Tag Archives: European Financial Stability Facility

Credit Ratings Are Now Officially A Joke

With the downgrade of EU’s emergency funding fund, the US credit rating agency Standard & Poor have made the whole rating business a fucking joke. If you think this will make waves in tomorrow’s markets, forget it! Nobody takes this shit serious anymore…

“Triple-A or no triple-A, I couldn’t care less.”

Shakeb Syed

“On Jan. 13, 2012, we lowered to ‘AA+’ the long-term sovereign credit ratings on two of the European Financial Stability Facility‘s (EFSF’s) previously ‘AAA‘ rated guarantor member states, France and Austria,” S&P writes in a press release.  Adding: “The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated ‘AAA’ by Standard & Poor’s, or by ‘AAA’ rated securities.”  Well, we already know that, morons!

And you can’t say A without saying B, also, in this business. So, in light of last weeks mass downgrade of European core nations, this is just a natural consequence.

But it becomes rather ridiculous when we’re talking about an international emergency fund that the EU leaders are able to do whatever they want with. Perhaps they choose to “print” enough euros to ten-fold the size of the fund?

Nobody knows anything for sure, these days.

And that’s why most financial pros just don’t give a damn about the rating actions anymore; it’s no longer  possible to take the rating business serious.

And, as Norwegian chief economist Shakeb Syed, rightfully points out – there are far more important things to worry about when it comes to the EU economy than its stupid stability facility.

“Triple-A or no triple-A, I couldn’t care less,” Shakeb Syed at Sparebank 1 Markets says in an interview with Norwegian website www.dn.no.

Syed recon there will be some reactions in the financial markets on Tuesday, but not much,

“In the market, the fund have implied interest costs that is not consistent with a triple-A. So,  in practice, the difference is not that great,” Syed points out.

The Norwegian analyst also says what many financial pros are thinking these days;

“The EFST is a dead-end.”

“Triple-A or not, the fund will never be big enough th cover both Spain and Italy,” he notes.

And Shakeb Syed seems too keeping the right focus, stating that investors should be more worried about  the ECB than the EFSF.

Anyway – here’s a little more from today’s “shocker” by Standard & Poor’s:

“The developing outlook on the long-term rating reflects the likelihood we currently see that we may either raise or lower the ratings over the next two years.”

“We understand that EFSF member states may currently be exploring credit-enhancement options. If the EFSF adopts credit enhancements that in our view are sufficient to offset its now-reduced creditworthiness, in particular if we see that once again the EFSF’s long-term obligations are fully supported by guarantees from EFSF member-guarantors rated ‘AAA’ or by securities rated ‘AAA’, we would likely raise the EFSF’s long-term ratings to ‘AAA’.”

“Conversely, if we were to conclude that sufficient offsetting credit enhancements are, in our opinion, not likely to be forthcoming, we would likely change the outlook to negative to mirror the negative outlooks of France and Austria. Under those circumstances we would expect to lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on the EFSF’s ‘AAA’ or ‘AA+’ rated members to below ‘AA+’.”

So, anyway the wind blows……

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The European Meltdown Begin

The European economy seems to have entered the meltdown phase, as prime ministers in both Greece and Italy are leaving their posts and rumors of a euro zone break-up in a matter of few days are emerging. The financial markets continues to tumble, as the euro zone is now subject to an unconstrained panic attack from financial markets, with Italian spreads at 5.6%, Spanish spreads over 4% and the French spreads creeping to 1.5%.

“The market meltdown signifies the effective collapse of the notion of a leveraged EFSF and other technical quick fixes.”

Eurointelligence.com

The euro zone’s latest “comprehensive solution” collapsed yesterday, as all the technical quick-fixes did before. We have now reached the bifurcation point in the crisis where the euro zone will, within days, have to make a choice between debt monetization, which is hardly feasible without a political commitment to a fiscal union, and a break-up. The latter will happen if no decision is taken.

According to Reuters, citing unnamed EU sources, French and German officials have been discussing a radical systems change, involving a smaller and more integrated euro zone.

Eurointelligence.com comments in today’s morning brief:

“We believe this story is true, but likely to make the crisis much worse. A break-up followed by ringfencing the core would, in a first stage, cause the total collapse of the financial system in Europe, including in Germany and France. We are not talking about crisis resolution here, but about the resurrection of Europe from the rubble.”

In others words: The political leaders are about to give up on a rescue operation of Europe, and are changing focus towards saving whatever is possible to save.

At the same time; government  leaders are staring to resign, with Italian Berusconi and Greek Papandreau leading the way, leaving the euro zone in complete  chaos.

Robert Shrimsley of the Financial Times makes the point that there is now a possibility of technical government – led by Lucas Papademos in Greece, and Mario Monti in Italy, both former high ranking EU officials.

While European officials may find this reassuring, it is not solving what is fundamentally a political problem in those countries. The problem with technocrats is that they have avoided the traditional routes to power. Shrimsley  concludes the best politicians are also experts – they know what is politically possible.

“We agree with this. It is another one of these quick fix ideas. The EFSF did not work. Leveraging did not work. The next delusion is technical government. The euro zone crisis is a major political crisis at heart. This is why the financial markets are panicking,” http://www.eurointelligence.com writes.

As a result of the Italian crisis and the large exposure of Austrian banks to Italy ,Austria’s AAA rating may be in danger, Financial Times Deutschland reports.

