"Vista of Monument from Lincoln Memorial, Washington, D.C."
Ilargi: When we talk about "the markets", it's obvious that it is a poorly defined term, about as opaque as it gets. But whatever or whoever the markets may be, we may rest assured of this: the markets are not stupid.
And so when the White House, through Jay Carney or Tim Geithner, says S&P's downgrade of US debt shows "a Stunning Lack of Knowledge", or "Really Terrible Judgement", that doesn't fool the markets. Who remember all too well how cozy the US love affair with the ratings agencies has been over the past decade and change.
If Washington had come out swinging against Moody's, S&P and Fitch ten years ago, when they started sticking AAA ratings on mortgage backed securities and CDO's boxed full of them, then there would have been credibility. Even 3 years ago, when the ratings agencies had failed to warn about the imminent fate of Bear Stearns and Lehman, the US government might still have had some credibility left if it had criticized the agencies then.
But today, in August 2011, when it's finally the government's own rating that's affected, that government lacks all credibility in its criticism of S&P. After a ten year silence, on topics that anyone could see needed scrutiny -badly-, the impression had become firmly entrenched that Washington was fine with anything the ratings agencies did. Until this weekend, that is. But now it's too late.
None of the government regulators in place has taken any decisive action against any of the three agencies for a decade, even when such action was more than warranted. So now the White House sounds like a bunch of spoiled and petulant kids crying for their mommies. And what's most important about this is that the markets realize it all very well, and will act accordingly.
I have written about a similar loss of credibility for quite a while now: that of the ECB, and the EU in general, particularly where it comes to their handling of the financial crisis is Europe. There have been far too many instances where things were said, promised and pledged, where lines were allegedly drawn firmly in the sand, only to be discarded in a split second whenever that became more practical. They weren't going to buy bonds, they weren't going to interfere here, or there, but then ended up doing so anyway.
The latest blow to European financial credibility came out of a series of emergency calls this past weekend. The ECB supposedly will come out guns ablaze to safe yet another Eurozone member, in this case Italy, and why not tag on Spain while we're at it, by buying its sovereign debt. This is just a temporary measure, we're told, till the European Financial Stability Facility (EFSF) is set up and ratified. And then all will be solved and hunky dory.
The EU and ECB have about €40 billion left in their emergency coffers, after bailing out Greece (2x), Portugal and Ireland. Italy alone has somewhere in the vicinity of €2 trillion in overall debt. It has to roll over between €300 billion and €400 billion in debt every year for the next five years. The ECB earlier today proudly announced it had purchased €700 million in Italian and Spanish debt. Well, it would have to do that every single day for the next 500 days in order just to roll over 365 days worth of Italy's debt.
The EFSF is supposed to double from €220 billion to €440 billion, so was the deal agreed in the last meeting. But that deal has not been ratified yet. Plus, Italy's situation is now dramatically different: it will need to go from "donor" to recipient status. Moreover, EU Commission President Barroso has already called for a full review of all bail-outs enacted so far, which should lead to a rise in the emergency fund of some €2 trillion.
An idea that was immediately shot down by Dutch Finance Minister Kees de Jager, who merely said what Der Spiegel had earlier been told off the record in Berlin: it's not going to happen. Germany, Holland and Finland, the only more or less healthy EU members left, will not guarantee Italian and Spanish debt. They can't afford to because it would greatly endanger their own economies. And the political careers of those who would want to say yes.
This, too, is common knowledge in the markets. And the fresh calls for austerity in Italy will not save the day either. Too little far too late.
The Daily Mail in Britain ran an article earlier today that was later pulled. It talked about the looming bankruptcies of Italy's no.1 bank, Unicredit, as well as France's no.2, Société Générale. Touchy subject matter, at least for now. Then again, if we have a few more days like we had last week, and especially today, we will see banks go down, no doubt about it. These two banks have a lot of exposure to Greek debt. And that alone could sink them, unless the cavalry saves them. Pity the cavalry charges carrying only blanks; with its credibility shot the way it is, no-one will even take one step aside.
But even if the Greek debt wouldn't have sunk these banks, Italy's fast deteriorating debt situation might. And France, too, will undoubtedly be downgraded from its present AAA status. The ratings agencies have busy times ahead of them. They will downgrade quite a few countries, and entire herds of banks.
What they will not do, though, is surprise the markets. They have long been tuned in to what is happening. They are not stupid.
