The Reality Of Moody's European AAA Downgrades

Tyler Durden's picture

The importance of the negative credit outlook from Moody’s lies less in the realm of financial markets, given how little investors seem to value the views of the credit rating agencies. Rather the major importance lies in the policy and political reactions to the rating actions. As UBS notes, there is a risk of popular (not political leadership) adverse reaction. The media in Germany (where there is a tradition of media hostility to the Euro periphery) or in the Netherlands (approaching a general election in September) may portray this as "we are being dragged down by the Euro periphery". If that does transpire it could easily fan the flames of populist resentment of the Euro still further. Critically, if the media attribute (or mis-attribute) the blame to the periphery, there could be obstacles to that integrationist momentum. The reality of a common monetary policy and the necessity of some kind of communalized fiscal responsibility are being brought to bear on the Euro area polity - but markets seem confused. CDS markets are pricing Germany's risk as if it was becoming increasingly encumbered to the periphery and yet the FX market is dragging EURUSD lower on expectations of massive upheaval and potential SPexit with no German 'unlimited' support. CDS appears to fit with raters, FX more with haters.


The spread between Germany and USA 'risk' has risen notably since the EU Summit. This implicitly means the market is pricing in some level of acquiescence by Germany. At the same time, EURUSD has slipped dramatically lower as it appears that market believes that the EU is heading to some cataclysm reality (that implicitly does not include an unlimited German backstop).



While the CDS move fits with the ratings agencies (Germany's risk is higher as it will implicitly weaken its balance sheet by being encumbered by the periphery); FX markets appear to reflect a different - worse - scenario.


We do note that the last few days, German risk has compressed modestly - as perhaps all the hope from the EU Summit that perhaps Germany was indeed moving towards the less-sovereign-transfer 'integrationist' perspective is now fading fast. It seems to us that either Germany is a safer 'risk' as it remains ensconced on its fence-sitting that nothing has changed and/or FX markets misjudge the German's acquiescence.


However, for all those who believe Germany is the savior uber alles - UBS notes that thinsg might not be all they appear - and a downgrade makes perfect sense (with or without integration):

Although the move towards a downgrade for the Euro area sovereigns is rooted in collective responsibility, it is worth pointing out that there is an element of national responsibility as well. Finland is not being put on negative outlook despite being a part of the same collective entity. The reason for this is the Finnish balance sheet (principally) and the low net debt position. In contrast economies like Germany have seen a significant increase in its government debt burden over the course of the past few years - in large part because of the shockingly weak nominal growth performance of the German economy over the course of this century. Germany has demonstrably failed to grow its way out of debt, which means its net debt position is not strong enough to maintain a stable credit outlook in the face of the vicissitudes of collective responsibility.


Source: UBS

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slaughterer's picture

Potter holding the 50DMA on the ES. 

Precious's picture

This problem will be taken care of shortly, as the DOJ brings bogus corruption charges against the rating agencies for their audicity to tell their version of the truth.

john_connor's picture

compression trade bitchez

Esculent 69's picture

Why does anyone believe in the rating agencies that knowingly lied about the fraudulent ratings of crap paper on a housing market they knew would collapse, and now we are supposed to believe that anything in this fake market is a AAA.  AAA OF SHIT IS SHIT. If they really want to fuck you they will create a new AAAA.  

knukles's picture

Why would you believe anything?


Esculent 69's picture

I only believe in what i hold in my hands

FieldingMellish's picture

At this point the only solution to just about all the Western economies is to inflate the debt away. Well, not away but to a point were it can be managed better.

BliptoP3's picture

If only we didn't have to pay for oil ...  hmmmm... gets me thinking.

Peter K's picture

Give it a couple of years:)

madcows's picture

Um, they could default?  Inflating doesn't seem to be working, because the money isn't going into circulation.  All that "printing" is just the FED buying government crap and loaning to the big banks at 0% so they don't go belly up.

Have you received a big raise?  Has your mortgage and car payments become easier to pay with all that money floating around?  No? I thougt so.

FieldingMellish's picture

I don't see big economies defaulting since they are holders of their own debt so they would be defaulting on themselves. Money velocity is, like bond yields, at historic lows. It has a tendency to spring back in a vicious cycle.

I got to admit that not paying a month's coupon (1/12 of 1%) is not really going to shake the tree too much.

I work for myself. My house is modest and paid for. My car is 12 years old... and paid for.

TPTB_r_TBTF's picture

TPTB want a default so they can grab the collateral.

TPTB take thin air and use it to create debt.  They donT want that debt back.  They can create more debt any time they so desire. 

They want the collateral.  They want you to default.

madcows's picture

Russia Defaulted in 1998.  Venzuela defaulted in 1998.  Ukraine - 2000.  Ecuador 2008.  Peru 2000.  Agentina 2002.  Moldova 2002.  Uraguay2003.  Dominican Republic 2005.  belize 2006.  Big economies fail.  How long can you borrow from yourself?

The comment isn't about your house or your car.  It was in response to your comment about governments being able to inflate their way out of the mess.  The FED and ECB are doing all they can to inflate.  IT ISN'T WORKING!  Hence the comment about you not getting a raise.  We're not inflating.  We're deflating.

TPTB_r_TBTF's picture

There is always more than one alternative solution to any problem.  If you only see one solution to any problem: then maybe you ainT done thinking yet...


The Plan is for a reset (a.k.a. a currency reform).

