No AAA's No Mo'?

The big news yesterday – which managed to slightly cut short yet another rally in 'risk assets' – was the announcement by Standard & Poor's that it would review the unsolicited ratings of 15 euro area sovereigns and has put them on 'credit watch with negative implications'.

This negative bias encompasses all the remaining AAA rated nations, even Germany.

As S&P announced on its web site (excerpt):


„Standard & Poor's Ratings Services today placed its long-term sovereign ratings on 15 members of the European  Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications.

[…]

Today's CreditWatch placements are prompted by our belief that systemic  stresses in the eurozone have risen in recent weeks to the extent that they  now put downward pressure on the credit standing of the eurozone as a whole.

We believe that these systemic stresses stem from five interrelated factors:

(1) Tightening credit conditions across the eurozone;

(2) Markedly higher risk premiums on a growing number of eurozone sovereigns,  including some that are currently rated 'AAA';

(3) Continuing disagreements among European policy makers on how to tackle the  immediate market confidence crisis and, longer term, how to ensure greater  economic, financial, and fiscal convergence among eurozone members;

(4) High levels of government and household indebtedness across a large area of the eurozone; and

(5) The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain,  Portugal and Greece, but we now assign a 40% probability of a fall in output  for the eurozone as a whole.


Our CreditWatch review of eurozone sovereign ratings will focus on three of  the five key factors that form the core of our sovereign ratings methodology:  the "political," "external," and "monetary" scores we assign to the  governments in the eurozone (see "Sovereign Government Rating Methodology And  Assumptions", published June 30, 2011).

Our analysis of "political dynamics"  will focus on both country-specific and eurozone-wide issues that appear to us to be limiting the effectiveness of efforts to resolve the market confidence crisis. Our analysis of "external liquidity" will focus on the borrowing requirements of both eurozone governments and banks. Our analysis of "monetary  flexibility" will focus on ECB policy settings to address the economic and  financial stresses the countries in the eurozone are increasingly facing.   

We expect to conclude our review of eurozone sovereign ratings as soon as  possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending  on the score changes, if any, that our rating committees agree are appropriate  for each sovereign, we believe that ratings could be lowered by up to one  notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and  by up to two notches for the other governments.“


(emphasis added)

Well, one doesn't need to be a rocket scientist to understand that the high credit ratings of the modern-day welfare/warfare states, specifically the regulatory democracies of the West, are entirely undeserved. While it could be argued that the nation-states' virtually unlimited power to loot the wealth of their citizens has so far provided a reasonable excuse for maintaining the high credit ratings of these governments, the euro area's debt crisis has suddenly laid the vulnerabilities of the system bare.

Although the European citizenry is highly unlikely to be able to effectively resist the plundering of its wealth (elections are no panacea, as every new administration will be a case of 'meet the new boss, same as the old boss'), there is the not inconsiderable problem of the immediacy of the financing requirements of both governments and the banking cartel that is intertwined with them in the modern state-capitalistic model (which could also be termed 'velvet gloved neo-fascism' – there is of course an iron fist behind the velvet glove).

The solutions so far offered by the eurocracy that aim at restoring the 'confidence' of those supposed to continue to provide the financing for its pyramid scheme, consists in the main of a promise to implement more efficient methods of looting.

The proof is in the pudding: when looking at the various 'austerity' schemes in more detail, what stands out are inter alia a number of outright, brazen thefts.  Take for instance the recent decision by Portugal's government to raid the country's pension funds in order to meet its 'deficit targets', a method appropriated from similar moves in Hungary and an analogous (but different in the details) scheme in Ireland.

All the other austerity schemes revolve mainly around one thing: higher taxes. Instead of lessening the burden of government on the economy by cutting its spending, the parasitic ruling classes have decided to instead increase the burden on the economy by mainly raising taxes.

Most of the austerity budgets include a mixture of tax hikes and spending cuts, so perhaps the above characterization of the efforts could be deemed as too harsh. Alas, when looking at the details of each package, the preponderance of tax increases is quite noticeable, even in the case of Mario Monti's new budget, the announcement of which included a small sacrifice from the prime minister himself, who is waiving his own salary (this is really only a symbolic gesture for propaganda purposes – the man can certainly afford it; but it is better than nothing). 

As to the crocodile tears spilled by welfare minister Elsa Fornero when she had to utter the word 'sacrifice', that was certainly political theater of the highest order. Alas, it's almost the equivalent of Benny the Bouncer unexpectedly bursting into tears when he comes round to collect the protection money for Uncle Brusca, while telling you that you're going to have to pay more this time.