Here's the score for my Google Financials list (see previous posts) at the end of the day’s trading. Tomorrow promises gale force winds, with nary any shelter to be found. Bank of America lost 20.32% (soon a penny stock?), Citi 16.42%, JPMorgan Chase 9.41%, Morgan Stanley 14.49%. Even Goldman Sachs flirted with a 10% loss earlier in the afternoon, then -was- pulled back to "only" a 6% loss. This center cannot hold.
Obviously, when you look at these numbers, it's high time for the cavalry to come riding in. And there was a time when that would have been impressive.
These days, the cavalry have so little credibility left they're likely to get robbed by the side of the road on their way to the scene of the crime. Times are a-changin'.
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Is The World Going Bankrupt?
by Alexander Jung, Christoph Pauly, Christian Reiermann, Michael Sauga, Gregor Peter Schmitz, Thomas Schulz and Wieland Wagner - SPIEGEL
Europe and the US are hopelessly over-indebted. The crisis that started in the US real estate sector in 2007 has devastated state finances on both sides of the Atlantic and is threatening to wreck the euro and trigger a second global downturn. The world lacks the political leadership needed to end the turmoil.
The fear is back, in the stock exchanges and in the capitals of the industrial nations. There are growing signs everywhere of a new financial crisis, and the political leaders of the West are looking helpless and out of their depth.
The United States is struggling with an enormous budget deficit. And the euro zone's central bankers and government leaders can't find a strategy to end the permanent malaise of their single currency. The White House has achieved little more than to buy some time with a new debt compromise reached after theatrical political squabbling between Democrats and Republicans. Last Friday night, rating agency Standard & Poor's lowered its rating for the US from AAA to AA+.
Muddling through, postponing, playing down -- the motto of the crisis managers on both sides of the Atlantic has sent alarm bells ringing in stock markets. Britain's Economist magazine is warning of a double-dip recession in the US, a second downturn just three years after the last one. Many economists have been pointing out that last week's panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008.
Then as now, banks stopped lending each money. Then as now, banks' cash deposits at the central bank doubled within days. The European Central Bank reacted by assuring banks of unlimited liquidity in the coming months. It was an emergency measure that led to short-term relief but sparked anxious questions among bankers and stock market players. How long can the central bank keep up its market-soothing liquidity operations before it finally loses its credibility, the most important asset of a central bank? Is the financial crisis about to escalate? And will the world then be bankrupt?
It was less than three years ago that the global economy inched towards the abyss after the US real estate bubble burst. In order to save their over-indebted banks and insurance companies, Western governments borrowed huge sums of money themselves. They nationalized banks and implemented vast stimulus programs, while central banks flooded the economy with cheap money. As former German Finance Minister Peer Steinbrück put it, "fire was fought with fire."
That helped to prevent a global economic crisis of the kind that brought the world to a standstill in the 1930s. But it also set ablaze the headquarters of the world's economic fire-fighters. Who will save the saviors? That question was already being asked back in 2008, and it has gained urgency now that government debt mountains are higher than ever.
Crisis Management Obstructed by Politics
The scale of new borrowing is less of a problem than the inability of governments to find a credible strategy for reducing their debts. In the US, the government and opposition have been locked in a dispute over whether the deficit should be removed through tax hikes or cuts in social spending. In Europe, the solvent governments of the northern countries are refusing to underwrite the debt of the struggling Mediterranean countries.
The West faces a dual crisis that has engulfed its most important political leaders. President Barack Obama has failed to mend a gaping rift in US society and to outmaneuver the conservative Tea Party rebels. In Europe, it has become more evident with each European Union summit that German Chancellor Angela Merkel, rather than being in control of the crisis, is being driven along by it.
The West hasn't been this weak since World War II, and never before has a crisis paralyzed Europe, America and Japan at the same time. The problems of the leading industrial nations aren't just sapping the political influence of the so-called Free World, they are also threatening the global economy. There are growing fears in the US that the debt woes could drive up inflation to new record levels. In Europe, the future of the single currency is at risk.
Merkel can't avoid the key decision much longer: either the euro zone will be converted into a close fiscal union with financial transfers and commonly issued Eurobonds, or Europe's most indebted nations will have to leave the currency union -- with unforeseeable consequences for the remaining members.
The longer the Western debt crises smolder on, the darker the outlook for the global economy. Because the US economy is collapsing, American consumers are buying fewer goods from China and India. And because investors are piling out of euro and dollar investments, supposed islands of stability are starting to look shaky as well. In recent weeks, the Swiss franc and the Brazilian real have appreciated so strongly that exporters in those countries have been virtually unable to sell their products abroad.
