Standard & Poor's Ratings Services today lowered the 'AAA' long-term issuer credit rating on the European Financial Stability Facility (EFSF) to 'AA+' from 'AAA' and affirmed the short-term issuer credit rating at 'A-1+'. We removed the ratings from CreditWatch, where they had been placed with negative implications on Dec. 6, 2011. The outlook is developing. When we announced the placement of the ratings on the EFSF on CreditWatch on Dec. 6, 2011, we said that, depending on the outcome of our review of the ratings of the EFSF's guarantor member sovereigns, we would likely align the issue and issuer credit ratings on the EFSF with those of the lowest issuer rating we assigned to the EFSF members we rated 'AAA' (as of Dec. 6, 2011), unless we saw that sufficient credit enhancements were in place to maintain the EFSF rating at 'AAA' (see "European Financial Stability Facility Long-Term 'AAA' Rating Placed On CreditWatch Negative," published Dec. 6, 2011). On Jan. 13, 2012, we announced rating actions on 16 members of the European Economic and Monetary Union (EMU or eurozone; see "Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments," Jan. 13, 2012). We lowered to 'AA+' the long-term ratings on two of the EFSF's previously 'AAA' rated guarantor members, France and Austria. The outlook on the long-term ratings on France and Austria is negative, indicating that we believe that there is at least a one-in-three chance that we will lower the ratings again in 2012 or 2013. We affirmed the ratings on the other 'AAA' rated EFSF members: Finland, Germany, Luxembourg, and The Netherlands. Germany and Finland, the remaining AAA-rated countries in the single currency, are expected to come under pressure to increase their commitments to bolster the EFSF's funds to prevent a further downgrade and the likelihood that lenders will demand higher interest costs. The blow to the EFSF came as bankers poured cold water on hopes for an early deal between Greece and its creditors after they accused Athens of making "completely unreasonable" demands for debt payment cuts. Charles Dallara, head of the Institute of International Finance which represents Greece's private creditors, said talks had yet to reach agreement on any aspect of a deal following demands from Greek negotiators for ultra-low interest rates on its outstanding debts.
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Tuesday, January 17, 2012
S&P delivers it's verdict on the European Central Bank's long-term refinancing operation
Standard & Poor's Ratings Services today lowered the 'AAA' long-term issuer credit rating on the European Financial Stability Facility (EFSF) to 'AA+' from 'AAA' and affirmed the short-term issuer credit rating at 'A-1+'. We removed the ratings from CreditWatch, where they had been placed with negative implications on Dec. 6, 2011. The outlook is developing. When we announced the placement of the ratings on the EFSF on CreditWatch on Dec. 6, 2011, we said that, depending on the outcome of our review of the ratings of the EFSF's guarantor member sovereigns, we would likely align the issue and issuer credit ratings on the EFSF with those of the lowest issuer rating we assigned to the EFSF members we rated 'AAA' (as of Dec. 6, 2011), unless we saw that sufficient credit enhancements were in place to maintain the EFSF rating at 'AAA' (see "European Financial Stability Facility Long-Term 'AAA' Rating Placed On CreditWatch Negative," published Dec. 6, 2011). On Jan. 13, 2012, we announced rating actions on 16 members of the European Economic and Monetary Union (EMU or eurozone; see "Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments," Jan. 13, 2012). We lowered to 'AA+' the long-term ratings on two of the EFSF's previously 'AAA' rated guarantor members, France and Austria. The outlook on the long-term ratings on France and Austria is negative, indicating that we believe that there is at least a one-in-three chance that we will lower the ratings again in 2012 or 2013. We affirmed the ratings on the other 'AAA' rated EFSF members: Finland, Germany, Luxembourg, and The Netherlands. Germany and Finland, the remaining AAA-rated countries in the single currency, are expected to come under pressure to increase their commitments to bolster the EFSF's funds to prevent a further downgrade and the likelihood that lenders will demand higher interest costs. The blow to the EFSF came as bankers poured cold water on hopes for an early deal between Greece and its creditors after they accused Athens of making "completely unreasonable" demands for debt payment cuts. Charles Dallara, head of the Institute of International Finance which represents Greece's private creditors, said talks had yet to reach agreement on any aspect of a deal following demands from Greek negotiators for ultra-low interest rates on its outstanding debts.
