Downgrade
“The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers lead us to believe that the agreement reached has not produced a
breakthrough of sufficient size and scope to fully address the eurozone's
financial problems. (...) We also believe that the agreement is
predicated on only a partial recognition of the source of the crisis: that the
current financial turmoil stems primarily from fiscal profligacy at the
periphery of the eurozone. In our view, however, the financial problems facing
the eurozone are as much a consequence of rising external imbalances and
divergences in competitiveness between the eurozone's core and the so-called
"periphery." As such, we
believe that a reform process based on a pillar of fiscal austerity alone risks
becoming self-defeating, as domestic demand falls in line with consumers'
rising concerns about job security and disposable incomes, eroding national tax
revenues.” (My emphasis).
One should always be
prepared for a hefty surprise in these markets. Suddenly I find myself agreeing
with S&P! In the explanation for the downgrade of France the following gem
is hidden:
“The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers lead us to believe that the agreement reached has not
Also very useful to read how S&P are justifying
their broad sweep.Somebody have been
reading up on their Kindleberger and the history of the crisis in 1929-32.
The only question is:
what would S&P have done if France (and Germany) had introduced reforms and
tax changes to spur domestic demand and had offered long-term loan programs to
Greece and Portugal to help productivity development. Or if Italy had embarked
on a long, slow reform program to set free the country from decades of bad
management of the laws?
Probably they would
have downgraded France and Italy anyway, so in that respect the above quote is
just a proof how much of a political institution SP really is. We now wait
for the next chapter: The downgrade of Germany. Ultimately it is Germany that
has forced a wrong solution upon the rest of the euro 17.
Will it mean anything
for France and the 8 other downgraded euro-nations? Too early to tell. But for
sure a lot had been priced in already.
More interesting, is
this a game-changer? My feeling is that it is not. After all, I cannot remember
a rating change that was forward-looking and indicative of any changes that
were not already visible to everybody else. But we will be able to see it in the
risk appetite in the coming days.
Euro
The euro has
fortunately weakened further as a result of the ratings. Good for Europe!
However, Colleague Frank points out that the number of short positions betting
against the euro is at a historical maximum. But I found a piece on Bloomberg that left me puzzled. Who had
understood that the reason for the surprising strength of the euro was that it
was propped up by the AUD. Silly me! I thought it was the belated reactions on
the part of ECB that had caused the euro to remain stronger than the other main
currencies. Never too late to learn something new...
Reuters carry an interesting story – and they
appear very keen on telling us that it is well-researched: Hedge funds have
apparently bought sufficiently many Greek bonds to actually force a default.
That would immediately release the payments of CDS according to ISDA rules.
No comments:
Post a Comment