Is Italy the Latest Failed Euro State?

[Hazir]

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.

An assumption that was wrong, because it was against what the rules said, and wrong because it ignored that the people who were going to have to cough up the money said they wouldn't pick up the bill and last time I checked still haven't and are still refusing it.

Which doesn't mean that in the end they absolutely won't, but so far, that's where we stand. And that made that assumption pretty stupid. I estimate the people who made it are lucky that we're in a severe financial crisis with too many EU banks on the edge of the abyss. Otherwise Greece and its creditors would have been thrown in front of the bus. After which Greece would have gotten some sort of emergency aid to keep the state going.

[LittleFuzzy]

An assumption that was wrong, because it was against what the rules said, and wrong because it ignored that the people who were going to have to cough up the money said they wouldn't pick up the bill and last time I checked still haven't and are still refusing it.

Except it was right because so far the EMU has. How do you handle the cognitive whiplash between here and the DSK thread, where you did exactly what these people did, and then kept insisting to all of us "but events proved me right."

[Dreadnaught]

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.

I agree, our policies are unsustainable. Who do you think you're talking to?

But we haven't inflated ourselves out of debt. Our currency is less valuable against other currencies than it has been in perhaps 15 years.

[GGT]

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.

They should have downgraded the US back when we started accumulating debt obligations without funding them---like Medicare Part D, military spending on steroids, Wars in Iraq and Afghanistan---Bush tax cuts that weren't off-set with less spending or more revenue. It was clear we began kicking the can down the road in 2001, but where were the ratings agencies then?

[GGT]

Boing!

S&P Threatens Broad Downgrade of Finance Companies

Published: Friday, 15 Jul 2011
By: Reuters



Standard & Poor's Friday raised the pressure on debt negotiators in Washington, saying it could downgrade insurers, securities clearinghouses, mortgage agencies and a laundry list of other firms without a deal soon to lift the U.S. debt ceiling and cut the deficit.

While S&P [.SPX 1316.14 7.27 (+0.56%) ] had already made clear it could downgrade the United States' sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills.

The U.S. Treasury took the last available step Friday to try and extend that borrowing capacity.

The ratings agency on Friday put on review for possible downgrades a range of powerful financial firms — many of them little known to the public but crucial to the country's financial infrastructure.

U.S. government securities are central to the operations of most of the companies cited.

They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks.

They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises central to the U.S. residential mortgage market.

S&P characterized its targets as "entities with direct links to, or reliance on, the federal government." Separately, the agency said the four remaining U.S. non-financial companies with triple-A ratings were not affected by the downgrade threat.

'Warning Shot'

"S&P is firing a warning shot, saying the entire financial clearing system is in question," said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

He raised the prospect of a financing squeeze for financial institutions if Treasury debt is downgraded.

S&P said Friday it still sees the risk of default as "small, though increasing." Some investors downplayed the chances of a severe market reaction if the United States is downgraded, however, given that the market has known this could be coming.

"Do you think China is going to sell all their Treasurys when they find out the ratings are lowered? They know the situation, they've known it all along," said James Melcher, founder and president of the global-macro investment manager, Balestra Capital in New York.

"They cannot sell a significant amount of their Treasurys without running interest rates up to 20 percent or more; they would be shooting themselves in the foot."

Onus on Washington

Many of the firms put on review for a possible downgrade were quick to turn the focus back on President Barack Obama and the congressional leaders trying to hash out a deal to stave off a debt default.

"Whatever happens will have nothing to do with us, and everything to do with Washington.

The hope on everyone's part is obviously that Washington gets its act together so that both their rating and ours can remain where they belong —at AAA," said Patrick Korten, a spokesman for insurer Knights of Columbus, which was included on the negative watch list.

Among the other insurers put on review, a spokesman for Goldman Sachs, parent company to Goldman Sachs Mitsui Marine Derivative Products LP, declined to comment.

A spokesman for New York Life said S&P told it no financial institution can carry a higher rating or outlook than its sovereign rating, and that the insurer believes its rating to be fully justified.

Others on the list were not immediately available to comment.

