Is Italy the Latest Failed Euro State?

[wiggin]

So now they considering a step that Hazir and me are saying they should have already done, that is very same a step that Wiggin told me is absolutely off and against all evidence.

I think it was never claimed, that the US & UK were sacrosanct to rating agencies, but that the ratings were in favourable for those countries. That said, with the current announcement put themselves under zugzwang.

I perfectly agree that if the US fails to make a deal by the deadline that the rating agencies should act. I just don't think that the chance of default is very likely, so there's no reason to lower the credit rating now. The issue in the US is very different from that in most sovereign debt crises in that there is no question about the US' ability to pay. There is some political risk here, yes, but not a very big one. A warning from various rating agencies is very appropriate.

[earthJoker]

Reviewing for a downgrade isn't the same as downgrading.

Of course not, but what is the sense in announcing a review, aren't they supposed to do that anyway, I mean it is their job. And they announce the outcome of that reviewing already, that doesn't seem to be professional to me.

[GGT]

They know their clout, and rather flaunt it. If they were all about fundamentals (and not political influence) the USA would have been downgraded in 06-07 when the Lehman dominos fell, all the major banks were undercapitalized and over leveraged, and our commercial paper market froze. TARP failed on the first vote, and the market tanked. TARP passed on the second vote, and suddenly everything was looking up.

Theirs is more of a political assessment than a fundamental solvency/liquidity/value evaluation.

[Hazir]

So now they considering a step that Hazir and me are saying they should have already done, that is very same a step that Wiggin told me is absolutely off and against all evidence.

I think it was never claimed, that the US & UK were sacrosanct to rating agencies, but that the ratings were in favourable for those countries. That said, with the current announcement put themselves under zugzwang.

And let s mot forget that the most likely flow of events will be in that case that the US goes directly from AAA status into default, even before any of those EMU countries having to cope with junk status.

[Hazir]

I perfectly agree that if the US fails to make a deal by the deadline that the rating agencies should act. I just don't think that the chance of default is very likely, so there's no reason to lower the credit rating now. The issue in the US is very different from that in most sovereign debt crises in that there is no question about the US' ability to pay. There is some political risk here, yes, but not a very big one. A warning from various rating agencies is very appropriate.

The risk of a default is there, right here right now. You say it won t happen so all the world has to take your word for it? There are enough Republicans who think of default as the lesser evil, making it coming about a very real possibility. People putting their money towards US bonds today are taking no less of a gamble than people buying İtalian debt.

[wiggin]

They know their clout, and rather flaunt it. If they were all about fundamentals (and not political influence) the USA would have been downgraded in 06-07 when the Lehman dominos fell, all the major banks were undercapitalized and over leveraged, and our commercial paper market froze. TARP failed on the first vote, and the market tanked. TARP passed on the second vote, and suddenly everything was looking up.

Theirs is more of a political assessment than a fundamental solvency/liquidity/value evaluation.

That doesn't make any sense. Lehman didn't endanger US sovereign debt. Plenty of commercial paper did get lower ratings (and the commercial debt markets were essentially frozen completely), but sovereign debt was never in much trouble from Lehman.

The risk of a default is there, right here right now. You say it won t happen so all the world has to take your word for it? There are enough Republicans who think of default as the lesser evil, making it coming about a very real possibility. People putting their money towards US bonds today are taking no less of a gamble than people buying İtalian debt.

You don't have to take my word for it - take the smart money's word for it. Yields are still remarkably low.

The point is that various rating agencies agree with the market - since the US can pay its debts, they find it highly unlikely that they won't, even with the political shenanigans. Yet they have been recognizing two recent issues in their warnings. The first is that political factors are becoming more of a risk of a technical default (though still a very remote one), and the second is that the US has yet to address some medium-term and long-term debt problems that might cause an issue in the future. Very appropriately so, rating agencies have started warning that if either of these situations gets worse, the US' ironclad credit rating is in danger.

[earthJoker]

The point is that various rating agencies agree with the market

They did also agree with each other when Greece had low rates a few years ago, they also agreed with each other on Lehman having a A rating.

[GGT]

That doesn't make any sense. Lehman didn't endanger US sovereign debt. Plenty of commercial paper did get lower ratings (and the commercial debt markets were essentially frozen completely), but sovereign debt was never in much trouble from Lehman.

