Free Markets, Free People
Here come the Euro credit downgrades
The credit rating companies have had a number of European countries on a credit watch for a while. And they made it pretty clear that what the leaders of the EU had cobbled together late last year didn’t answer the mail. So really, this should come as no surprise:
Standard & Poor’s has downgraded France’s credit rating, French TV reported Friday, while several other euro zone countries face the same fate later in the day, according to reports.
"The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating," said Commerzbank chief economist Joerg Kraemer.
"That may irritate markets in the short term but wouldn’t be a big problem in a world where the U.S. and Japan also don’t have a triple-A rating anymore. Triple-A is a dying species," he said.
Wow, that’s wonderful, no? “Triple-A is a dying species?” Oh well, moving on…
Triple-A is a dying species because of the obscene spending of welfare-state politicians. We’re supposed to shrug and accept it per the Kraemer’s of the world. This is just an “irritation”, you see.
In reality it is much more than that:
John Wraith, Fixed Income Strategist at Bank of America Merrill Lynch told CNBC the confirmation of a mass downgrade would be another serious step in the crisis and would lead to a serious worsening of sentiment.
"To a large degree it’s widely anticipated," Wraith said. "However, we think the reality of it is going to have a knock-on, ongoing impact on these markets."
“It clearly deteriorates still further the credit worthiness of a lot of the European banks and just keeps that negative feedback loop between struggling banks and the sovereigns that may have to support them if things go from bad to worse in full force,” Wraith added.
A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries’ borrowing costs rise still further.
"It’s been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction," said Samarjit Shankar, Director Of Global Fx Strategy at BNY Mellon in Boston.
"But the Italian auction brought us back to earth and now we face the spectre of further downgrades."
Italy’s three-year debt costs fell below 5 percent on Friday but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.
As we’ve said for some time, the key to whether this works out or not lies in the bond markets. And this will make the bond markets very uneasy.
Oh, and just to add fuel to the fire. From Zero Hedge:
Last week, when we pointed out what was then a record $77 billion in Treasury sales from the Fed’s custody account, in addition to noting the patently obvious, namely that contrary to what one hears in the media, foreigners are offloading US paper hand over first, there was this little tidbit: "The question is what they are converting the USD into, and how much longer will the go on for: the last thing the US can afford is a wholesale dumping of its Treasurys. Because as the chart below vividly demonstrates, the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world." Well as of today’s H.4.1 update, the outflow has increased by yet another $8 billion to a new all time record of $85 billion, in 6 consecutive weeks, which is also tied for the longest consecutive period of outflows from the Fed’s Custody account ever. This week’s sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year. And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development. So while the elephant in the room could have been ignored 4, 3 and 2 weeks ago, it is getting increasingly more difficult to do so at this point, especially with US bond auctions mysteriously pricing at record low yields month after month. But at least the mass dump in Treasurys explains the $100 swing higher in gold in the past month.
Click on over and check out the chart. Lots of questions to be answered for which, apparently, only a few are chasing answers.
While the media is dominated by political races and urinating Marines, this little drama is passing by almost unnoticed. But trust me, it’s effect, should everything collapse as it may, will be profoundly noticed.