Another broad group in S&P sights is the clearinghouses, which guarantee contracts tied to everything from oil contracts to shares of Google [GOOG 597.62 68.68 (+12.98%) ] and are critical to U.S. financial market stability.

"It's not unexpected and we don't see this as a reflection on how OCC conducts its business," said Jim Binder, spokesman for the Options Clearing Corp, which clears U.S. options or futures for 14 exchanges.

"It's all about what's going on in Washington," the U.S.-based Depository Trust & Clearing Corporation, which runs the National Securities Clearing Corporation and the Depository Trust Company, said the S&P action was expected.

"Changing the outlook on various financial institutions is common practice for ratings agencies when the outlook on a sovereign is changed," according to a statement from the DTCC, which provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at $33.9 trillion.

Freddie Mac also declined to comment.

Fannie Mae did not immediately respond to requests for comment.

http://www.cnbc.com/id/43772701

Moody's Rating Agency on Wednesday placed the U.S. triple-A rating on review for a downgrade in the coming weeks on mounting concern that lawmakers will fail to raise the debt limit. But one independent rating agency is going even further.

"The Weiss ratings is very close to downgrading the sovereign debt of the United States one more notch to a 'C-', which will put it just one notch above junk," Martin Weiss, President of Weiss Ratings told CNBC on Thursday.

In April, Weiss Ratings gave the U.S. sovereign debt rating a 'C'.

Moody's warning came as the White House and President Barack Obama are locked in tense negotiations to raise the $14.3 trillion debt ceiling by August 2 or risk a default. Fed chairman Ben Bernanke has told a U.S. House of Representatives panel that failure to increase the ceiling will immediately cut government spending by 40 percent.

Weiss believes a downgrade by the ratings agencies is long overdue, noting that the top-notch standard assigned to the U.S. is unfair to investors and savers as they are not compensated for the level of risks they were taking.

"(The United States) has a huge debt load compared to most other countries," he said."(It) has a very unstable economy over the last 10 years compared to most other countries." The U.S. debt-to-GDP (gross domestic product) ratio currently stands at over 90 percent.

“The only thing that's really holding up the US debt rating is a widespread international acceptance for US Treasury securities and nice strong liquid market. But even that might be coming into question,” he added.

http://www.cnbc.com/id/43748858

[wiggin]

Just saw this chart on the Economist. I couldn't believe how low capital ratios are in European banks. No wonder the eurozone is obliged to bailout these countries; they don't have a choice.

[Dreadnaught]

One of the few good things of Dodd-Frank (and TARP, in some respects) is the enhanced capital ratios. The "pass" level is 5%?

[RandBlade]

5% is very low

I like how top of the chart of the major developed nations is the US and UK, with the Netherlands too. Yet listen to Hazir and not only is this eurozone crisis over-rated but every single thing means doom and gloom for us more.

While back in reality, the French banks (which have loaned far more to Greek interests than ours anyway) are barely scraping through even at lowly 5%

[earthJoker]

I like how top of the chart of the major developed nations is the US and UK, with the Netherlands too. Yet listen to Hazir and not only is this eurozone crisis over-rated but every single thing means doom and gloom for us more.

While back in reality, the French banks (which have loaned far more to Greek interests than ours anyway) are barely scraping through even at lowly 5%

While back in reality Hazir pointed out several times that the bail out of Greece is actually a bail out of the banks.

Is it just me, or is one of the most important financial centres of the world missing in the chart?

[RandBlade]

Hazir has said its a bailout of the banks, but when I said it was a bailout of French and German banks and Greece should be allowed to default instead, he said no if Greece fails the worst hit would be the UK.

No offence but while Switzerland is an important financial centre, its not one of the major economies. Its barely been mentioned in this whole crisis which is probably why its missing.

[earthJoker]

Well, we have done our homework already, and that is actually another reason why a comparison would be interesting. At least more interesting than Belgium.

[GGT]

Is Switzerland left off because of its non-disclosure and privacy rules, or something like that?

[earthJoker]

Is Switzerland left off because of its non-disclosure and privacy rules, or something like that?