Global Downtrend Feared
And so the world is at risk of sliding into a downward spiral. The debt crises are weakening economic growth, and the declining momentum in turn is making it even harder to escape the debt crisis. Italian bank UniCredit has predicted a "synchronous downtrend in the US, Latin America, Asia and Europe." A downtrend that would also engulf the economy that has so far been getting through the crisis better than most others: Germany.
If the vicious cycle is to be broken, the governments in Europe and the US must take action now, united and coordinated. No less than the world's economic stability is at stake. But so far, that particular risk doesn't seem to feature prominently in the concerns of the world's crisis managers.
Jean-Claude Juncker, Luxembourg's prime minister and president of the euro group of euro-zone finance ministers, is a veteran of EU policymaking. After the July 21 special EU summit in Brussels, he declared that the euro crisis had been sorted out, and that the second Greek bailout agreed to that day was "the last package." The triumph lasted barely 14 days. The crisis started worsening again last week. Financial markets have set their sights on Spain and Italy , two economies that are too big to be dismissed as peripheral problems like Greece, Ireland or Portugal.
The risk premiums on the government debt of the two countries rose to risky levels last week. Italian and Spanish bond yields were four percentage points above comparable German debt, seen as the benchmark of stability.
That makes borrowing more expensive, and governments simply can't afford such rates in times like these. When Ireland's interest rates reached similar levels last autumn, its neighbours urged the country to seek a bailout from the €440 billion ($625 billion) EU emergency rescue fund, the European Financial Stability Facility (EFSF).
Pledges Don't Calm Markets for Long
But Italy and Spain are too big. It has once again become clear that the euro was launched as a fair-weather currency. And that the euro zone's rescue mechanisms, despite all the additions and improvements , remain little more than inadequate, stopgap measures.
Once again, government leaders are falling behind the financial markets and economic realities in a race that will determine the fate of the euro. It is particularly worrying that their announcements and pledges appear to have an ever decreasing shelf-life.
Last year, when they rushed to the aid of Greece and set up a rescue fund for the high-debt nations on the edge of the currency bloc, they managed to calm markets for a few months. But since then, the breathing space following EU announcements has been whittled down to weeks, even days.
Europe's rescue efforts are not just behind the curve. The measures they end up taking turn out to be insufficient. "Too late and too little," said former EU Commissioner Günter Verheugen, referring to the failure of EU leaders to secure a long-term solution for their ailing currency. Merkel opposes increasing the volume of the rescue fund. "Every increase would only be an invitation to speculators to go on finding out how much more the euro zone is ready to give," said one German government expert.
Berlin Officials Say EU Fund Can't Save Italy -- Even if It's Trebled
Officials in Berlin say the fund could cope with a bailout of Spain but wouldn't be able to handle Italy even if its resources were trebled. Worse, that assessment also applies to the permanent European Stability Mechanism (ESM) that is due to replace the EFSF in 2013. This admission is unlikely to strengthen confidence in the euro. "You can't bail out an economy like Italy," said one high-ranking government official. The financial requirement would be too huge. Italy's EU partners couldn't even provide a guarantee for the country's government debt, currently totalling €1.8 trillion, as some economists have proposed.
The alternative is simple: Eurobonds. But at present, German officials are only mentioning that possibility in whispers. The common issuance of government debt is still a taboo in top government circles -- for the time being.
The German government fears that such bonds would entail major disadvantages for Europe's largest economy. The yield on them would be higher than on current German sovereign bonds, because the euro zone as a whole wouldn't be as creditworthy as Germany is on its own. If the interest rates on Eurobonds were just one percentage point higher than German government bonds, it would cost the German government an additional €20 billion per year in the medium term.
That is why Merkel and Finance Minister Wolfgang Schäuble are insisting that Italy find its own way out of the crisis by cutting government spending and enacting reform. But Berlin is under pressure, not just from the other EU member states, but from Washington. The US is pushing Germany to agree to Eurobonds. Obama is calculating that if Europe gets to grips with its crisis, his own fight to cut US debts will become easier.
US At Risk of Double-Dip Recession
The wrangling over raising the US debt ceiling led the country to the edge of a financial disaster, and the deal reached seems like a band-aid on a torn jugular. A total of $2.4 trillion is to be saved over a period of 10 years, but that's not much given the debt today already amounts to a barely imaginable $15 trillion and will probably have reached $20 trillion in a decade.