It makes sense when you think back to the chain of events. Not using today's benefit of 20/20 hindsight. Lehman, Bear Stearns, Merrill Lynch, Goldman Sachs, Citi group, Bank of America.....all had exposure to AIG. Lehman was allowed to fall, but after that (and systemic panic) our Treasury, Federal Reserve, and Congress were dragged into fixing the problem. Using emergency monetary policy, buying all sorts of debt, assets, treasurys, and flooding the market with new dollars. Yeah, that ultimately means US sovereign debt. Full faith and credit of the US.

[Hazir]

Sorry, I have no idea what you just said EJ.

People with visions should see a psychiatrist (?)

[Hazir]

You don't have to take my word for it - take the smart money's word for it. Yields are still remarkably low.

The point is that various rating agencies agree with the market - since the US can pay its debts, they find it highly unlikely that they won't, even with the political shenanigans. Yet they have been recognizing two recent issues in their warnings. The first is that political factors are becoming more of a risk of a technical default (though still a very remote one), and the second is that the US has yet to address some medium-term and long-term debt problems that might cause an issue in the future. Very appropriately so, rating agencies have started warning that if either of these situations gets worse, the US' ironclad credit rating is in danger.

That would be the same smart money that thought Greece was a safe place to buy government bonds right up untill the Greeks themselves came out and told everybody that they really weren't such a good risk at all? Most people would have serious doubts calling that money anything but gobsmacking stupid.

And yes, theoretically the US can always pay its debt. It could do so as a debtor that's actually honoring its obligations, or it could do so by printing extra dollars, because that is what it promised to its debtors. We all know that. The fact of the matter is that the US has always been more likely to take the second route. Because it could and because that route is a lot easier on the American public (how's that for the US not resembling Greece?). I call that a default by stealth.

The fact of the matter is still that UNLESS the US will fixes its problems, short, medium and long term people putting their money in US debt are going to be short selled in a way that does NOT merit a prime rating.

[GGT]

P'shaw. The US is exceptional, haven't you heard? We don't have the same political fissures of the eurozone. Our 50 states will unite as a republic, and do what's best for the nation. We'd never fight about our weakest or most indebted states, but rally 'round them and brainstorm ways to help them pay their debts. Family trips to Disney Land? Medical seminars in Las Vegas? Golf tournaments in Arizona? Send your kids to college in Michigan? How about an unpaid internship in DC....you can network and make a lot of valuable connections!

[LittleFuzzy]

A second thought here, and I might add, this is just some brainstorming.

Why is a rating agency actually threatening the government to downgrade their rating, what is the sense in that. Does that mean they really want to influence it? As I see it, they either see a chance of failure, and than they need to adapt their rating now, or they don't see any reason for concern, but than they wouldn't need to warn. The only reason to warn and not to change the rating would be, if they actually think that their warning will make a difference on the outcome of the talks.

If the effects weren't so negative, I would actually like to see if Moody's will also do the walk and not only the talk.

That's ontological reasoning.

[earthJoker]

China not amused.

http://www.nytimes.com/2011/07/15/bu...n-on-debt.html

BTW Dagong's current rating of the US is A+

[Hazir]

P'shaw. The US is exceptional, haven't you heard? We don't have the same political fissures of the eurozone. Our 50 states will unite as a republic, and do what's best for the nation. We'd never fight about our weakest or most indebted states, but rally 'round them and brainstorm ways to help them pay their debts. Family trips to Disney Land? Medical seminars in Las Vegas? Golf tournaments in Arizona? Send your kids to college in Michigan? How about an unpaid internship in DC....you can network and make a lot of valuable connections!

Yeah, I know. Also whereas other countries have to shape up for the future, the US only has to point at its past.

[GGT]

Our laurels are kinda crispy, though.

[Dreadnaught]

Of course not, but what is the sense in announcing a review, aren't they supposed to do that anyway, I mean it is their job. And they announce the outcome of that reviewing already, that doesn't seem to be professional to me.

It's pretty common. If they just downgraded with no warning, everyone would complain about how these downgrades came without warning and destabilized the markets.