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Why haven't the Europeans acted to solve the crisis? Several answers are apparent :
First there is the political reluctance to do so by all the countries but especailly Germany [ the paymasters]. Germany if it point balnk refused to help would look like the bad guys and that worst of thongs being "uneuropean" - so they prevaricate and do the minimum rather than take the political risk of leaving the Euro or expelling members. Much the same political reluctance also applies to any other nation which sought to leave the Euro and / or default . For example default by one of the PIGS would badly impact French , Italian and German banks - causing a financial crisis and the break up of the Euro as we currently know it...Second countries such as Greece Spain Italy and Portugal still see the Euro [via low interest rates set for Germany ] as the means which brought them riches, in both by increasing growth in output, increased private spending[ borrowing] on consumer goods such as German cars, cheap public sector borrowing [ e.g.to build gleaming infrastructure, public hospitals etc ] as well as rising asset prices [eg land and housing ] ..They have yet to work out that it also brought excessive borrowing and unsustainable levels of debt.Third the German narrative is that Germany is responsible and saves rather than spends they therefore see the problem with the Euro being reckless borrowing and spending by the periperal members and denying the role of the ECB which set very low interest rates [ for which read German] monetary policy thus fuelling a housing boom and borrowing bubble in places like Ireland and Spain. Moreover their exchange rate is lower as a result of being in the Euro which boosts their exports and thus they can export their unemployment to other nations [ both inside and outside the Eurozone ]. Fiscal union ? er no too expensive and the Germans and Dutch quite understandably don't want to pay as they would have to [ and indeed this wasn't what they signed up for when they joined - although arguably they were tricked by their own politicians, Eurocrats and yes - the French - by believing in their own propaganda ]Of course Britain also suffered from a boom bust cycle - the major difference is that Britain has a sovereign currency and is a fiscal union and can adjust its monetary as well a fiscal policy to address the problems. So the truth is the Eurzone tied to a sinking ship by historic decisions based on misguided idealism as well as blatant political and economic expediency. They are hoping that by papering over the cracks the problem will go away - it looks increasingly likely it wont.
Europeans have long been warned about their endless delaying tactics. They were told that if they did not act, the markets would act for them. Well, that time has arrived. The markets now dictate their actions, and they no longer have the freedom of choice. Berlusconi was toppled by the markets. Greeks and Italians had new leaders put in by the markets. Merkel and Sarkozy are no longer in control of events -- they merely react to them.
"When will Europe face the truth?" - if this is rephrased as "Can Europe face the truth?", I think most people would say: "No, because the truth is politically unacceptable." Therein lies the rub, there is no 'politically acceptable' solution.
For different reasons both your 'central choice' options are unacceptable: the former will be resisted by the Brussels Eurocrats who will see any break-up of the Euro as a disaster for 'the project'; the latter, which you discount, particularly unacceptable to Germany as it will be left with the bill.
There will be no winners here, everyone is a loser but some will lose more than others.
During his first press conference of the year, European Central Bank (ECB) President Mario Draghi had been talking about the precarious state of the euro zone for almost half an hour when someone in the audience asked about Peer Steinbrück.
The former German finance minister had more or less said that the ECB was the EU's only functioning institution and that it had to get more involved in managing the ongoing crisis. With a forgiving smile, Draghi closed his long response by saying that "obviously we are always very pleased when people say that the ECB is the only institution that works."
Although it hasn't even been three months since Draghi stepped down as the Bank of Italy's governor to take over the reins of the ECB, he exudes the confidence of someone who has everything under control -- and not only in relation to the ECB, where he has reshuffled responsibilities on its governing council, but also in terms of the euro crisis.
In fact, the situation on the financial markets has noticeably relaxed. In sovereign bond auctions last Thursday and Friday, Italy and Spain had no problem raising fresh money for themselves -- and at tolerable yields too. On Thursday, while discussing the ECB's recent decision to make unlimited liquidity available to euro-zone banks, Draghi confidently stated that "the more time that passes … the more we see signs that it has been an effective policy measure."
