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 " ", 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.“
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).
“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.”
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 .
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.”
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.”
Austerity A La Monti
, 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.
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
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