[Hazir]

It's pretty common. If they just downgraded with no warning, everyone would complain about how these downgrades came without warning and destabilized the markets.

Given that these ratings are supposed to say something about future events it's more than a bit odd that in the case of the US the prediction supposedly (as per yourself and wiggin) should be made post ante. İ think we can figure out ourselves whether or not the US has defaulted. Ratings should have an added value above stating what has happened.

[Dreadnaught]

They are also based on past events. The US has basically never defaulted. But if they do, it changes the future outlook according to their models.

Furthermore, the ratings agencies have been meeting with our lawmakers to make it clear that they would consider any delay of welfare payments as a default as well. Sounds similar to the pressure your southern neighbors are hearing as well.

Once again, the ratings agencies aren't tools of the US.

[wiggin]

They did also agree with each other when Greece had low rates a few years ago, they also agreed with each other on Lehman having a A rating.

That's because there was an assumed subsidy to Greek debt from core eurozone nations. The US has no such backing; frankly, no one other than the US itself could back such a large debt portfolio.

That would be the same smart money that thought Greece was a safe place to buy government bonds right up untill the Greeks themselves came out and told everybody that they really weren't such a good risk at all? Most people would have serious doubts calling that money anything but gobsmacking stupid.

See above. Greek yields have consistently risen when it becomes clear the ECB/eurozone nations are dithering on further rescues and a haircut/default looks more and more imminent. Whenever things actually get done, Greek yields drop. The story of Greece has a lot to do with the structure of the eurozone, which explains the somewhat odd nature of both Greek's credit ratings before the crisis and the market's willingness to lend to them at near-German yields.

And yes, theoretically the US can always pay its debt. It could do so as a debtor that's actually honoring its obligations, or it could do so by printing extra dollars, because that is what it promised to its debtors. We all know that. The fact of the matter is that the US has always been more likely to take the second route. Because it could and because that route is a lot easier on the American public (how's that for the US not resembling Greece?). I call that a default by stealth.

The US 'has always been more likely' to inflate debt away?!? Source? AFAIK it has simply not happened. US public debt was slowly being paid off from WWII until Reagan, dropping to ~25% of GDP in the 70s. And for most of that period (outside a spike in the early 50s due to a number of factors), US inflation rates were quite subdued. There were two major spikes in the 70s and 80s have to do with oil and economic crises (and the end of Bretton Woods), but after that interest rates have been moderated by aggressive Fed action.

So, where exactly has the US inflated their debt away? We know they haven't ever defaulted, so I challenge you to show me a set of data indicating your claims have any validity. If they were true, the US would pay a premium on its debt that it simply doesn't.

The fact of the matter is still that UNLESS the US will fixes its problems, short, medium and long term people putting their money in US debt are going to be short selled in a way that does NOT merit a prime rating.

Yes, if the US doesn't fix their medium and long term debt problems (there isn't a short term debt problem), there will be challenges to paying it back while maintaining adequate economic growth. We all agree on this, don't we? I think the question is whether it merits a downgrade now (answer: it doesn't), and whether it's likely to merit a downgrade in the future (answer: it depends on Congress, but I'm betting they'll get around to fixing entitlements eventually).

[earthJoker]

That's because there was an assumed subsidy to Greek debt from core eurozone nations.

Why should they do that? It would be utter stupid to assume subsidy despite the no-bailout clause.

[wiggin]

Why should they do that? It would be utter stupid to assume subsidy despite the no-bailout clause.

Because a default on euro-denominated debt would be a big mess for the entire eurozone, and investors assumed that wouldn't be allowed to happen?

Why do you think Greek debt yields were nearly at German levels since they joined the euro? Charity?

[earthJoker]

No because Greece couldn't inflate itself out of depth any more. Also because they wrongly believed the statements of Greece about their deficit.

[wiggin]

I'm not sure I understand. Since the drachma no longer existed, the Greeks didn't have an independent monetary policy, so their inflation would likely be more constrained (though I should mention that regional differences in inflation across the eurozone are pretty significant). That protects your investment from being devalued, but it doesn't protect you from default - in fact, it makes it more likely since the Greeks now have no other option to deal with their large and ballooning debt.