What is absolutely critical for Greece and its official creditors, including the ECB, is to ensure that the objective of a sustainable debt stock is paramount. There are operational alternatives. For example, in order to avoid an explicit haircut, the ECB bonds could be transferred to an EU balance sheet, old or new, and treated similar to the procedures for the Paris Club. Also, the maturities could be extended in order to provide for the benefits of a debt reduction to Greece.
"There is a risk that several of the things that reportedly are being considered right now would end up triggering a credit event. Unfortunately, there is no first best solution given the severity of the situation in Greece. What is critical here is not to put the threat of a credit event above everything else. The key is to be able to do something that is credibly associated with medium-term debt sustainability and economic growth. The benefits of getting this right far exceed the cost of a credit event.
08.14 Another day, another new ECB deposit record - €501.933bn. Remember, European banks are being charged to park money with the ECB, but they would rather do that than lend it to other banks that they don't trust
It was privatisation that caused the problem.
The State has been bled dry by private contractors deliberately overcharging the Government. We've known for years that schools were paying two and three times the market rate for IT equipment. We've known for a while that the privatised railways cost us more in state subsidies now than we they were fully nationalised.
And the same with Gas and Water and Electricity.
Then there's the Health Service - again - widespread overcharging. A deliberate policy of bankrupting the Public Sector in order to justify carving it up and selling it off.
They've taken everything except Education, Health and Welfare out of the public sector and the consequence has been a massive rise in costs and a significant reduction in quality and availability of service.
And now they're coming for the last three.
Anyone who expects an outcome other than the one we've seen over railways, gas, water, electric, old age care etc, is a fool.
The €1.5bn auction of six-month bonds was heavily oversubscribed, attracting bids worth €4.6bn - a bid-cover ration of 3.1.
Christophe Frankel, deputy head of the fund, said: "The success of today's auction confirms investors' confidence in the EFSF as a high quality issuer."
Tuesday's auction was organised by the Bundesbank. The average yield was 0.2644pc.
On Monday, S&P cut its rating from AAA to AA+, reflecting its downgrade of France and eight other eurozone countries on Friday.
Earlier today the EFSF head Klaus Regling said in Singapore that he did not expect much impact from the S&P downgrade as long as Moody's and Fitch didn't follow suit.
The auction followed other successful sales by Greece and Spain on Tuesday as borrowing costs across the weaker eurozone periphery states generally fell despite continuing concerns over the debt crisis.
The EFSF, which started off with borrowing power of €440bn, has €250bn left following rescues of Portugal and Ireland. It is to be replaced in June with a permanent crisis fund, the European Stability Mechanism (ESM).
S&P has been severely criticised across the eurozone, even before the EFSF decision was announced. Olli Rehn, an EU Commissioner, said ratings agencies are the tools of "American financial capitalism".
While Wolfgang Schauble, Germany's finance minister, said rating agencies' influence should be curbed.
Mohamed El-Erian, head of PIMCO (the world's biggest bond fund) has called for Greek lenders to accept a more severe haircut on the bonds - as Greece heads closer to the threat of a disorderly default.
El-Erian joined the ranks of experts arguing that private sector creditors need to take bigger losses, otherwise Greece will never get its debt pile in order and return to growth (our Athens correspondent, Helena Smith, reports).
Under the current proposal where creditors take a 50% haircut, around €100bn will be sliced off the country's public debt. The aim is to cut Athens' debt mountain down from 160% of GDP to 120% of national output by 2020.
El-Erian criticised this plan in an interview carried in today's Kathimerini newspaper, saying:
According to our analysis, 50% is not enough for Greece to restore credibly the conditions for medium-term debt sustainability and economic growth.
A 50% haircut would still leave open too many questions about Greece's
economic and financial outlook. What is absolutely critical for Greece and its official creditors, including the European Central Bank, is to ensure that the objective of a sustainable debt stock is paramount.
If Greece can't agree a deal soon, it will run out of time to receive further rescue funds from the EU, IMF and the ECB.
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