Let us return to S&P's downgrade threat however. The way we read the agency's missive, it revolves all around the 'confidence' issue. After all, for many of the currently 'AAA' rated governments, nothing major has changed regarding the substance of their public and private debt burdens over the past year or so. On the surface, it seems slightly incongruous to have confidently rated them AAA credits a year ago and threatening to withdraw that assessment today. As far as we are concerned, the error was the rating of one year ago. However, the point we want to make is that S&P is evidently mainly concerned over the lingering threat posed by debt rollovers, as a massive amount of outstanding debt paper matures over the next year. Note also the specific mention of the banking system, which faces a confidence crisis as well and has enormous trouble in attracting funding, especially of the unsecured longer term variety.

The concern over the euro-area's 'political dynamics' is of course well founded. The past 18 months since the first outbreak of the sovereign debt crisis  have been marked by the utter inability of the eurocracy to devise a coherent plan to tackle the problem, with the few concrete agreements that have been reached still lacking in implementation. It has proven extremely difficult to come up with proposals that all 17 euro area governments could agree on, however, unanimity is (still) required in order to implement far-reaching agreements.

S&P is therefore also correct to be concerned over the fact that as a consequence, sources of funding are increasingly drying up for both sovereigns and banks in the euro area. Since it is impossible to carry the debtbergs of the welfare states without constant debt rollovers, and equally impossible for banks to carry their vast balance sheets when funding for their assets becomes ever harder to obtain, the whole region keeps teetering on the verge of a systemic crisis.

However, it is the final point that strikes us as the most noteworthy – the mention of 'monetary policy flexibility', or rather, the lack thereof. This is a rather unsubtle reminder that the ECB's reluctance to deploy its printing press is nowadays regarded as a 'negative'. In short, S&P concurs with the current economic orthodoxy that the ECB should print money to 'restore market confidence'.

One really needs to pause and think about this one for a moment. This is what it has come to: the central bank's money counterfeiting powers are seen as an essential feature in regaining the 'confidence' of investors in government bond markets. In other words, to make bond traders happy, one must promise to them that one will do one's utmost to destroy the currency the bonds are denominated in. This is utterly perverse.

As an aside, it is the exact opposite of the view that pertained in the late 1970's to early 1980's: at the time, restraining the printing press was seen as essential to regain the market's confidence, especially that of the mythical so-called 'bond vigilantes'.

Lastly, it should be mentioned that a downgrade of the remaining AAA ratings in the euro area, mainly those of France and/or Germany, would thoroughly smother all attempts to persuade that dead lead duck known as the EFSF to take wing.

 

Schäuble Is Happy – Uh-Oh

Contrary to what one might expect, especially given what S&P had to say about Germany in the context of its upcoming ratings review, German finance minister Wolfgang Schäuble appeared curiously contented over the looming downgrade threat (which reminds us, the timing of S&P's announcement is somewhat curious as well).

As Bloomberg reports:


German Finance Minister Wolfgang Schaeuble said Standard & Poor’s downgrade warning for 15 euro- area governments will help force European leaders to ratchet up efforts to resolve the two-year-old crisis this week.

A day after German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their push for new rules to tighten euro-area economic cooperation, Schaeuble called S&P’s warning — issued hours after Merkel and Sarkozy met in Paris — the “best encouragement” to drive toward a solution at a Dec. 8-9 European summit in Brussels.

“The truth is that markets in the whole world right now don’t trust the euro area at all,” Schaeuble said today in Vienna. S&P’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence of global investors.”

Merkel and Sarkozy are leading the charge toward the latest crisis fix after agreeing a joint position on automatic penalties for deficit violators and anchoring debt limits into euro states’ constitutions. Investors are looking toward such an agreement among euro countries to pave the way for intensified action from the European Central Bank.

With the EU summit looming, U.S. Treasury Secretary Timothy Geithner arrived in Frankfurt to meet with ECB President Mario Draghi and Bundesbank President Jens Weidmann before heading to Berlin for talks with German Finance Minister Wolfgang Schaeuble. The ECB holds a policy meeting on Dec. 8.”


(emphasis added)

In other words, Schäuble's main concern is not necessarily the threat to Germany's rating, rather it is over the outcome of the upcoming euro-group summit. In that sense one must agree with his stance, as the recent lessening of market pressures (see the charts below) has once again opened the prospect of a commensurate lessening in the urgency to adopt reform.

The S&P announcement has reimposed some of that pressure. However, this does certainly not mean that we like the way in which things are going – as our readers know, we are all for restoring the classical liberal vision of the EU's founders – the creation of a bureaucratic, socialist super-state is not what we have in mind when we speak of reform. It is however what the purveyors of the euro had in mind, see the collection of old eurocrat quotes recently published by Mish. The original source of the quotes can be found here.

