...and other bank shots...
as tyler mentioned yest, we still don't have a "final" on dexia's tits-uppityness; here we have banksters at gSachs & MS pretend that they can't understand that the whole wwBankster.con system is reckoned weaker due to the degrading of certain "capital" that the banksters hold as "reserves" and "risk-less" ones, at that!
what we have here is a barber shop for people who are already bald
"tits uppityness" LOL You're a classic, Slewie.
Seconded...
Goldman and JPM are going to be sinking in Greek CDS claims in about a month so do exactly the opposite of what these Momo's are suggesting.
United States:
Joint BIS Forum
"(...) 97% of the American population is more confident in their fiat currency belief system than they are in their religion or God."
And, oh my god, what a good thing that is.
The powers that be are desperate to maintain the 30 year debt escalation which has led us to the edge of the world as we know it. European policymakers are expected to get their house in order (issue more debt and print) to maintain the facade. The "investors" in the market appear to be pricing this in, at least in the short term (which is all markets can see, if that).
The collapse of this debt supernova seems inevitibile but the time course highly unpredictable, and the triggering event unknowable. The consequences will likely be enormous, with fundamental changes to the corrupt and fradulent institutions which led us into the abyss. There may be chaos and then a harsh response as we revert to more primative skills for suvival. The Goldmans and Morgan Stanleys will not likely survive in their current fully enabled state, at the helm of finance and regulation.
So of course they see the downgrades as trivial events. To deny the status quo, in any form, is self-abnegation.
It may be overdue and just, but the consequences are terrifying for all of us.
Now MS has joined GS in waiting for commentary to be posted on ZH then cleaning it up, toning it down and reporting as their own ideas?
not much difference.
http://expose2.wordpress.com
Swedish nationalists attacked goldman sachs Stockholm office last night. Good work! http://www.youtube.com/watch?feature=player_embedded&v=bYPWggAzW4Q
http://www.frankfurt-main-finance.de/de/media/FMF/Download-Dokumente/Jah...
Europe Needs a Rating Agency 15/01/2012One of the key institutions in the capital markets, the credit rating industry, failed in the financial crisis – that much is beyond dispute. The decisive factors in that failure were the business models and roles played by the dominant agencies. They allowed the US real estate bubble to occur in the first place and further exacerbated the crisis. Regulation is only part of the solution...
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