AbelCatalyst's picture

Inflation helps banks. Debt write offs help the average person. There are far more average people than bankers. As inflation rises so does the angst within the masses... You can only turn up the heat on the pressure cooker for so long... Then the masses awake to realize they do posses power and are not servants to the silly 1%...

The endgame approacheth!!!

FieldingMellish's picture

And who do you think the gov't will help?


and just in time, comes another piece of the puzzle:

gatorengineer's picture

Germany is overwhelmingly pro Euro, and for that matter socialist.........  Else they woulda stop throwing money out the window to the unions in greece a long time ago.

Instant Wealth's picture

German politicians are overwhelmingly pro Euro,

German citizens overwhelmingly aren't ...

Instant Wealth's picture

... to be precise:

latest polls -> 58% anti-euro/pro DM

agent default's picture

In other words mainstream German politicians couldn't care less for what the people think.  They just want to push their agenda no matter what. I can't wait for the German version of the Golden Dawn. 

Peter K's picture

" Germany has demonstrably failed to grow its way out of debt, which means its net debt position is not strong enough to maintain a stable credit outlook in the face of the vicissitudes of collective responsibility."

And that is the money line. Germany is in fact the sick man of Euroland, suffering from the drag of operating it's historic Bismarkian/Hitlarian social welfare model. It manages to eak out a positive real GDP due to it's historic post war export sector and the US picking up the tab for it's defense. But now, with the Chinese economy going into the shitter, and the US having a problem with maintaining the level of spending to keep 300k men under arms in Germany (and Britain cutting back also), the Germans will find themselves approaching what was known as the Gorbachev moment in the old USSR. And we know what happens then, now don't we?  :)

Wolferl's picture

300 K US troops in Germany? Seems you were asleep over the past 20 years. There are about 40 K US troops in Germany now and over the past decades, not to defend Germany but as a base in Central Europe to provide assistance for the world wide US military surpression.  

TrumpXVI's picture

"Economies like Germany (U.S.A.) have demonstrably failed to grow their way out of debt."


I can see that and all I've got in the way of cred is a BFA.

the iD's picture

looking forward to Egan's downgrade of the US again. and then the second fiddles can follow up on it. looking at you S&P. A-merikkka

knukles's picture

What has been so telling of the US downgrades is not the reference to financials, but the failure of leadership to do anything constructive. 

But then again, why do we delude ourselves wishing for constructive measures when the leaders are politicians?

Dr. Engali's picture

Just print a shitload of money ,pay off the debt, start a war, rinse and repeat. more debt and a lot less serfs to feed.

SmittyinLA's picture

The German people's willingness to "just say no" to "state policy" is wildly overrated and competely ignores their history.

There's literally no limit to how much shit the German govt can stuff down the German people's throat, they have no gag reflex. 

agent default's picture

Only if it makes sense to them.  A German has to be convinced that a decision is rational, otherwise he will get pissed.  Quiet, but pissed.  And at some point if you try to stuff another drop down his throat, he will puke all over you.  The difference, is that Germans don't react in that flash fire way you see in the European South, lots of noise rioting and no real effect.  They will take the systematic approach, and that will hurt for real.

txsilverbug's picture

Hey man.. were in a hole.. were just gonna have to dig our way out..

The Final Countdown's picture

A downgrade of the last remaining AAA countries -no matter how meaningless from an economic point of view- could definitely be the endgame trigger for the Euro. It's either that, or whatever's left of 'democracy' in Europe will have to be 'suspended indefinitely'.

Public support for propping up the Euro has been dissolving fast in Germany, Finland and The Netherlands. Over here in The Netherlands, the largest ultra left-wing party is tied head to head with the largest liberal party in polls. It suffices to say the former is not exactly pro-Europe. The slightest indication that a new government to be formed after the September elections, will have to decide to throw more money into the Euro blackhole whilst raising taxes and cutting retirements and benefits at home, will tip the scales in favor of the left-wing parties, who cannot possible retrace on their statements about Europe without ruining their credibility for decades to come. I estimate similar sentiments are growing in Germany.

Without Germany or The Netherlands (who have always been among the core countries and initiators of the EU), the Euro is toast. I don't expect Germany to blow up the Euro by themselves, but I can imagine things might accelerate in that direction if other countries -no matter how small their economies- are forced to either leave the failed experiment or show complete disregard for their voters.

gatorengineer's picture

a downgrade from AAA to AA makes AA the new AAA......

The Final Countdown's picture

The letters are meaningless. The only thing that matters is what happens when there are no countries left that have a functional government with a mandate to carry out whatever is necessary to kick the can a little longer.

White.Star.Line's picture

Europe might as well collapse.
The Netherlands too.
Maybe Golden Earring will finally come out and do an overseas tour....

magpie's picture

Blank cheque for the Euro even if it seems convoluted, political consensus is for keeping it. In the end, german industry will be crushed by energy costs and taxation down the road. No game over before that. Estimate maybe a 3 to 5 year timeframe at most.

magpie's picture

Hard to tell if the real estate bubble has even peaked in Germany. Besides, with a barrage from the rating agencies the Euro weakening will at first be appreciated (but for how long) and the tax hikes will cover the rates rising. Downward movement would obviously be accelarated by a left leaning government (more bailouts etc, talk of levy, capital flight).

Joe A's picture

Interest rates are fixed, MBS were fixed, oil is fixed, ratings are fixed, everything is fixed in this ponzi scheme called the financial system.

magpie's picture

No one expects ze price discovery.