The US has been living above its means for years. The wars in Afghanistan and elsewhere, the world's most expensive healthcare system, costly stimulus programs -- the US kept on paying for it all with borrowed money. It worked as long as the economy kept on growing and flooded the state coffers with tax revenues. But now those coffers are empty, and the planned spending cuts couldn't come at a worse time. "The deal's spending cuts increase the odds of a double-dip recession," said Robert Reich, a US economist and former labor secretary during the Clinton administration.
Experts at the International Monetary Fund recently published a study of 170 fiscal policy measures undertaken since 1930 and concluded that state spending cuts dampen economic growth, with every cut amounting to 1 percent of gross domestic product leading to a 0.62 point reduction in growth in the subsequent two years.
The current debt plan envisages cuts amounting to 16 percent of US GDP over the next decade. If the IMF's calculations are correct, the US would inevitably slip into a new recession. It is imperative that the fiscal problems be addressed. But just like in Europe, the crisis stems largely from a lack of government action and leadership. The political climate in Washington is poisoned, the system isn't working properly and needs to be reformed.
US Heading for 'Banana-Republic Status'
"Our nation isn't facing just a debt crisis; it's facing a democracy crisis," wrote the New York Times. Nobel Prize-winning economist Paul Krugman wrote the debt deal "will take America a long way down the road to banana-republic status."
America was founded on the principle of the separation of powers and that decisions are reached through consensus. But the new Tea Party radicals in Washington just want power rather than results. For them, compromise has become a dirty word.
In almost half of all US electoral districts, either Republicans or Democrats have clear majorities. That means there's no dialogue between the two fronts. In the primaries, politicians only have to fear internal party critics from the hard left or hard right. And those critics can be very loud. The result is that ideology overrides pragmatism, even if it means the nation sinks under its fiscal burden and pulls the rest of the world with it.
Given the gridlock in Washington, the Federal Reserve is seen by many as the last savior because it is politically independent and can't be blackmailed by Washington. There are growing calls for the Fed to do what it did three years ago: print money.
Since 2008, the central bank under Ben Bernanke has pumped out 2.5 trillion fresh dollars. That stimulated the economy and could now provide an alternative, albeit crude, way out of the debt crisis. The billions of dollars flushed into the global economy lead to price increases. It is tempting to pay down the debts with the help of inflation.
But the strategy has two dark sides: inflation amounts to a creeping expropriation of ordinary citizens, whose assets gradually lose value. And there is a risk that the US will export inflation to other parts of the world -- to China, for example.
China Faces Slowing Growth and Mounting Inflation
Life is getting more expensive in the country often referred to as the world's factory -- not just for producers, but also for consumers. Chinese consumer prices rose 6.4 percent in June year-on-year, the highest rate in three years. Pork, the most popular food in China, is becoming a luxury -- its price has risen by more than half since June of last year. The inflation is making people angry. Early last week, around 1,000 taxi drivers went on strike in the eastern city of Hang Zhou to protest against rising fuel prices and traffic congestion.
The unease is being compounded by a deteriorating economic outlook in China's most important export markets -- Europe and the US. The Chinese probably lost their last illusions about America's economic might when the US raised its debt ceiling yet again to avert insolvency. China has more than a third of its $3.2 trillion foreign currency reserves invested in dollars.
Chinese central bank governor Zhou Xiaochuan urged Washington last week to act responsibly to deal with its debt. The state Xinhua News Agency said the political wrangling in Washington had been a "madcap farce" and it described US debt as a "ticking bomb."
The Chinese economy, the world's second largest, is already at risk of overheating, with dramatic consequences for the world, because it has been the driving force behind global growth. China has been growing at double-digit rates for years -- by 10.3 percent last year alone.
German firms in particular have been benefiting from the huge Chinese market, which is starting to slow. An important sentiment indicator measuring the mood of corporate purchasing managers fell in July. The Shanghai Stock Exchange has been stagnating. And real estate prices fell 13 percent year-on-year in the first half.
The expected slowdown could be interpreted as a sign that China's economic planners are managing to engineer a "soft landing" for the economy. The central bank has raised interest rates five times since October 2010 and ordered banks to boost their loan loss provisions in a bid to stem price pressures. But a weakening construction sector -- a key industry in China -- is likely to pull other sectors like cement manufacturers and steel makers down with it.
China is like a junkie being forced into a rehabilitation program. But the government of Prime Minister Wen Jiabao only has itself to blame. When demand from the US and Europe collapsed during the last financial crisis, his government pumped around 4 trillion yuan (about €450 billion) into the economy, the biggest stimulus package in history, to boost the sale of PCs, television sets and cars. New motorways, airports and train lines were planned. China turned into a gigantic building site.
