Free Markets, Free People
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.
Michael Moore, the “documentary” film maker who has pushed various liberal causes with extraordinarily slanted films, has called on President Obama to “show some guts” and arrest the head of Standard & Poors.
“Pres Obama, show some guts & arrest the CEO of Standard & Poors. These criminals brought down the economy in 2008& now they will do it again,” Mr. Moore wrote.
Yes, it’s all S&P’s fault. Somehow the 100% of GDP debt, 4 trillion of which was heaped on the pile within the last 3 years, was an S&P plot. Apparently Moore is of the opinion that credit rating agencies ought to align themselves politically and if they don’t, or won’t, well they’re open to arrest. S&P obviously should have just kept to itself and supported the outrageous spending this administration has committed itself too.
It seems in Moore’s world the rating agency’s job is to turn a blind eye to actions and activities which, for any other country, would have earned a downgrade quite a while ago.
It it is telling that on the liberal side of things, the first inclination is to attack the messenger. And that inclination is driven by one primary thing – politics. Specifically the politics of personal destruction. The downgrade obviously hurts Obama politically. And all the spinning in the world doesn’t change that.
Because they see this as a desperate situation, the mask slips a bit and you see the true face of "liberalism". Imagine, in a Moore approved regime, how dissent would be handled if he’s now calling for the arrest of the CEO of S&P.
Mr. Moore went on to note that the “owners of S&P are old Bush family friends,” continuing a theme he has developed through several films about capitalism as essentially a crony system for the rich and Wall Street, especially the Bush family.
He went on to link approvingly to an article last week in the Guardian, a left-wing British newspaper, about a police raid in Milan against the offices of S&P and fellow ratings agency Moody’s. Italian police were searching for evidence on whether the rating agencies, in the words of a local prosecutor, “respect regulations as they carry out their work”.
Two more interesting points – somehow it is “Bush’s fault” (there’s a surprise). Additionally it is “important to respect regulations” when these agencies carry out their work. Of course Italy was downgraded by Moody’s and the reaction there by government has been much the same as here – “what us? How dare you”. Fallback? Government regulations, of course.
Naturally Moore doesn’t bother to point out that the government of Italy is run by a right-wing Prime Minister who, at any other time, he’d now be calling a “fascist” for doing that.
Vintage Moore. Vintage liberalism. Liberalism in very deep trouble. And that’s always when its inner totalitarian usually begins to show.
Following the downgrading of the US sovereign debt, S&P has also downgraded the credit ratings of the two quasi-government agencies, Freddie Mac and Fannie Mae, to the same level as the US (AA+). The reason given by S&P:
The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government. In addition to the implicit support we factor into our ratings, the U.S. Treasury has demonstrated explicit support by providing these entities with capital quarterly, as necessary.
The projected cost to bailout Fannie and Freddie through 2020 is estimated to be between $373 billion and $376 billion. The agencies which Barney Frank assured us were in fine financial shape are, in fact, giant money pits. They are indeed reliant upon the US government for their subsidy as is obvious by the future funding that’s being planned for them. It is believed that approximately $291 billion dollars was necessary in 2009 to prop up the two agencies.
Of course it is possible that the administration will try to attack this finding by S&P as well. However, the reality is the agency’s downgrade has indeed had an effect, no matter how hard the administration and various Democrats attempt to attack the messenger. Everyone has known at some point it wasn’t a matter of “if” the US debt would be downgraded, but “when”. And all the grousing and griping we’ve seen the last few days, all the attempts at blame-shifting and attack politics don’t change that simple bit of reality. Freddie Mac and Fannie Mae’s downgrade simply puts a cherry on the downgrade sundae.
Amidst all the “happy talk” about signs that the economy is “turning around” we see more troubling signs that it is, in fact, being badly mishandled:
The US Treasury is facing an ordeal by fire this week as it tries to sell $100bn (£62bn) of bonds to a deeply sceptical market amid growing fears of a sovereign bond crisis in the Anglo-Saxon world.
The interest yield on 10-year US Treasuries – the benchmark price of long-term credit for the global system – jumped 33 basis points last week to 3.45pc week on contagion effects after Standard & Poor’s issued a warning on Britain’s “AAA” credit rating.
The yield has risen over 90 basis points since March when the US Federal Reserve first announced its controversial plan to buy Treasury bonds directly, a move designed to force down the borrowing costs and help stabilise the housing market.
The yield-spike may be nearing the point where it threatens to short-circuit economic recovery. While lower spreads on mortgage rates have kept a lid on home loan costs so far, mortgage rates have nevertheless crept back up to 5pc.
The housing market hasn’t yet bottomed out and Britain isn’t the only country whose credit rating Standard & Poors is reviewing. If we can’t sell debt instruments there are only a couple avenues left to us aren’t there? And, as noted, both would certainly “short-circuit” any economic recovery.