As for the rest, Greece did lie a bit to get accepted into the euro, but the sheer size of their debt auctions should have made people put two and two together. There was plenty of evidence that Greek debt loads were high and getting higher, and that their economy was woefully inadequate for being able to pay off their profligacy. No, people knew that Greece was racking up quite a bill, but they assumed an implicit subsidy from the rest of the eurozone - and they were right.

[earthJoker]

I'm not sure I understand. Since the drachma no longer existed, the Greeks didn't have an independent monetary policy, so their inflation would likely be more constrained (though I should mention that regional differences in inflation across the eurozone are pretty significant).

The inflation of Greece is not significant any more if you are invest from a Euro country into Greece, there is no currency risk.

That protects your investment from being devalued, but it doesn't protect you from default - in fact, it makes it more likely since the Greeks now have no other option to deal with their large and ballooning debt.

Of course default is more likely, but the risk of devaluation is zero. As investor you have to take both the risk of devaluation and risk default into consideration.

As for the rest, Greece did lie a bit to get accepted into the euro, but the sheer size of their debt auctions should have made people put two and two together. There was plenty of evidence that Greek debt loads were high and getting higher, and that their economy was woefully inadequate for being able to pay off their profligacy. No, people knew that Greece was racking up quite a bill, but they assumed an implicit subsidy from the rest of the eurozone - and they were right.

Now you have to make up your mind, either there is a real risk of Greece going default, then the markets were wrong back then, or there is no risk for Greece to go default but then the markets are wrong now. The facts about Greece didn't changed only the knowledge of the facts.

[RandBlade]

No because Greece couldn't inflate itself out of depth any more. Also because they wrongly believed the statements of Greece about their deficit.

Bovine manure. Once the monetary union was formed it was assumed that bailouts would happen if necessary.

Once a collapse happened, bailouts have happened as necessary.

[Hazir]

Bovine manure. Once the monetary union was formed it was assumed that bailouts would happen if necessary.

Once a collapse happened, bailouts have happened as necessary.

There would have been a default if it wouldn't have thrown all of Greece not into hardship but into third world style poverty AND if EMU banks wouldn't have been in such a bad state due to the ongoing financial cris.

Bailing out Greece was NOT something on the books formally, and it needn't have happened under other circumstances, because then the rule would have applied that Greece is just a tiny country on the southern fringe that's of no special importance.

None of that counts of course today, but it doesn't mean it didn't count when Greece got unfettered access to cheap money; then anybody managing 'smart money' should have taken 'no bail-out' serious, as they should have taken it serious that a county like Greece could not really afford to live on credit the way they did. Not having a separate monetary policy any longer etc.

@Wiggin; you're still talking nonsense, yields on Greek debt only started to rise to realistic levels once it became clear that maybe there was not going to be a real 100% bailout quite to the liking of Greece's creditors.

[Hazir]

Once again, the ratings agencies aren't tools of the US.

It sure seems to make a difference whether you put your own house or a house down the street on fire.

[Dreadnaught]

It sure seems to make a difference whether you put your own house or a house down the street on fire.

So telling the truth equals "putting your own house on fire"? I suspect you just don't like what the agencies are saying. The US is under enormous pressure over this same issue, but you're acting like you're alone in this. I can hear the tiny violin.

[RandBlade]

Hazir: @Wiggin; you're still talking nonsense, yields on Greek debt only started to rise to realistic levels once it became clear that maybe there was not going to be a real 100% bailout quite to the liking of Greece's creditors.

Exactly, which proves an assumption about a bailout was what caused the low rates, not a naive belief that Greece was as good as Germany.

[Hazir]

So telling the truth equals "putting your own house on fire"? I suspect you just don't like what the agencies are saying. The US is under enormous pressure over this same issue, but you're acting like you're alone in this. I can hear the tiny violin.

Which truth? I don't care what these agencies are saying because they are consistently wrong. What I am against is how these consistently wrong ratings are used to guide investment policies and oversight regulations.

Aside from that; I think the US does not merit an AAA rating, because its fiscal policies are unsustainable, because there is no will on either side of your divided government to come to an understanding and because your governments have consistently inflated themselves out of debt. Ever since the breakdown of Bretton Woods. If it weren't for the fact that you print the prime reserve currency of the world nobody and absolutely nobody would find it logical that a country that neglects its currency like the US is given top notch ratings.