Oh, this is beginning to feel like the crisis all over again in at least two respects: news events taking place on the weekend (well at least from the US perspective) and multiple wobblies happening at the same time.
Frankly, Greece should have been rated junk long before it was relegated to that terrain (note this Moody’s downgrade just takes Greece further into speculative territory, from Caa1 to Ca, which is a degree of refinement that many might deem to be irrelevant). And I’m told by a former ratings agency employee that the agencies have absolutely no methodology for rating countries (although given how well their methodologies worked in structured credit, this shortcoming probably means less than it ought to).
But at least the narrative is pretty realistic. From the Wall Street Journal:
Moody’s Investors Service slashed the Greek government’s debt ratings three notches further into junk territory Monday, citing the likelihood that private creditors will suffer “substantial” losses on their holdings of government debt…
In a statement, Moody’s said the program announced by the European Union indicated that the likelihood of a distressed exchange and a default on Greek government bonds was “virtually 100%.”
“Looking further ahead, the EU program and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden,” Moody’s said.
It added that Greece’s support package would also benefit other members of the euro zone by curbing the severe risk of near-term contagion that would probably have resulted from a disorderly payment default or large haircut on outstanding Greek debt.
“However, Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100% of (gross domestic product) for many years and it will still face very significant implementation risks to fiscal and economic reform,” Moody’s said.
In other Greek news, the Financial Times reports that some banks are balking at the demand that they “contribute” to the deal announced last week:
The UK’s Royal Bank of Scotland, Germany’s DZ Bank and LBBW and Austria’s Erste Bank, which between them hold about €3bn of Greek sovereign debt, are among the lenders that have not yet committed to take part in a programme that will see participants swap or roll over their Greek debt for bonds that mature in 30 years.
Senior bankers said considerable uncertainty remained about the details of the Greek bail-out plan and its likely application. Even the level of projected participation of private-sector bondholders – which the European Union said would be €37bn over the next three years, and the Institute of International Finance, which has co-ordinated bondholders, said would be €54bn – has caused widespread confusion.
In fact, the discrepancy is straightforward – the €54bn is indeed the amount that the banks expect to commit to Greece, assuming that there is 90 per cent take-up of the rollover or exchange plan, but the €37bn is what Greece would actually receive, net of €16.8bn of the “credit enhancement” programme.
Credit enhancement is the name for the mechanism by which Greece will be obliged to reinvest 20 per cent of its sovereign funding into an insurance vehicle collateralised with triple A debt to guard against future default.
If banks aren’t certain how the deal works, that suggests a pretty basic problem in communications. Yowza.
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It’s been set to music already.
The Doors – Roll, Roll, Roll…Save Our City….
http://www.youtube.com/watch?v=PNigNUD8CKo
Yves,
I like the multiple wobblies happening at the same time characterization.
I wonder who tells Moody’s what to do? Assuredly there is no science to their ratings so it is manipulated kabuki for some grand scheme by the inherited rich that own our world. It will be interesting to see how the US situation is handled by the kabuki rating agencies to further the Shock Doctrine moment.
Other than the Greek politicians on the left and right who are conspiring with Wall Street and the ECB to kill Greece economically, there is nothing stopping Greece from establishing its own credit rating agency which could immediately retaliate by downgrading Moody’s credit rating and the credit ratings of the too-big-to-fail Wall Street banks and the French and German banks who hold Greek debt.
Or perhaps the prerequisite is for Greece to place Papandreou and the parliamentarians who approved of the bailouts and austerity measures on trial for treason and terrorism.
At this juncture, from what I’ve learned, (consider me your average ‘man in the street,’) it prompts the question; “Who relys on the ratings agencys anymore?” Didn’t the ’08 fiasco teach anyone anything about said ratings agencys?
If some entities are tied in some way to the ‘ratings’ put out by these dodgy instrumentalities, can said entities decouple from these groups and forge ahead on their own?
“Who watches the watchers, etc. etc.”
Banks rigged the system for AAA ratings and they are still allowed to fuck people out of their houses even after being exposed as cancerous to society at large. Banks must be cornered, tazed and cuffed.
The only thing I want for Christmas is to see the entire senior managements and boards of Moody’s, S&P, and Fitch doing a perp walk in stripes. Until that happens however, could we at least BAN THEM (!!!) from ever issuing sovereign debt rating again? Not only do they admit an immense bias against any kind of government debt, but in the case of sovereign debt, any and all news that these people use to form their opinions is widely available for even a casual observer to analyze.
Given that, the only reason I can see for these companies to issue sovereign ratings is their desire to lob softballs at the Currency Vultures.
John Mauldin asserted over the weekend that Greece ultimately will have to impose a 90% (ninety percent, not a typo) haircut on its sovereign debt to regain sustainability.
That’s pretty shocking. In one of the worst defaults in recent memory, Argentina imposed ‘only’ a 70 percent haircut.
With its debt still well north of 100% of GDP (as Moody’s explicitly acknowledges), Greece does not have the slightest prospect of growing its way out of its plight.
This 21% haircut plan (which delivers even less of a haircut from Greece’s perspective, thanks to its obligation to fund the collateralized zero-coupon credit enhancement) appears to be the first of several incremental haircuts, following the familiar ‘progressive disclosure’ stalling tactic favored by cornered rats worldwide.
Markets, of course, see through this. With Greece temporarily shored up, the bond vigilantes will simply direct their withering fire elsewhere.
The proposed participation of Spain and Italy in this goofball Euroretard fiddle only serves to pile more straws on the backs of these teetering Latin camels. Time for Ms. Market to rip their face off — sell till the pips squeak!
Mama mia! Coño carajo!
Addendum: the Italian 2-Year Note yield is rising 30 bps to 3.95%, and the 10-Year is up 20 bps to 5.60%.
How can Italy compete with Germany, while paying 2.8 percent more on its 10-year sovereign debt, and with its debt at 120% of GDP?
Italy is a frog being slowly boiled in a pot. The water just hasn’t reached a lethal temperature yet.
Europe: where the legless rescue the blind and insane.
Second addendum:
What — us broke? ;-)
Learning that, “the agencies have absolutely no methodology for rating countries” seems to be all the more reason for the Senate Banking Committee to go after these screws.
“Debt Ceiling: Should John Boehner And Eric Cantor Be Tried For Treason? ” Yes! Following criminal prosecution of Hank Paulson, et al.