Local authorities ran up massive debts to stimulate the boom. That has lessened the central government's scope to cool the economy down. If interest rates are raised too sharply, the provinces won' be able to service their debts. New York economist Nouriel Roubini, who predicted the 2008 financial crisis, fears that China could offload its surplus cement, steel and aluminium on world markets at dumping prices.
German Economic Miracle at Risk
Germany has been enjoying what many have described as a new economic miracle, with 3.6 percent growth in 2010. In the first quarter of 2011, growth even reached 5 percent year-on-year. But with the world economy facing a slowdown, Germany's enormous dependence on exports, the driving force behind its impressive recovery in the last two years, could now spell doom. The US and Italy are among Germany's top five trading partners -- and neither country is likely to provide much impetus for German industry in the foreseeable future.
There is a further danger: the Swiss and Japanese central banks are intervening in markets to stop the appreciation of their currencies which has been putting their exports at risk. If the Americans follow suit, a global race to depreciate national currencies could ensue -- a disastrous form of protectionism. In its latest "Global Trade Alert," the London-based Center for Economic Policy Research warns that protectionism is on the rise among industrial nations.
The world is closer to an economic crash than at any time since the outbreak of the financial crisis, even though governments are in many respects in a better position than they were in 2008. True, many Western states have amassed gigantic piles of debt. But unlike three years ago, there has been no disorderly insolvency so far that threatens to tear banks into the abyss. On the contrary: Western governments have the means to get to grips with their debt crises.
However, the usual crisis diplomacy with telephone conferences and pledges of "decisive action" won't suffice to calm markets. Effective decisions are needed now, on both sides of the Atlantic.
In the US, the government and opposition must agree on a sustainable plan to reduce the debt -- spending cuts will be as necessary as higher taxes, and politicians must make sure that the measures don't choke off economic growth. That isn't easy but it's not impossible either, as former President Bill Clinton showed in the 1990s. Similar plans are available today. The question is whether the divided political establishment can find the strength to implement them.
A Choice for Euro Zone -- Break Apart or Integrate Much More
And in Europe, governments need to realize that they can't keep on sitting out the euro crisis. The currency bloc will either break apart or its members will move much closer together on fiscal policy. The latter move offers the chance to move ahead with European integration. Here too, the necessary plans are all there -- they just require a plethora of unpopular decisions.
If the euro is to survive, the donor countries will have to shoulder even greater financial risks than they have already. And the debtor nations will have to surrender their sovereignty in budget matters to Brussels bureaucrats for years to come.
The lesson from the latest crisis can be phrased in three words: solid state finances.
It has become evident that debt-to-GDP ratios of 80, 90 or 100 percent will sooner or later cast doubt on a country's creditworthiness. Even supposed paragons of fiscal virtue such as Germany must be careful. The German debt ratio of 83 percent is too high, given the ageing population. Who is supposed to pay down that debt in the future?
Scaling down debt isn't easy, as can be seen in Britain. The government of Prime Minister David Cameron has imposed more rigorous spending cuts than any other traditional industrial nation. The austerity program is coming at a high price. The cuts are hitting domestic demand and have all but wiped out economic growth. Every country that embarks on fiscal cuts faces a similar fate, and it takes years for the measures to bear fruit. States that have restored their budgets to health tend to grow faster than profligate ones.
So the economic prosperity of the West hinges on whether governments are capable of thinking in new dimensions of time. They finally need to start thinking further ahead than the next election.
Beyond debt woes, a wider crisis of globalization?
by Peter Apps - Reuters
The crises at the heart of the international financial and political system go beyond the debt woes currently gripping the Western world and to the heart of the way the global economy has been run for over two decades.
After relying on it to deliver years of growth, lift millions from poverty, keep living standards rising and citizens happy, nation states look to have lost control of globalization. In the short term, that leaves policymakers looking impotent in the face of fast-moving markets and other uncontrolled and perhaps uncontrollable systems -- undermining their authority and potentially helping fuel a wider backlash and social unrest.
In the longer run, there are already signs the world could repeat the mistakes of the 1930s and retreat into protectionism and political polarization. There are few obvious solutions, and some of the underlying problems have been building for a long time. "In times of economic recession, countries tend to become isolationist and retrench from globalization," says Celina Realuyo, assistant professor of National Security affairs at the US National Defense University in Washington DC.
