Sovereign Risk

Sovereign Risk

Italy Pays More For 6 Month Debt Than America Pays For 30 Year, As LTRO Claims Its First Bank Insolvency

Today Italy had a rather critical Bill auction in which it sold €9 billion in debt due six months from today. Obviously, since the maturity is well inside of the LTRO, the auction itself was rather meaningless from a risk standpoint. Still, the good news is that Italy managed to place the entire maximum amount targeted. The bad news: it cost Italy more to raise 6 months of debt, or 2.957%, than it costs the US to borrow for 30 years (2.70%). Not only that but the average yield 2.957% was the highest since December when the Italian 10 Year was north of 7%, and nearly 50% higher compared to the 2.104% at auction on May 29, or less than a month ago. The Bid/Cover of 1.62 was unchanged compared to the 1.61 at the May 29 auction. From Reuters: "Today's bill sale points to the sovereign getting this supply away but at yield levels sufficiently elevated to leave a niggling doubt at least as to the medium-term sustainability of the country's public finances," said Richard McGuire, a rate strategist at Rabobank. On Tuesday, Spain paid 3.24 percent to sell six-month bills. Madrid is seen at risk of having to ask for more aid after formally requesting a European rescue for its banks this week. But doubts are also growing on Italy's ability to keep funding its 1.95 trillion euro debt, which makes it the world's fourth-largest sovereign debtor. Domestic appetite has so far allowed the Treasury to complete 56 percent of its 445-billion-euro annual funding plan."

Moody's Downgrades Spanish Banking Sector By 1-4 Notches

The long anticipated downgrade of the recently bailed out Spanish banking sector has arrived. Moody's just brought the hammer down on 28 Spanish banks. Also apparently in Spain banks are now more stable than the country: "The ratings of both Banco Santander and Santander Consumer Finance are one notch higher than the sovereign's rating, due to the high degree of geographical diversification of their balance sheet and income sources, and a manageable level of direct exposure to Spanish sovereign debt relative to their Tier 1 capital, including under stress scenarios. All the rest of the affected banks' standalone ratings are now at or below Spain's Baa3 rating." Can Spain borrow from Santander then? They don't need the ECB.

Eric Sprott Presents The Ministry of [Un]Truth

We have no doubt that everyone is tired of bad news, but we are compelled to review the facts: Europe is currently experiencing severe bank runs, budgets in virtually every western country on the planet are out of control, the banking system is running excessive leverage and risk, the costs of servicing the ever-increasing amounts of government debt are rising rapidly, and the economies of Europe, Asia and the United States are slowing down or are in full contraction. There's no sugar coating it and we have to stop listening to politicians and central planners who continue to downplay, obfuscate and flat out lie about the current economic reality. Stop listening to them.

Spain May Not Be Uganda, But Germany Is Chile

While we discussed the definitive new world geography last week, it appears the CDS market has decided to add a new parallel for us, Germany is now Chile (in terms of 10Y restructuring and devaluation risk). As a reminder, Germany's credit risk has risen by almost 50% in the last 3 months to record highs, and has converged higher towards Europe's GDP-weighted average sovereign risk in the last 2-3 weeks.

Fitch Follows S&P, Slashes Spain By 3 Notches To BBB, Only Moody Is Left - Step 3 Collateral Downgrade Imminent

First it Egan-Jones (of course). Then S&P. Now Fitch (which sees the Spanish bank recap burden between €60 and a massive €100 billion!) joins the downgrade party of rating agencies that have Spain at a sub-A rating. Only Moody's is left. What happens when Moody's also cuts Spain from its current cuspy A3 rating to sub-A? Bad things: as we explained on April 30, when everyone has Spain at BBB or less...

LCH Hikes Margin Requirements On Spanish Bonds

A few days ago we suggested that this action by LCH.Clearnet was only a matter of time. Sure enough, as of minutes ago the bond clearer hiked margins on all Spanish bonds with a duration of more than 1.25 years. Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even moire collateral beginning May 25. Only problem with that: it very well may not have the collateral.

Moody's Downgrades 16 Spanish Banks, As Expected

As was leaked earlier today, so it would be:

  • MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
  • MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
  • MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE

In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.

S&P Opens The Pandora's Box: The Wall Of Refi Worry Is $46,000,000,000,000 Tall

In what S&P calls a 'Perfect Storm', the next four years will see a minimum of $30 trillion in companies' refinancing needs related to maturing bonds and loans and further they expect $13-$16 trillion more debt will be required to finance growth. With bond portfolios over-stuffed with corporate debt (since angst over sovereign risk has skewed asset allocation away from that cohort) the rating agency is concerned that ongoing bank deleveraging, these huge debt re-funding requirements, and the diminishment of central banks and governments to do anything about it leave serious problems with a credit overhang so large. Critically, especially as we hear calls for 'growth' plans from Europe, is the increasing likelihood that, as Reuters reports, this will potentially influence corporate credit quality and "alter the fragile equilibrium that currently exists in the global corporate credit landscape". While S&P expect the refinancing needs may well be met "This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds" which "raises the downside risk in global markets" as an inability to finance growth may well be the catalyst for another risk flare. "Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances. A perfect storm scenario would likely cause financing disruptions even for borrowers that are not highly leveraged."

US Equities Ignoring US Sovereign Risk Warning

We have been warning of the pending fiscal cliff in the US and the somewhat inevitable debt ceiling debacle, election uncertainty, and the question of Fed independence in an election year as potential catalysts for risk flares in the US and abroad. For now, US equities are happy to ignore these events, still drawn in their Pavlovian-educated manner to US equities for their nominal enrichment. The trouble is - there are clear warning signs from some particularly noteworthy markets that all is not well (that appear more capable of comprehending fundamentals). Forget for a moment the overnight plunge and recovery in futures as this will bring only anchoring bias; a step back to 30,000 feet and we note that the spread on USA Sovereign CDS has risen by over 30% in the last month (now back at 40bps or 3-month wides) flashing a worrying warning signal for US equities if the past is any guide. Remember that US CDS are denominated in EUR and do not simply reflect the 'default' risk of the fiat-issuing USA but the devaluation or restructuring risks - and it appears market participants are getting nervous once again of the profligacy of the US government and the ineptitude of the central banks with their one-trick-pony experimentation. At the same time, central banks' broad repression has crushed volatility in every asset class - except, as Morgan Stanley notes - credit which is inferring considerably higher chance of a risk flare in the short-term. So while this week will bring cheers of growthiness and cooperation and decoupling, the all-seeing eye of credit markets remain far less sanguine.

Europe Opens Down 2% As Sovereign Risk Surges

Germany's DAX is the hardest hit so far of the major European equity markets (futures) with a drop of over 2.2% (underperforming the French CAC40 -1.5% for now). The EuroSTOXX 50 is down 2% and reflects the general state of affairs in European equity markets as they open - which is a little worse than the S&P futures market's move since the European close on Friday.  European credit markets are very quiet and illiquid thanks to the UK's May-Day celebrations (and its position as hub for CDS market-making) but sovereign bonds are trading across mainland Europe and are being sold relatively hard so far. Spain, Italy, and Greece are underperforming with the former two pushing towards recent wide spreads even if yields remain off recent highs. EURUSD rallied a little off its overnight lows as Europe opens but has started to give back some of those gains. As the cash markets open there is some buying-the-dip pressure in stocks - even as govvies remain offered while financials remain under significant pressure. US equity futures and Treasuries remain in sync as ES limps a little higher off overnight lows.