Fitch Strikes Again

Following on the heels of the recent euro area downgrades by S&P, Fitch has now also issued several new downgrades. While this has not been unexpected, it further complicates the efforts to bring the crisis under control. Of course one must always keep in mind that these downgrades are only belated confirmations of what the markets have long ago recognized and priced in already. The only new problems raised by such downgrades come from indexation and the rules governing the fiduciary responsibilities of certain institutional investors. Investors who allocate their bond investments by the weightings that such bonds have in bond indexes are forced to sell bonds that are removed from indexes due to rating changes – this is one of the effects currently plaguing Portugal's bond market.

This in turn then forces clearing firms such as LCH Clearnet to alter the margin respectively haircut requirements of the bonds concerned in repo transactions, if their spread over the benchmark (a mixture of several AAA rated euro area government bonds) increases beyond a certain minimum threshold.

These margin increases in turn then tend to set off a spiral of even lower bond prices, provoking more downgrades and so forth. Italy has just been spared this fate as Clearnet lowered margin requirements on Italian bonds again following their LTRO induced recovery. Alas, Italy is in great danger to re-enter the death spiral if more credit rating downgrades are issued.

Fitch issued five major downgrades on Friday – and Italy and Spain were among them:

 

“The credit ratings of Italy, Spain and three other euro-area countries were cut by Fitch Ratings, which said the five nations lack financing flexibility in the face of the regional debt crisis.

Italy, the euro area’s third-largest economy, was cut two levels to A- from A+. The rating on Spain was also lowered two notches, to A from AA-. Ratings on Belgium, Slovenia and Cyprus were also reduced, while Ireland’s rating was maintained.

The downgrades, flagged a month ago by Fitch, come as Greece negotiates with creditors on how to avoid a default and other euro nations struggle to bolster the region’s defenses against contagion should those talks fail. While sovereign-bond yields have fallen in Italy, Spain in recent weeks as the European Central Bank added liquidity, the countries downgraded yesterday still lack financial flexibility, Fitch said.

“The divergence in monetary and credit conditions across the euro zone and near-term economic outlook highlight the greater vulnerability” these nations face in the event of financing shocks, Fitch said. “These sovereigns do not, in Fitch’s view, accrue the full benefits of the euro’s reserve- currency status.”

Belgium’s rating was cut to AA from AA+, while that of Cyprus was pared to BBB- from BBB. Slovenia was downgraded to A from AA-. Ireland’s long-term rating was maintained at BBB+.

All the countries were removed from “ratings watch negative,” though they retain a “negative outlook,” which implies the possibility of a downgrade within two years, according to Fitch.”

 

While Italy and Spain remain the biggest worries for the euro area, one should not forget that Belgium is so to speak part of the 'hard currency core's' weak underbelly. For the moment, the markets are giving Belgium some rope, but this doesn't mean it won't become a focus again at some point in the future.

 

Credit Market Charts

Below is our customary collection of charts updating the usual suspects: CDS spreads, bond yields, euro basis swaps and a few other charts. 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 Friday's close.

On Friday, the markets were still fairly exuberant. This may change at any moment, given the fact that the euro area crisis has merely received a stay of execution by the ECB's latest interventions, so to speak. The summit currently underway and the still stalled Greek debt negotiations are apt to throw a monkey wrench into the happy 'risk on' partying.

On the other hand, a second huge 36 month LTRO exercise is to be put in place in late February, so the markets have to look forward to that as well.

On Friday most CDS spreads and yields continued to retreat, but Portugal's were once again a notable exception. Portugal is now widely regarded as a 'Greece in waiting'. CDS on Portugal's government debt have hit a new all time high of 1,431 basis points on Friday and its 10 year yield landed above 15% for the first time since Portugal joined the euro.

 


 

5 year CDS on Portugal, Italy, Greece and Spain – CDS on Portugal hit a new all time high – click chart for better resolution.

 


 

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

 


 

5 year CDS on Bulgaria, Croatia, Hungary and Austria – all still falling – 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 – a few small bounces here – click chart for better resolution.