"Given the increased number of stakeholders on any issue -- climate change, the global financial system, cyber security -- it is unclear how traditional nation states can lead on any issue, let alone build consensus globally," she said.
The financial system, the Internet and even the supply chains for natural resources have quietly slipped beyond effective forms of state control. These instruments of globalization have delivered huge wealth and kept economies moving with arguably greater efficiency, but can also swiftly turn on those in authority. Just as Egyptian President Hosni Mubarak discovered that shutting down the Internet was not enough to prevent social-media fueled protest overthrowing him, the world's most powerful nation states are confronting their helplessness in controlling markets and financial flows.
Technology and deregulation allow both information and assets to be transferred around the world faster than ever before -- perhaps faster than states can possibly control, even with sophisticated laws, censorship and other controls. The broad consensus at the 2009 London G20 meeting has already been replaced by a much uglier tone of polarization and mutual recrimination at both domestic and international levels.
Where once they would have lobbied quietly, Russia and China now angrily criticize the United States, with Russian Prime Minister Vladimir Putin describing it as an economic "parasite." In the United States and Europe, far right groups including the Tea Party, eurosceptics and nationalist forces look to be rising, sometimes potentially blocking policy-making. On the left, calls grow for greater controls on unfettered markets and capital.
Over the past year, global currency valuations have become the source of new international tensions as major states accuse each other of "competitive devaluation" to boost exports. In cyberspace, nations worry powerful computer attacks on essential systems could one day spark war, with rows over cyber spying already fuelling mutual distrust.
Censorship, Controls Impossible?
It's unlikely that nations can genuinely pull back from globalised systems on which they have become reliant. "The Net sees censorship as damage and routes around it," computer science guru John Gilmore said in 1993. In the modern, high-speed globalised system, one could say the same of attempts at financial and economic restrictions.
Many areas of the global economy have also become effectively "ungoverned space" into which a host of actors -- from criminals to international firms such as Google and Goldman Sachs to countless other individuals and groups -- have enthusiastically jumped. International companies and rich individuals move money -- and even entire manufacturing operations -- from jurisdiction to jurisdiction to seek low wages, avoid tax, regulation and sometimes even detection. In many states, that helped fuel a growing wealth gap that is self producing new tensions.
Some argue demands to impose new controls may miss the point. In any case, many of the current crises in the system are the result of attempts to control or distort markets and economic flows. "Ironically, the theory was always that.. the (euro) single currency would stop the unpleasant capitalists from destabilizing Europe," says Charles Robertson, chief economist at Russian-British bank Renaissance Capital, pointing to its intention of freeing European states from never-ending local foreign exchange hassles. "So the short answer is no, without massive capital controls, states cannot stop this."
Arguably, the wider global financial system has similar inbuilt problems and imbalances -- but after decades of being largely ignored, they look to be unraveling rapidly, by the same fast-moving markets that previously fed them. That is a problem not just for already struggling Western countries but the emerging powerhouses some hoped would replace them as a source of global leadership.
Unsustainable Systems Unravel?
"For most of the last decade, growth and economic activity in many places has been driven by forces that were inherently unsustainable," says Simon Derrick, head of foreign exchange at Bank of New York Mellon. "What's happening now is these... are coming under pressure and it's getting to the stage where that can no longer be ignored. But none of these issues are going to be politically easy to do anything about."
Low U.S. interest rates and taxes particularly after 9/11 and the dot-com crash fueled the asset booms that produced the credit crunch. But they were only sustainable in part because U.S. government spending -- including on expensive foreign wars -- was effectively underwritten by emerging economies, particularly China, buying up their debt.
Beijing could make those purchases because it was earning billions from soaring exports underpinned by what most observers agree was an unrealistically low-pegged currency. Those dynamics fueled record economic growth that help to maintain domestic stability. If that slows, some worry unrest could return -- particularly if Chinese Internet controls and other domestic security measures prove as unable to control dissent as the admittedly less sophisticated systems of North Africa.
Critics say most attempted financial crisis fixes -- bailouts and stimuli-- have simply "kicked the can down the road," providing short-term relief but little more. "Nobody's kicking a bigger can with more force than the Chinese government," wrote Ian Bremmer, president of political risk consultancy Eurasia Group. "The entrenched dominance of their state-led economy has created the greatest near-term buffer to instability in the developing world... (but it is also) by far, the most unsustainable and volatile long-term."
Europe’s Crisis May Stuff U.S. Banks With Undeployable 'Hot Potato' Cash
by Bradley Keoun and Dakin Campbell - Bloomberg
The European debt crisis is poised to flood U.S. banks with something they don’t want and can’t use: more money.
