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 – 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
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
Most read in the last 20 days:
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...