 


 

5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – all bouncing a tad on Friday. Bahrain still near its recent highs – click chart for better resolution.

 


 

5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – these were all still heading lower on Friday. The SovX seems to be in a corrective formation – so far one can make the case that it is an a-b-c type corrective wave, but it may well become more complex as time goes on – click chart for better resolution.

 


 

Three month, one year, three year and five year euro basis swaps – a slight dip on Friday – 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) – approaching another major support level and bouncing a bit on Friday – click chart for better resolution.

 


 

5 year CDS on two big Austrian banks, Erstebank and Raiffeisen – a small bounce – click chart for better resolution.

 


 

10 year government bond yields of Italy, Greece, Portugal and Spain – except for Spain – yields continued to head lower on Friday, with the exception of Portugal and Greece. Spain's ten year yield is now at an important level of lateral support – click chart for better resolution.

 


 

UK gilts, Austria's 10 year government bond yield, Ireland's 9 year government bond yield and the Greek 2 year note – click chart for better resolution.

 


 

Portugal's 10 year government bond yield – another new high, closing on Friday above 15% for the first time since Portugal joined the euro – click chart for better resolution.

 


 

 

 

 

Charts by: Bloomberg


 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Yanking the Bank of Japan’s Chain
      Mathematical Certainties Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70...
  • Prepare for Another Market Face Pounding
      “Better than Goldilocks” “Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?   The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]   Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for...
  • What Went Wrong With the 21st Century?
      Fools and Rascals   And it’s time, time, time And it’s time, time, time It’s time, time, time that you love And it’s time, time, time… - Tom  Waits   Tom Waits rasps about time   POITOU, FRANCE – “So how much did you make last night?” “We made about $15,000,” came the reply from our eldest son, a keen cryptocurrency investor. “Bitcoin briefly pierced the $3,500 mark – an all-time high. The market cap of the...
  • The Future of the Third World
      Decolonization The British Empire was the largest in history. At the end of World War II Britain had to start pulling out from its colonies. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire.   The colors represent the colonies of various nations...
  • Bitcoin Forked – Precious Metals Supply and Demand Report
      A Fork in the Cryptographic Road So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.   Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we...
  • Seasonality: Will Patterns that Worked in the Past Also Work in the Future?
      Historians of the Future Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.   When in doubt, you can always try to reach the pasture...  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of...
  • Czar vs. Pope
      Vladimir the Great Sums Up Pope Francis the Fake Vladimir Putin has once again demonstrated why he is the most perceptive, farsighted, and for a politician, the most honest world leader to come around in quite a while.  If it had not been for his patient and wise statesmanship, the world may have already been embroiled in an all-encompassing global conflagration with the possibility of thermonuclear destruction.   Vladimir Putin is sizing up Pope Francis with his “good...
  • Bitcoin Has No Yield, but Gold Does – Precious Metals Supply and Demand Report
      Bitcoin and Credit Transactions Last week, we said:   It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt. Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by...
  • Is Historically Low Volatility About to Expand?
      Suspicion Asleep You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?   All quiet on the VIX front... what can possibly happen? [PT] - click to enlarge.   When such questions regarding future market trends arise, it is often...
  • Why There Will Be No 11th Hour Debt Ceiling Deal
      Milestones in the Pursuit of Insolvency A new milestone on the American populaces’ collective pursuit of insolvency was reached this week. According to a report published on Tuesday by the Federal Reserve Bank of New York, total U.S. household debt jumped to a new record high of $12.84 trillion during the second quarter. This included an increase of $552 billion from a year ago.   US consumer debt is making new all time highs – while this post GFC surge is actually...
  • Will They Haul Off Trump’s Statue, Too?
      Confused by Shadows POITOU, FRANCE – This week, we are talking about theperishable nature of gods. Yesterday, the city fathers of our hometown of Baltimore let it be known that it was time to toss out the old deities.   The Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in Baltimore, which the mayor inter alia wants to remove. Suddenly it has become fashionable to erase the memory of an important part of US history all over the country. By experience, this...
  • Bad Ideas About Money and Bitcoin
      How We Got Used to Fiat Money Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

350x200

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

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com