Cash held by U.S. banks surged 8.4 percent to a record $981 billion during the week ending July 27, the Federal Reserve said in an Aug. 5 report. That’s more than triple the amount firms had in July 2008, before the collapse of Lehman Brothers Holdings Inc. almost froze bank-to-bank lending.
Even more money may be deposited with U.S. lenders if investors pull away from European banks amid concern the Greek debt crisis may spread to Italy or beyond, said Brian Smedley, a strategist at Bank of America Merrill Lynch in New York. Those funds may not be so welcome: With few opportunities to lend them out profitably, U.S. firms may have to slap fees on depositors to keep returns from eroding.
"It becomes a loser to hold these excess deposits," said Bert Ely, a bank-industry consultant in Alexandria, Virginia. "At the margin they have to think, ‘What can we do with $50 million of deposits?’ The answer is not much."
Bank of New York Mellon Corp., the world’s largest custody bank, announced plans last week to charge institutional clients for unusually high balances above $50 million. In a letter to customers, the New York-based firm said it’s "taking steps to pass on costs incurred from sudden and significant increases in U.S. dollar deposits" linked to events including the Greek crisis and the uncertainty over the U.S. debt-ceiling debate.
‘Getting More Worrisome’
The increasing reluctance of European banks to lend to each other was on display last week. The so-called Euribor-to- Overnight-Indexed-Swap spread, which reflects the comparatively higher risk of lending euros for three months versus overnight, widened to 0.55 percentage point today. The rate compares with 0.36 percentage point at the start of the week and 0.32 percentage point a year ago.
The European Central Bank today started buying Italian and Spanish assets in an attempt to halt the region’s sovereign debt crisis. The ECB bought Italian and Spanish bonds this morning, according to five people with knowledge of the transactions, driving their 10-year yields down to 5.39 percent and 5.3 percent respectively from above 6 percent on Friday. Both reached euro-era records last week.
"Things in the European interbank market have gotten very slow, and it’s only getting more worrisome by the day," said Carl Lantz, the New York-based head of interest-rate strategy at Credit Suisse Group AG. "It’s safe to say it feels like 2008 in the European funding markets."
By contrast, the U.S. Libor-OIS spread -- a stress barometer for dollar-based bank-to-bank lending markets -- stood at 0.20 percentage point today, down from 0.24 percentage point a year ago. "U.S. banks continue to have very easy access to cash," Lantz said.
Among the world’s biggest banks, nine of the 10 perceived as the most likely to default are European, data compiled by Bloomberg show. Credit-default swaps on Milan-based UniCredit SpA surged 23 percent last week to 360 basis points, indicating an investor would have to pay $360,000 a year to insure $10 million of debt. For Bilbao, Spain-based Banco Bilbao Vizcaya Argenta SA, such swaps climbed 13 percent to 314 basis points. Among the largest U.S. banks, Bank of America Corp. had the highest price at 207 basis points, followed by Morgan Stanley at 200 basis points, Goldman Sachs Group Inc. at 166 basis points and Citigroup Inc. at 162 basis points.
The relative ease in dollar interbank markets stems partly from the $2.3 trillion the Fed has pumped into global financial markets since November 2008 through its purchases of Treasuries, mortgage bonds and agency debt. Fed balances stood at $1.62 trillion as of Aug. 3, up from $1.05 trillion a year ago, $718 billion in August 2009 and $10.3 billion in August 2008, before the U.S. mortgage crisis.
"There’s an enormous amount of dollar liquidity because of what the Fed has done in recent years," said Raymond Stone, who tracks U.S. money markets as a managing partner at Stone & McCarthy Research Associates in Plainsboro, New Jersey. "That certainly helps."
Most of the largest U.S. banks have increased their deposits. JPMorgan Chase & Co.’s deposits rose almost 13 percent to $1.05 trillion at the end of June, from $930 billion at the end of December. Bank of America’s deposits climbed 3 percent to $1.04 trillion from $1.01 trillion. Since late 2008, the Fed has been paying interest on deposits placed with the central bank, known as interest on excess reserves, or IOER. That rate is currently set at 25 basis points, or 0.25 percent.
At that rate, banks may struggle to profit from even non- interest-paying deposits, because the companies must pay premiums to the Federal Deposit Insurance Corp. when they route the money to the Fed. On April 1, the FDIC changed its methodology for assessing premiums, resulting in an increased cost for most large banks. Because a deposit at the Fed is technically an asset, taking the money may stretch banks’ capital-to-asset ratios, which are watched by regulators, Joseph Abate, a money-market analyst at Barclays Capital in New York, wrote in an Aug. 5 report.
