Tag Archives: Moody’s

Credit; Cras Credemus

The investor sentiment in the European credit market suddenly changed on Monday afternoon. Whether it’s just another dead cat bouncing, or investors really see the situation improving, we will find out tomorrow as Greek Prime Minister George Papandreou face a vote of no confidence.

“The catalyst for the change in sentiment seemed to be the announcement that the potential lending capacity of the European Financial Stability Facility (EFSF) will be raised to EUR440 billion. “

Gavan Nolan

The markets expectations for the Eurogroup meeting culminating Monday was never particularly high, but it still proved a disappointment to many. Spreads opened this week wider when it became clear that the euro zone’s finance ministers would not be signing off on the next EUR 12 billion tranche of Greek aid. However, something changed during the trading session.

The Eurogroup confirmed that they would not disburse the funds until the Greek parliament had passed the latest austerity programme proposed by the government.

This wasn’t a surprise to many market participants – noises from the IMF and EU last week suggested this was likely to be the case.

“Nonetheless, the lack of movement and the immense pressure on the Greek government to deliver – prime minister George Papandreou face a no confidence vote tomorrow – was always going to weigh on risk assets,” credit analyst Gavan Nolan at Markit Credit Research writes in today’s Intraday Alert.

But it didn’t turn into a rout, and by late afternoon the market had recovered from the earlier widening.

Sovereigns were still underperforming but at the close the Markit iTraxx SovX Western Europe index was just 1 basis point wider at 223,5 bp’s.

The catalyst for the change in sentiment seemed to be the announcement that the potential lending capacity of the European Financial Stability Facility (EFSF) will be raised to EUR 440 billion, according to Markit Financial Information.

This will be achieved by increasing the amount of guarantees from euro zone member states to EUR 780 billion.

“The restricted lending capacity of the EFSF – due to the AAA rating requirement and the consequent overcollaterisation – has been an issue for the markets, and the fact that the authorities are at least putting measures in place for further bailouts will ease some near-term concerns,” Gavan Nolan writes.

Adding: “Also of importance was the related announcement that the European Stability Mechanism, which is to succeed the EFSF in 2013, will not enjoy preferred creditor status.”

Many though that the preferred status would make it more difficult for countries that tapped the facility to return to the private capital markets.

There was also uncertainty in the market over whether the legal subordination of existing bonds could trigger a credit event.

“Clarification on this issue is therefore to be welcomed,” Nolan comments.

Italy’s spreads were under pressure today after Moody’s placed the country’s Aa2 rating on review for downgrade late on Friday.

The agency highlighted Italy’s well known structural problems – low growth, low productivity and inflexible labour markets – as well as the dangers from the escalating euro zone debt crisis.

In contrast, Moody’s today upgraded Brazil’s rating one notch to Baa2, citing the government’s conservative fiscal policies.

The credit markets have reflected Brazil’s prudence for some time.

“Indeed, the Latin American sovereign has traded tighter than higher rated Italy for over a year,” Gavan Nolan at Markit concludes.

On the personal account, an old latin expression comes to mind;

Cras Credemus, Hodie Nihil – Tomorrow We Believe, But Not Today.

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Italy And Spain Damage Investor Sentiment

Appetite for risk dissolved today in the face of yet more sovereign debt concerns and worrying economic signals. It was the two countries regarded as the safest of the “PIIGS” – Italy and Spain – that damaged sentiment, according to Markit Credit Research.

“With a general election in Portugal next month and local elections in Italy, political instability could yet create more spread volatility over the course of the year.”

Gavan Nolan


With Europe in a total financial chaos, without someone to lead the economic rescue operations, it’s no wonder investors are a bit sceptical. Another round of bad news sort of nailed the day in credits, Monday.

Late on Friday S&P placed Italy’s “A+” rating on negative outlook, citing the “heightened downside risks” in the government’s debt reduction programme.

Specifically, the agency highlighted the country’s weak growth prospects and the lack of political commitment to reducing the public debt burden (about 120% of GDP).

S&P did acknowledge that Italy’s budget deficit was smaller than the other peripheral euro zone countries, and that its banks have better quality balance sheets.

“These two factors help explain the relative stability in Italy’s spreads compared to the other peripherals,” credit analyst Gavan Nolan at Markit Credit Research writes in his Intraday Alert.

Adding: “Spain is not fortunate enough to be able to claim the same, and its economic problems are causing problems for the government.”

Over the weekend, the incumbent Socialist Party suffered a major defeat in regional and local elections, including the loss of strongholds such as Barcelona and Castilla La Mancha.

While a resounding defeat was expected, the result showed just how difficult it will be to maintain social unity in a time of austerity, Nolan points out.

There is talk of bringing forward the general election to this year, though this has been dismissed by prime minister Zapatero.

“With a general election in Portugal next month and local elections in Italy, political instability could yet create more spread volatility over the course of the year.”


The events in Italy and Spain temporarily took attention away from Greece.

“But the fate of the Hellenic Republic is central to how the debt crisis will unfold, and the uncertainty surrounding the country is set to shape sentiment until the denouement, whenever that may be,” Gavan Nolan writes.

The government met today to approve a fifth austerity plan, and there are reports that the EU and IMF will require them to quicken the pace of state assets sales in order to receive bailout funds.

“The country’s capacity to withstand yet more austerity is questionable and is only likely to heighten speculation around debt restructuring,” the Markit analyst states.

Away from the travails of the periphery, markets were also troubled by disappointing economic leading indicators.

The preliminary estimate of the Markit/HSBC China Manufacturing PMI showed that the world’s second-biggest economy is continuing to cool.

“The index dropped to 51.1 in May, a 10-month low, and added to fears that monetary tightening could lead to sharp slowdown,” Nolan comments.