One that really stuck out was the following utterance by Romano Prodi, former prime minister of Italy and EU commission president at the time he made this statement in December 2001:


“I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”


(emphasis added)

Given the direction things are moving in now, it sure looks like a long-standing plan of the centralizers is coming to fruition. 'Never let a crisis go to waste', as they say. As Liebreich, the blogger who collected the quotes remarked:


“So a future crisis is not seen as an indictment of the current system, but an opportunity to extend it.”


Indeed.

 

Austerity A La Monti

Via Bloomberg, here are the highlights of Mario Monti's austerity budget for Italy:


*Pension revamp: Pensions will be tied to contributions rather than salary at retirement starting in 2012. Larger pensions will be de-linked from inflation. The retirement age will be raised to 62 years for women and 66 for men, with incentives to work until 70 for both. Women’s retirement age will be aligned with that of men starting in 2018. Early retirement will be penalized. Before being able to retire, men will need 42 years of contributions to the social security system and women will require 41 years, from the current 40 years for both.

*Reintroduction of a tax on primary residences dropped by the previous government, along with a reassessment of registered property values.

*The value-added sales tax will be raised 2 percentage points from September 2012, if necessary.

*State guarantee of bank-bond sales. [bwahahaha, ed.]

*A fee on the balance of securities held in trading accounts, not applicable to government bonds.

*One-time charge of 1.5 percent applied to capital repatriated in a recent amnesty program, in addition to the 5 percent fee originally assessed on the funds.

*Company tax amounting to 5.5 billion euros. Companies that hire workers will be able to fully deduct the regional IRAP levy that is calculated on the basis of revenue and headcount rather than profitability.

*The government will refinance a guarantee fund backing about 20 billion euros in credit for small and medium-sized enterprises.

*Measures against tax evasion include requiring electronic payment for transactions above 1,000 euros. The current limit is 2,500 euros. Fighting evasion is a “priority” for the government, which will also encourage banks and credit-card companies to lower their transaction fees, Monti said.

*Tax on luxury goods such as private airplanes, sports cars and yachts.

*Liberalization of shop hours and the retail sale of some medicines.


(emphasis added)

Emphasized above are all the tax hikes and subsidies included in Monti's budget (why on earth are new subsidies required?). Apart from the 'liberalization of shop hours and the retail sale of some medicines', we are hard-pressed to find anything in this catalog of measures that is even remotely 'pro economic growth'. All we see are tax hikes, including a comical attempt to steer investment from productive assets into government bonds by taxing investment in the former.

Pension reform is of course necessary and inevitable, not least due to the higher life expectancy people enjoy today (nonetheless, inevitable as it is, it is an abrogation of past promises, which people should keep in mind with regards to other long-standing government promises. Their abrogation is preordained).

Lastly, Monti is attempting a clampdown on Italy's 'shadow economy'. Such attempts always involve the curtailing of liberties, and in this case a very dangerous precedent is set by disallowing 'cash transactions above a limit of € 1,000'. Leaving aside for a moment that these measures won't be effective – at least one must hope they won't be, since killing the shadow economy would be tantamount to strangling the economy, period – this requirement forces people to use the banking system. How else are they going to effect 'electronic transfers'? In other words, people are forced by this stipulation to deposit money with the very fractionally reserved banking system that has lately become extremely suspect and is de facto constantly teetering on the edge of collapse. We realize that most people are not worried about this possibility yet. The point is however that they should be free to decide whether or not they want to entrust their money to this system.

All in all, the main measures of Monti's budget read like the manifesto of highway robber. Where, aside from the pension reform, are the spending cuts? Where is the long overdue shrinking of the overbearing bureaucracy that has grown like a weed over recent decades? 

All that these measures will achieve is putting a further burden on the already alarmingly weak Italian economy. Tax revenues will likely decline as a result.


 

Euro Area Credit Market Charts

 

Below is our customary collection of CDS prices, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Monday's close – that is these were the prices before the news from S&P arrived. Both CDS prices and bond yields were still happily declining on Monday.

We still think a 'crisis pause' of a few weeks is likely, especially if the ECB should decide to intervene more forcefully. Alas, we don't yet see that any of the fundamental problems are closer to a solution that they were before. So this 'time-out' probably won't last very long.




5 year CDS on Portugal, Italy, Greece and Spain – before S&P threw cold water on the party late on Monday, the retreat in CDS on Spain and Italy continued. CDS on Greece of course continued to advance back to their recent high – click chart for better resolution.




5 year CDS on France, Belgium, Ireland and Japan – click chart for better resolution.




5 year CDS on Bulgaria, Hungary, Croatia and Austria – click chart for better resolution.



 

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click chart for better resolution.



 

5 year CDS on Romania, Poland,  Lithuania and Estonia – Poland has seen the biggest improvement in relative terms in the recent pullback – click chart for better resolution.




5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click chart for better resolution.

