Tag Archives: Credit rating agency

Sovereign debt crisis: Here we go again.

Moody’s cuts Greece rating, stokes debt fears:

Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1, infuriating the Greek government and temporarily denting the euro amid renewed worries about the ability of Greece and other debt-loaded euro-zone governments to avoid default.

The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013.

That could result in a voluntary restructuring of existing debt, the ratings agency said.

[…] The spread on Greek five-year credit default swaps widened 27 basis points to 1,010 basis points, according to data provider Markit. A basis point is 1/100th of a percentage point.

That means it would cost $1.01 million annually to insure $10 million of Greek debt against default for five years, up from $983,000 on Friday.

[…] The yield on Greek 10-year government bonds rose to 12.12% Friday, moving back above the 12% level for the first time since January, Jenkins noted, while the two-year spread had hit 15.22%.

It’s not just Greek yields that are rising. Portugal’s 10-year yield is hitting new highs. Many suspect that Portugal will be the next domino to fall, followed by Spain, and then Italy. Italy’s yield is also hitting new highs.

And the sovereign debt crisis continues, just as I’ve been saying it would

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Europe burns! CDS imply 7 to 11 notch credit downgrades. Belgium and France to join the sovereign debt crisis?

First Greece. Then Ireland. Next may be Portugal and Spain. Some are talking about Italy as well. As the sovereign debt crisis spreads through Europe, it is working its way up the food chain. Now, some are talking about Belgium and France too:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.

Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.

Costs to insure French government debt trebled this year, reaching an all-time high of 105.5 today, according to data provider CMA. Credit default swaps tied to Czech securities were little changed at 90 basis points and Chilean swaps ended last week at 89.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

This is eerily familiar. The credit rating agencies gave overly optimistic ratings to collateralized mortgage obligations (portfolios of mortgages) and were then slow to downgrade them. Now, they are making the same mistake on an international level.

What do you think would happen if the credit rating agencies recognized reality and downgraded these countries to where the market believes they should be? The markets would crash. That’s why they are avoiding the painful truth.

However, the credit rating agencies and governments can only deny reality for so long. Eventually, they will have to recognize the truth. The market will force the credit rating agencies to downgrade sovereign debt whether they want to or not. The market will force countries to restructure their welfare state systems or force them into bankruptcy.

I pray that this is done sooner rather than later. It will be painful. Extremely painful. There will be riots in the street as we are already seeing. But it is better to bear the cost now when the situation is still manageable, just barely so, than when all chances of saving western civilization are gone and nations descend into anarchy and tyranny.

Irish Credit Rating Crashes

Just yesterday, somebody told me the Irish credit problem has been solved. With the market indexes trading at or near two-year highs, that would seem to be the case.

But then we get news that Moody’s cuts Irish credit rating by five notches:

Moody’s Investors Service said Friday it has cut its rating on Irish government bonds by five notches to Baa1 from Aa2. The credit rating agency said the outlook for the rating is negative. The downgrade comes after the agency said in November that the most likely outcome for Ireland’s credit rating was a multi-notch downgrade that would leave it within the investment-grade category. “Ireland’s sovereign creditworthiness has suffered from the repeated crystallization of bank related contingent liabilities on the government’s balance sheet,” said Dietmar Hornung, lead analyst for Ireland. As well as the cost of supporting the banking sector, Moody’s said the increased uncertainty over the country’s economic outlook and the decline in the Irish government’s financial strength contributed to the downgrade.

OUCH! Ireland’s credit rating drops 5 notches and the outlook is still negative, which means Moody’s could downgrade it even further.

The sovereign debt crisis is far from over.