Germany, another of the world’s growth engines, also saw its rate of expansion slow.

The Markit Flash Composite PMI came in at 56.4, still indicating growth but the lowest reading since October 2010.

“Signals that China and Germany are running out of steam will put even more emphasis on the US and the ISM number at the beginning of next month,” Gavan Nolan concludes.

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Call For Independent Audit of Greek Debt – Get Rate Cut Instead

A group of some 200 academics, economists, MEPs and other notables have issued a call for an audit of Greek debt, a demand that may be raised in the Greek parliament in the coming days and which has also been quickly embraced by Irish trade unions and development NGOs regarding Dublin’s public borrowing. Last night Greece was granted a 1% rate cut on its EUR 110 billion loan – Ireland was not.

“Such an audit would throw up some interesting questions regarding the legality – banks may have been lending in contravention of public debt rules of European debts.”

Nick Dearden


The group, which includes former UN assistant secretary general Denis Halliday, and ten left-wing and Green MEPs, on Thursday (3 March) argued for the creation of a debt audit commission similar to that established in 2008 by the Ecuadorean government that ultimately led to a repudiation of ‘illegitimate’ debt. The concept has since been embraced by Irish campaign groups and organisers hope similar pressure to launch forensic investigations will also be mounted in Spain and Portugal and other heavily indebted European states.


The idea comes from European debt and development NGOs, including Jubilee Debt Campaign, a UK-based Christian charity, and Eurodad, the European Network on Debt and Development, who have long campaigned for Western countries to cancel the debt of developing countries and are now turning their attention to the debt of peripheral euro zone states.

On Friday, Irish development organisation Afri, author Fintan O’Toole, a series of Irish economists and leading trade unionists backed the creation of a similar commission in their country.

An audit commission, composed of public auditors, economists, lawyers and other specialists, as well as representatives of civil society and organised labour, would look into why public debt was incurred, the terms under which it was contracted, what the borrowed money was spent on and seek to establish who was responsible for problematic debt agreements.

“Such an audit would throw up some interesting questions regarding the legality – banks may have been lending in contravention of public debt rules of European debts,” Jubilee Debt Campaign director Nick Dearden says.

The group of signatories, which also include British director Ken Loach, American linguist Noam Chomsky, Slovenian philosopher Slavoj Zizek and Indian economist CP Chandrasekhar, say that the commission should have full access to public debt agreements and documentation for the last four decades, including bond issues, bilateral, multilateral, and other forms of debt and state liabilities.

The commission would also have the power to summon public officials to give evidence and examine Greek and foreign bank accounts.

Should proof emerge of portions of Greek borrowing incurred for wasteful or corrupt purposes, such findings could then be used as the basis for a repudiation, or default, of “odious debt”.

Debts defined as illegitimate, odious or illegal could then be declared null and void and Greece could refuse to repay.

Odious debt a legal theory that posits that the national debt incurred by a despotic regime for purposes that do not serve the best interests of the nation do not have to be paid back.

The concept then began to be used in the late 1990s by development charities to argue that whether a government had been despotic or not, the debt burden forced on third world nations, particularly in Africa, was trapping countries in underdevelopment.

Core euro zone banks and Berlin and Paris would likely be against such a move, as, according to the latest government budget,

Greek public debt is expected to rise from €299 billion, or 127 percent of GDP, in 2009 to €362 billion, or 159 percent of GDP, in 2011. Any substantial repudiation of this debt would punch massive holes in the balance sheets of the banks in the core of the euro zone that performed much of the lending, mainly German and French institutions.

Similar effects would be felt by UK banks in the case of Irish lending.

Such a development could also precipitate a fresh revival of market contagion were it believed that international lenders could be forced to incur significant losses.

Initially promoted by leftist groups in Greece, the concept is now steadily gaining a wider hearing as a growing number of voices in the country begin to make the argument that the cost of paying back “illegitimate” debt should not be borne by the Greek people. Instead, they say, the burden should be shared by “predatory lenders”.

I hereby introduce the term : “Too Stressed To Test” as a substitute for “Too Big To Fail”

 

Greece Gets Rate Cut

What's taxes got to do with it?

In spite of the growing scepticism towards the Greek debt, the King of the PIIGS, was granted a 1% rate cut last night by the EU commission and an extension of the payment period from the current three and a half years to seven and a half.

Ireland was offered a similar reduction, but the country’s new prime minister says he could not accept the terms demanded.

“It was impossible to reach a deal for Ireland this evening,” Taoiseach Enda Kenny told reporters after an acrimonious seven-hour meeting of euro zone premiers and presidents in Brussels on Friday, according to the EUobserver.com.

“I wasn’t prepared to contemplate a common euro zone tax base,” he continued, adding that Ireland still intends to be “constructive” about discussions about EU tax policy as contained in a ‘euro pact’ agreed by leaders early Saturday morning, but that was as far as Dublin was willing to go.

He said that Ireland had been asked “to make a reference to our corporate tax rate.”

Referring to an angry confrontation between Kenny and French President Nicolas Sarkozy over corporate taxes, he said: “France has had very strong views on corporate tax rates for quite some time, but then so do I.”

Saying that Ireland unlike Greece had not asked for a loan extension,  insisting: “This country wants to pay its way. We seek no evasion of our responsibilities.”

“It will be difficult” to continue the discussions, he adds, “but I am convinced we can find a way.”

Sarkozy for his part noted that the issue is “very sensitive for our Irish friends.”

“There is a discussion that is progressing in one way or another … but there is no certainty,” he continues, asking for “at least a gesture.”

In return for Greece’s concessions, Athens has committed to a detailed fire-sale privatisation programme worth some €50 billion.

A nice Greek island, anyone?

(Real cheep, too!)

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