No, we are left out because we are neither part of the Euro nor the Anglo-Saxon world, which means in this comparison irrelevant. But if you're interested:
http://www.bloomberg.com/news/2010-0...g-for-ubs.html

(...)
‘Inconceivable’ Levels

At the height of the credit crunch in 2008, Swiss regulators gave UBS and Credit Suisse four years to raise their risk-weighted capital to as much as double the Basel II requirements. A cap on leverage means the banks must aim to hold capital equal to at least 5 percent of their assets. By the end of June, the banks must have enough cash on hand to survive for 30 days in case another crisis erupts.

UBS is boosting capital to a level that would have been “inconceivable” before the crisis, Chief Financial Officer John Cryan said in a May 4 interview. The tier 1 ratio, a measure of financial strength, was 16 percent at the end of March, the highest in at least five years. It needs to rise to about 25 percent to satisfy the regulators, he said.

“We do feel that we ought to hold stronger capital ratios than we did before the crisis,” said Cryan, 49. Keeping that much money in reserve does come “at a cost to the owners of the bank,” he said. (...)

[GGT]

The US is at 16% now, according to that chart, and our banks are squealing like spoilt pigs. If we had regulators telling them to raise it to 25%....as some of our consumer protection agencies or congressional banking committees have already done....we'd have certain politicians saying that's a "job-killing, economy-busting" proposal. Or that the gummint shouldn't be telling banks or financial firms what to do in a freeee market economy.




edit I forgot to add/ask about different accounting methods. Hazir and I touched on that a long time ago, but I'm not sure how (or if) the US and EMU came to terms on that. We still have tons of loopholes, quirky deductions, and "fuzzy math" with things called carry trades. Our whole tax code is so obscure and messed up, we have specialized tax attorneys whose entire career is spent looking for ways to not pay taxes, and it's better to pay them millions of dollars than simply pay taxes. That's why we have the Dutch domino or Cayman cookie (or whatever the hell those tax tricks are called).

[wiggin]

eJ: I believe the Swiss were left out for a simple reason. The IMF compiled the data in a piece talking about the upcoming (at the time) EBA 'stress tests', which obviously doesn't affect anyone outside the EU. I think the US was just thrown in or comparison's sake.

edit: BTW, the core tier 1 capital seems to be quite lower than 16% in Swiss banks. A few months old, but this claims the maximum is 13.9%:

http://in.reuters.com/article/2011/0...7221ET20110303

Still far better than most of Europe, though.

[earthJoker]

Well the Swiss banks want to be ready if the new regulation with 10% core tier 1 and 9% other capital gets through the parliaments, the UBS so far still lobbies heavenly against this change. The CS is rather quite. The goal of the new regulation is to avoid an Iceland/Ireland situation where you have a too big to fail and to big to save at the same time.

[wiggin]

It's probably wise for at least the two biggest Swiss banks to have at least 10% core tier I capital, and it's probably better if it's even higher. They're not doing too badly by European standards, though.

[Hazir]

Hazir has said its a bailout of the banks, but when I said it was a bailout of French and German banks and Greece should be allowed to default instead, he said no if Greece fails the worst hit would be the UK.

No offence but while Switzerland is an important financial centre, its not one of the major economies. Its barely been mentioned in this whole crisis which is probably why its missing.

not seeing the bigger picture is a special talent of you it seems.

[RandBlade]

The Swiss banks are in a situation where they're too big to save already, unlike American banks, purely based on the size of Switzerland. So its probably a good idea for the Swiss to set higher standards than Americans need to.

[Hazir]

Just saw this chart on the Economist. I couldn't believe how low capital ratios are in European banks. No wonder the eurozone is obliged to bailout these countries; they don't have a choice.

As a soevereign debt problem this whole crisis shouldn t be too relevant if it weren t for the fact that the banking sector isn t ready to cope with defaults by Greece and/or other countries. It also explains why this is not really a crisis of the euro but a revolt of the tax payer.

Note by the way that Germany is in the graph twice. The real danger lies with the state owned Landesbanken. They are a core problem causing a huge headache for Merkel.

