Fitch

Can Austerity Work?

Fitch joins the Hungary "junking" parade, which centers around the country's former unwillingness to yield to the banking cartel regarding its central bank, which as of today is no longer the case: "The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF/EU deal."

Fitch admits, via Bloomberg headlines, what we already knew:

*FITCH: EFSF DEBT 'AAA' RATING DEPENDS ON FRANCE REMAINING 'AAA'

*FITCH SAYS RISK OF EFSF DOWNGRADE HAS INCREASED

Dick Bove and Fitch, timely and accurate as ever...

We spoke to soon: it appears suicide is painless after all, as Fitch just changed the French outlook to negative.The punchline: "The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon." As for the line that will finally shut up France in its diplomatic spat with the UK: "Relative to other 'AAA' Euro Area Member States, France is in Fitch's judgement the most exposed to a further intensification of the crisis." And now, the market shifts its attention to non-French rating agencies, who will downgrade France in a "slightly" shorter timeframe... more like 2 hours according to some rumors.

Never a dull Friday when dealing with continents that have a terminal solvency, pardon, liquidity crisis.

• FITCH PLACES BELGIUM, SPAIN, ITALY, IRELAND, SLOVENIA AND CYPRUS ON RATING WATCH NEGATIVE

Shockingly, French-owned Fitch has nothing to say about... France.

Every day after close it is one endless downgrade parade in which any of the permutations of rating agencies and either European sovereigns or banks get up and start playing musical chairs with each other. Then proceed to sit down for the overnight session. One of these days all the chairs will have been pulled. The banks cut in some capacity, either via long-term IDR or viability rating, are Bank of America, Barclays, BNP, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Societe Generale. Now we know that even creditors do not want to trigger any ratings downgrade covenants because it would offset what is likely a terminal margin call, but at some point someone will need to do through the various bond docs and find out just who (ahem Bank of America) will need to post far far higher collateral as a result of all these relentless downgrades.

Turns out it is not France. Instead, it is its most insolvent bank (although with SocGen and BNO around, who really knows)

• CREDIT AGRICOLE CUT 1 LEVEL TO A+ FROM AA- BY FITCH    :ACA FP

As a reminder, it is our hypothesis that it was none other than Credit Agricole who was bailed out by the coordinated central bank action two weeks ago: "Dollar Libor Market Hints 66x Leveraged Credit Agricole Was Bank X"

French Fitch strikes back at the US for not pushing the Fed to do more to bail out Europe. Now it is US Moody's and S&P's turn..."  The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon. Fitch will shortly publish its revised economic and fiscal projections for the U.S. and will conduct a further review of its sovereign ratings in 2012. However, in the absence of material adverse shocks, Fitch does not expect to resolve the Negative Outlook until late 2013, taking into account any deficit-reduction strategy that emerges after Congressional and Presidential elections."

Just a step behind the Chinese as usual, and just in time to kill a modest EURUSD rally. Also on the same day as the first mass strike in Portugal which reminds us that everyone will want a piece of the debt reduction pie.

It just goes from bad to surreal in Europe where the latest moment of pure Greek "gods kill titans" tragicomedy, comes from French rating agency Fitch threatening to cut... France? Excerpts via Bloomberg:

• FITCH: FRANCE CAN'T ABSORB MORE SHOCKS WITHOUT UNDERMINING AAA
• FITCH: FRENCH AAA WOULD BE AT RISK IF CRISIS INTENSIFIES
• FITCH: ADDED MEASURES LIKELY NEEDED FOR FRANCE '13 DEFICIT GOAL
• FITCH PROJECTS FRANCE DEFICIT IN '13 ABOUT 4% OF GDP

And now back down:

• FITCH SAYS ITALY RATING MAY BE CUT IF IT LOSES MARKET ACCESS
• FITCH SAYS ITALY RATING COULD BE CUT TO LOW INVESTMENT GRADE
• FITCH SAYS ITALY IS PROBABLY ALREADY IN RECESSION
• FITCH SAYS MONTI GOVERNMENT MAY REMAIN IN POWER TO APRIL 2013

For once, Fitch took the words right out of our mouth, and in the process reminded us that the time of the stupendously named ASSGEN CDS (357 bps, +41 today) is here (for our previous coverage on Generali, read here, here and here). And just because we like to live dangerously, we believe the time has come to knock on the door of the grand daddy of all: Pimco parent, German uber-insurer Allianz, where the crisis will eventually hit like a ton of anvils if and when things really get out of control. ALZ CDS + 12 at 136. Going much wider. After all, recall that the deus ex machina of the EFSF as a CDO Cubed came from, that's right, Allianz. So now that it has failed, guess who has the most to lose... If we had more time we would attach the recent Credit Sights piece on ALZ here, but we don't: we hope readers can track it down on their own.

And the winners are.... Moody's Ba2-; S&P: BBB-; Fitch: BB+;  Congratulations to Egan-Jones for once again being the only rating agency worth their money and calling this collapse in advance.

The reason why the EURUSD took a big step lower in the past minutes is because Fitch has come out with a note in which it has assigned an AAA rating to the amended EFSF program. That in itself is not an issue, what is however, to the market is the announcement that a 50% Greek haircut would be an event of default. That said this is not to be confused with an ISDA determinations committee ruling that CDS has been triggered: we now know this will never happen and is the reason why basis trades across the board are exploding as all sovereign CDS is effectively being unwound. Regardless, the market does not seem to be liking the fact that someone's head is not stuck in the sand. Fitch also adds that it is critical that ECB carry on bond purchases, something which neither the ECB nor Germany have agreed to. It also adds that Greek PSI deal is a necessary step, and that the effectiveness of the summit deal depends on details. This is important considering Greece was barely able to get 85% acceptance in its 21% proposed haircut. The 50% will be even more interesting. Fitch concludes that the market is likely to see further market volatility. That is a given.