In two weeks the analysts of Moody’s will visit the country and economists think that they decide to place the country on a negative outlook. In order to calm markets, the government now wants to quickly imitate the German example and introduce a constitutional debt break.

Personally, I’m quite stunned that a scenario I once (back in 2007) described as a “worst case,” is unfolding before my eyes, with the politicians repeating the same mistakes that others have done before them in almost every major crisis i history.

Anyway – here’s a postcard from our humorous friends at versusplus.com – a slightly different version of the famous “A Christmas Carol”  by Charles Dickens.

“In The Greek Midwinter”

See also: New Econparody Song About “Guess Who”

“Split-Rated” – New Econo-parody Song

iRock

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EU: Summit, Summa, Samarium

The top EU leaders are now dressing up for another countless crisis summit in Brussels. Over the next two days the elected representatives are going to try to agree on….on something. The single most important issue however – how the new bailout fund, EFSF is going to work – is most likely to be postponed, due to a slightly difference of opinion between Angela Merkel and Nicolas Sarkozy.

“It is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

Eurointelligence.com

Ms Christine LAGARDE, Managing Director of the International Monetary Fund, Mr Evangelos VENIZELOS, Greek Minister for Finance


I believe I agree with the analyst at www.eurointelligence.com when they characterize the already pronounced postponement of the EFSF issue as “hopeless but not serious.” There are too many loose threads in that ball, and it would probably not be safe to put it in play. But during the two-day extraordinary meeting is expected that the EU leaders comes up with something – at least some credible statements with a bit of substance.

On Thursday, France and Germany decided that they will not able to bridge their difference over the role of the EFSF by Sunday, and need more time to work out a deal.

It is not serious in the sense that there will be an agreement a few days later – in any case before the G20 summit, the Eurointelligence points out.

Adding: “But it is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

The postponement  is due to a combination of two factors: Nicolas Sarkozy’s diplomacy, and the German Bundestag’s insistence that it needs to give a mandate to the chancellor ahead of the summit.

Merkel would not have had a mandate to negotiate anything beyond the minimalist insurance solution that was recently under discussion.

She now has to crawl back to the Bundestag each time where she gets on a plane.

Merkel and Sarkozy will hold another bilateral summit on Saturday night, and will discuss the issue on Sunday. However no decisions will be taken.

In their joint communiqué, Thursday, they pretends that everything is fine.

But it did not persuade financial markets, which reacted with an increase in bond spreads.

Italy’s spread is now back at 4%, a level as we keep on point out is not consistent Italy’s sustained membership of the euro zone.

“From a market point of view, there is too much disappointment and disunity coming out of the EU right now. A further example has been the dispute between the IMF and the EU about Greece, as the IMF challenges the EU’s optimistic projections for Greek growth,” www.eorointelligence writes.

Mr François BAROIN, French Minister for Finance and Economic Affairs - Ms Elena SALGADO, Spanish Vice-President of the Government and Minister for Economic Affairs and Finance.

It also emerged that the bank recapitalization programme will fall in the too little, too late category of responses – now likely to be below €100 billion.

If you think that undercapitalized are the core of the problem, then this will not help. If you think that recapitalization will damage growth, a weak recapitalization may very well be better than a strong one –  but it will still be negative for growth.

When it comes to the EFSF, the debate is circling around the method of leveraging.

The Germans want to continue down the route the discussions had been going until Wednesday, by using a primary market insurance scheme that would allow the EFSF to insure up to €1 trillion in new debt issuance.

On the other side: The French say this is not sufficient, favoring a banking license for the EFSF.

Reuters reports that bond market experts are severely critical of the insurance schemes because it creates a two tier bond market.

If an Italian government bond was issued under this scheme, investors would no longer classify it as a sovereign bond, but as a structured product.

Another Summit on Wednesday

A follow-up summit is now scheduled for next Wednesday, according to  Frankfurter Allgemeine Zeitung.

Since there was no political agreement, chancellor Merkel was unable to deliver her speech in front of Bundestag today and to seek a negotiating mandate by the deputies as is now required after the constitutional court rulings and the legislation about the parliament’s involvement in EU decisions with budgetary implication.

So Merkel intends now to go to parliament in the beginning of next week to deliver what she could not bring to the deputies today.

Meanwhile, Wolfgang Schäuble have explicitly ruled out that the EFSF will be refinanced via the ECB as Sarkozy wants.

Damn! I would love to see some surprises for a change!

Green Light for More Money To Greece

The first thing to come out of the summit on Friday evening, was the statement about approval of the sixth trace of financial aid for Greece.

“Ministers of the euro area, meeting in Brussels on 21 October, agreed to endorse the disbursement of the sixth tranche of financial assistance to Greece. The disbursement is foreseen for the first half of November, following approval by the Board of International Monetary Fund (IMF),” the statement says.

The Eurogroup took the decision having examined the results of the fifth review of the economic adjustment programme for Greece, on the basis of a compliance report by the European Commission and a recent analysis of the sustainability of the Greek debt by the “Troika” (European Commission, IMF and European Central Bank).

The ministers also noted that the macroeconomic situation in Greece has become worse since the fourth review , but they welcomed Greece’s “substantial fiscal consolidation efforts”, especially the austerity package that the Greek parliament approved on 20 October.

Full text of the Eurogroup Communiqué,

The Eurogroup invites the Greek authorities to continue implementing structural reforms and their privatisation programme.

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