 


 

Three month, one year, three year and five year euro basis swaps – hovering just below the former support, now resistance level – click chart for better resolution.



 

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – another 16 basis points improvement on Monday, but the rate of change of the decline is now slowing down – click chart for better resolution.


 



 

5 year CDS on two big Austrian banks (Erstebank and Raiffeisen) – indexed to 100 (for actual prices in basis points divide by the price divisors in the legend) – click chart for better resolution.


 



10 year government bond yields of Italy, Greece, Portugal and Spain. There has been a very sharp pullback in Spain's yields and yesterday, Italian yields finally joined in the party in earnest as well. Greek and Portuguese yields remain unimpressed – click chart for better resolution.




 


10 year government bond yield of Austria, the 9 year government bond yield of Ireland, UK Gilts and the Greek 2 year note.  Greece's yields continue to rise day after day. It may be noteworthy that Ireland's government bond yield has not retraced much of the recent spike higher yet. It appears to us that the market focus is generally shifting back to the smaller nations on the periphery – click chart for better resolution.

 




Inflation-adjusted yields and the SPX have lately begun to confirm each other – click chart for better resolution.




 

5 year CDS on China (indexed to 100, use divisor in the legend for absolute level in basis points) – the pullback continued on Monday – click chart for better resolution.




5 year CDS on the debt of Australia's 'Big Four' banks – also moving a bit lower again – click chart for better resolution.


 



 

The Shanghai Composite Stock Index – what, not even a  bounce? Recall that the recent lowering of China's reserve requirements was greeted with great fanfare in the financial press. So why is China's stock market still in a bearish trend? As we noted in our recent missive on China, the direction in which the long term triangle breaks will likely tell us something about whether the authorities can resurrect the expiring boom – click chart for better resolution.




 


 


 


Charts by: Bloomberg, StockCharts.com



 
 

Emigrate While You Can... Learn More

 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • mad_professor-600x399A Historic Rally in Gold Stocks – and Most Investors Missed It
      Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right?   Successful stock market investing in two simple steps Photo via slideshare.net   As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him:   Thirty years ago, at an investment conference, there was a scalawag analyst...
  • gold barGold and Negative Interest Rates
      The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
  • NYSEWhy is the Stock Market so Strong?
      Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured.   Photo credit: Kjetil Ree   Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
  • 800px-JuergenHabermasCultural Marxism and the Birth of Modern Thought-Crime
      What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
  • the worst-1Why All Central Planning Is Doomed to Fail
      Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works.     A bunch of famous people with a simpleton view of how the...
  • mecca-3Gold Stampede
      Stampeding Animals The mass impulse of a cattle stampede can be triggered by something as innocuous as a blowing tumbleweed.  A sudden startle, or a perceived threat, is all it takes to it set off.  Once the herd collectively begins charging in one direction it will eliminate everything in its path.   Better get out of the way... stampeding bisons Photo credit: Surface Niusance   The only chance a rancher has is to fire off a pistol with the hope that the shot...
  • the-pantsir-s1-a-combined-short-to-medium-range-surface-to-air-missile-and-anti-aircraft-missile-system-the-system-consists-of-12-surface-to-air-guided-missiles-and-two-30-mm-automatiRussian Aggression Unmasked (Sort Of)
      Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time:   “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
  • 12-Capital vs consumer goods prod LTUS Economy – Ongoing Distortions
      Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below:   A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge.   Wholesale...
  • chart-2-gold and treasury yieldGetting it Wrong on Silver
      Erroneous Analysis of Precious Metals Fundamentals We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right? At first, we thought to just put out a short Soggy Dollars post highlighting the error. Then we thought we would go deeper. Here’s a graph showing the price action in silver since the...
  • trumpedPolitical Pundits, or Getting Paid for Wishful Thinking
      Bill Kristol - the Gartman of Politics? It has become a popular sport at Zerohedge to make fun of financial pundits who appear regularly on TV and tend to be consistently wrong with their market calls. While this Schadenfreude type reportage may strike some as a bit dubious, it should be noted that it is quite harmless compared to continually leading people astray with dodgy advice.   To answer the question posed in the picture with the benefit of hindsight: not really.... (look...
  • HPQRunning Mate Turns Into Fall Girl
      Odd Couple While checking on the US primaries a few days ago, we came across a piece of news informing us that pretend candle-swallower Ted Cruz had picked Carly Fiorina as his “vice-presidential running mate”. Our first thought upon hearing this was “WTF”?   The match made in heaven... two loooosers find each other. Photo credit: AP   It's not so much that he's picking another “loooooser” as The Donald would put it...the real absurdity of it is that...
  • Queen_2100 Years of Mismanagement
      Lost From the Get-Go There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.   The scalawag himself. Keynes provided governments with the...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com