[earthJoker]

The Swiss banks are in a situation where they're too big to save already, unlike American banks, purely based on the size of Switzerland. So its probably a good idea for the Swiss to set higher standards than Americans need to.

Well they are too big to save if they are in deep shit, but in the last crisis the national bank could bail out the UBS.

It is a good idea and so far it looks like it's getting through, but it's of course not in the interest of the banks, they want to maximize the return on investment.

[Hazir]

Of course the ridiculously high value of the CHF gives the swiss central bank extra ammunition. Hard to tell if it will be enough. And that advantage probably is a two edgedvsword anyway as it is making life harder for exporters.

[Dreadnaught]

As a soevereign debt problem this whole crisis shouldn t be too relevant if it weren t for the fact that the banking sector isn t ready to cope with defaults by Greece and/or other countries. It also explains why this is not really a crisis of the euro but a revolt of the tax payer.

Care to elaborate on that last point?

[Hazir]

Care to elaborate on that last point?

The governments of the countries that would have to pay for the solution, any solution, are facing outright hostility towards bailing out countries or banks. Merkel's position is shaky, the dutch government could fall over it. The Austrans and Finns don t jump for joy either. As a whole the EMU does not have a liquidity or a solvency problem and this crisis could be over tomorrow so to say. And then the people who solved it will be butchered at the next elections.

[wiggin]

You're only right in that this isn't a crisis that will bring down the entire EMU (or at least, it doesn't need to) - with a managed default of Greek debt, the rest of the eurozone can easily absorb the blow. But in that the current sovereign debt crisis underlines certain problems of having monetary union but not a fiscal union, it is a 'crisis' of the euro: the euro needs to change if it wants to avert such problems in the future.

[Hazir]

You're only right in that this isn't a crisis that will bring down the entire EMU (or at least, it doesn't need to) - with a managed default of Greek debt, the rest of the eurozone can easily absorb the blow. But in that the current sovereign debt crisis underlines certain problems of having monetary union but not a fiscal union, it is a 'crisis' of the euro: the euro needs to change if it wants to avert such problems in the future.

Actually, that's not entirely true. If the creditor nations decide to go for the throaths of the private investors, they could let Greece, Ireland, Portugal and maybe even Spain default, bail out the ECB, wipe out private equity in the banking sector where needed, after which they could go on on the basis of the old rules, which then would be taken a lot more serious by investors. Remaining problems of liquidity (mostly for Greece I'd say) could be solved through the regional funds. This is not a likely scenario, but it would mean that the euro structure is unchanged, and the 'markets' are punished for irresponsable lending. The club Med would get a huge push in the back with regards to making their economies more competitive.

[RandBlade]

Which is what should have happened from day one, but didn't. Even were it to happen now, it'd be too late to make the markets think its what'll happen instantly next time.

If back in 2008 we'd said from the start - to the depositors, banks, club Med, everyone - no bailouts means no bailouts then the lesson would have been clear and taken seriously.

[Crazy_Ivan80]

Well, we have done our homework already, and that is actually another reason why a comparison would be interesting. At least more interesting than Belgium.

What is this Belgium you speak of?

[Dreadnaught]

Actually, that's not entirely true. If the creditor nations decide to go for the throaths of the private investors, they could let Greece, Ireland, Portugal and maybe even Spain default, bail out the ECB, wipe out private equity in the banking sector where needed, after which they could go on on the basis of the old rules, which then would be taken a lot more serious by investors. Remaining problems of liquidity (mostly for Greece I'd say) could be solved through the regional funds. This is not a likely scenario, but it would mean that the euro structure is unchanged, and the 'markets' are punished for irresponsable lending. The club Med would get a huge push in the back with regards to making their economies more competitive.

As we've seen, that leaves open a door for a lot of volatility. More volatility than in most major monetary unions. And if I'm not mistaken, the Euro is the only monetary union around.

[wiggin]

Here's a nice piece from Michael Pettis on the broader issue:

http://mpettis.com/2011/07/current-account-dilemma/