FT - S&P ratings warning to top euro nations

Mr_Mumble

Adding to Generali's follow-up that 15 countries were put on creditwatch-negative, not just the most creditworthy 6, the unexpected aspect for the markets was S&P indicating a potential two-notch downgrade for France.

michaels wrote: »

So who would be left with top ratings from all 3 agencies - Switzerland, Norway, Canada, Singapore, Denmark and - amazingly, UK?

As you yourself have mentioned michaels the credit-rating agencies are measuring exactly that: credit-ratings. Not how-much-can-we-screw-creditors-out-of-by-trying-to-inflate-away-our-troubles-ratings

Still can't see how Blighty is AAA mind!

Generali

michaels wrote: »

Anyone with access to a Reuters terminal able to let us know if CDS's are telling the same story?

5 year CDS prices as at today, 2.30am GMT:

- Germany 95
- UK 90
- France 188

At face value, that implies roughly a 1% chance of the UK or Germany defaulting in the next 5 years and a 2% chance of France defaulting, however there are several important caveats to note.

1. The price of a CDS is related to supply and demand for CDSs rather than to the risk of default. There are many reasons to buy or sell CDSs, many of which will have nothing to do with credit quality.

2. There are all sorts of risks associated with buying a CDS that don't exist if you hold a bond. The biggest is that if you bought a CDS from Lehmans on a French 10 year bond in 2006 you still have the bond but you don't have protection!

3. Sovereign CDS markets are illiquid, under-developed and subject to political manipulation (e.g. the 'default' of Greece was structured in such a way as to prevent CDSs from paying out).

There are lots of others but these are the things that spring to mind.

purch

AA is the new Black :eek:

Generali

Mr_Mumble wrote: »

Still can't see how Blighty is AAA mind!

Political risk IMO.

Germany seem to be doing everything they can to wreck the Euro. That in turn will screw all the economies in it (although staying in isn't an option either as things stand).

As with so much of this crisis, I don't think a 'clean' solution exists any more. One could have been had by forcing insolvent banks to the wall, nationalising them and shafting the lenders to the banks (middle class savers). That option is receding fast as the debts have been transferred to the Government now and it's a far more painful process for a Government to default than a bank.

Compare Iceland and Ireland. Both have sound economies with banks that were insolvent. Iceland let theirs go to the wall, Ireland's Government decided instead to take on the debts of the banks. I'd much rather be a taxpayer in Iceland than Ireland right now.

michaels

I noticed today that harmonising corporation tax rates isd being mooted - The Irish will really fell it is worth the sacrifices...

I can't see how the UK could have a higher rating that Germany as surely if the Euro collapse hits and breaks Germany it will also break the UK at the same time?

And I'm afraid there is another question, if we can't use CDSs to assess realtive creditworthiness and govt bond yields are not a pure measure of perceived default risk as they also measure perceived inflation expectations and exchange rate expectations, how can we assess how the markets see the relative riskiness of different sovereigns?

Generali

michaels wrote: »

And I'm afraid there is another question, if we can't use CDSs to assess realtive creditworthiness and govt bond yields are not a pure measure of perceived default risk as they also measure perceived inflation expectations and exchange rate expectations, how can we assess how the markets see the relative riskiness of different sovereigns?

Ultimately I don't think we can.

For a start, there isn't a free market in Government bonds. Banks, insurance companies and annuity providers are forced to buy them and central banks use them to fix inter-bank interest rates or at least try to.

Secondly, as can be seen from countless examples, bond markets are happy to provide financing until they aren't. That moment is somewhere between hard and impossible to predict. Greece, for example, was paying 20 basis points (0.2 percentage points) more than Germany to borrow money just a few years back. Now Greek 2 year bonds have over a 13,000 basis point premium over Germany's!

The problem that might come for the UK is that she has run a surplus in something like 4 financial years since 1979. That makes the UK reliant on bond investors to want to keep buying bonds in order for the Government to want to keep spending. That's fine for now until, perhaps, one day it isn't.

michaels

Apparently now the Euro zone itself is on downgrade watch:

http://www.bbc.co.uk/news/business-16082759

Key bit for me was that if either Germany or France loses AAA then Eurozone will too. How does this impact ECB? What about all the banks and companies that have lodged funds with the ECB for 'safety' reasons - will they now need to move it elsewhere?

Generali

michaels wrote: »

Apparently now the Euro zone itself is on downgrade watch:

http://www.bbc.co.uk/news/business-16082759

Key bit for me was that if either Germany or France loses AAA then Eurozone will too. How does this impact ECB? What about all the banks and companies that have lodged funds with the ECB for 'safety' reasons - will they now need to move it elsewhere?

I've been pondering whether to post this or not as it's very complicated and I certainly couldn't put it into simple terms.

http://www.voxeu.org/index.php?q=node/6599

The over-simplified version is that the payments system (Target2) used by banks to settle payments across borders within the Eurozone is effectively being used as an informal bailout mechanism.

A still over-simplified version but the way I like to look at it with an economist's hat on* is that the Target2 is building up assets and liabilities to reflect the fact that within the Euro, the balance of payments is not in balance.

As you are all doubtless aware, the balance of payments must be, by definition, in balance, i.e. 0. If the UK imports more goods and services than she exports then she will have to borrow from abroad or sell assets to foreigners to make up the difference.

Now the Eurozone only has to have a balance of payments with the heathens outside the Eurozone, there is no need to have an internal balance of payments.

Within countries, regional imbalances in trade are rectified by Government transfers of tax. The North of England consumes more than it produces (it 'imports' from other parts of the UK) and a transfer of tax is made from surplus parts of the UK (e.g. London) to pay for that.

That tax transfer doesn't exist in the Eurozone so instead the imbalances seem to be building up within the cash clearing system. Those funds can't be moved AIUI. This is another part of the imbalance that is building up.

All of this is completely inevitable. Just as countries can't live beyond their means in deficit forever, they cannot produce surpluses forever either. This idea that Germany = good because it has a trade surplus and UK = bad because it has a trade deficit is bunkum. One can only exist with the other.

This probably reads like the ramblings of a lunatic but I think I'm right.






* An economist's hat:

purch

I think I'm gonna grow a beard like Hans-Werner Sinn :eek:

purch

Again, this article shows how the Eurozone and single currency was/is flawed, and cannot possibly work in the medium term and longer without a complete restructure and fiscal uniformity.

I do not doubt Germany's ability to get what it wants.

They always do, even if it takes years to achieve.