"The higher deposit cost, the potential need for additional capital and the flight-prone nature of these balances clearly outweigh the 25-basis-point return from IOER that they would earn depositing the money at the Fed," Abate wrote. Any reduction in IOER -- a move Fed Chairman Ben S. Bernanke told Congress in July might be possible -- may create a "serial round of deposit fees" since banks would try to "push cash from their balance sheets" like a game of "hot potato."
In hot potato, players toss a beanbag to each other, trying to get rid of it as quickly as possible so they aren’t holding it when the music stops. Slowing economic growth has capped demand for new loans, the biggest category of investments for most banks. Deposits held at U.S. domestically chartered commercial banks climbed 16 percent in the past 31 months to $7.38 trillion, while loans fell 6.4 percent, according to the Federal Reserve.
Deposit growth may accelerate if money-market funds that lend to European banks redirect their investments to U.S. banks, said Bank of America’s Smedley, a former senior trader and analyst in the Federal Reserve Bank of New York’s markets group.
Prime U.S. money funds had about $800 billion, or half their assets as of May 31, in securities issued by European banks, according to Fitch Ratings. A Greek default could threaten European banks that have lent to Greece and other heavily indebted European countries. During the week of July 27, cash held by U.S. branches and agencies of foreign banks fell by $65.7 billion, the second straight weekly decline, according to the Aug. 5 Fed report. At domestically chartered U.S. banks, cash swelled by $76.2 billion.
"The global banks around the world are all very connected, and they’re connected through the funding markets," Smedley said. "There’s no doubt that if there is an escalation in concerns about Spain and Italy at the sovereign level, and that spills over to the broader European banking system, it would most likely lead to an increase in funding costs in the markets where those banks are active."
Decade of Fiscal Stimulus Yields Nothing but Debt
by Caroline Baum - Bloomberg
When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.
Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011. It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a "cut" only in the fanciful world of government accounting.
The Budget Control Act of 2011 will save $917 billion over 10 years relative to the Congressional Budget Office’s baseline. It leaves the tough work to a bipartisan congressional committee of 12, to be appointed by the leadership in each house. If this supercommittee fails to agree on a minimum of $1.2 trillion of additional savings over 10 years, automatic spending cuts -- evenly divided between defense and nondefense -- will kick in.
Is there any reason to think the same folks who couldn’t agree on a grand bargain this past month will join hands and find commonality in the next three, with one month off for vacation?
Even if the committee agrees on the prescribed savings by Nov. 23 and Congress enacts them by Dec. 23, as required, laws passed today aren’t binding on future congresses. Throw in the fact that revenue and budget forecasts tend to be overly optimistic, and there’s even less reason to think Congress has put the U.S. on a sound fiscal path.
In a July 2011 working paper for the National Bureau of Economic Research, Harvard economist Jeffrey Frankel identified a pattern of over-optimism in official forecasts, a bias that gets bigger in outer years. (Who can forget the CBO’s 2001 estimate of a 10-year, $5.7 trillion budget surplus?) A fixed budget rule, such as the euro area’s Stability and Growth Pact with its mandated deficit-to-GDP ratios, only exacerbates the tendency. "Political leaders meet their target by adjusting their forecasts rather than by adjusting their policies," Frankel writes.
The deal hashed out in Washington at the eleventh hour this week does nothing to curb the unsustainable growth of entitlement spending -- on programs such as Medicare, Medicaid and Social Security. Medicare outlays have risen 9 percent a year for the last 30 years in a period of stable demographics, according to Steven Wieting, U.S. economist at Citigroup Inc. The automatic spending cuts outlined in the budget act would limit reductions in Medicare expenditures to no more than 2 percent a year.
By the end of 2012 or start of 2013, the federal government will be back at the trough with a request for additional borrowing authority. The debt will keep rising, and the ratio of publicly held debt to GDP will increase from 62 percent last year to as much as 90 percent in 2021, according to some private estimates, depending on what Congress does about the expiring tax cuts, the Medicare "doc fix" and the alternative minimum tax. The CBO’s estimate of $2.1 trillion in savings over 10 years is well short of the $4 trillion Standard & Poor’s says is necessary to stabilize the debt and avoid a rating downgrade.
No matter. Some prominent Keynesians are advocating more spending now for an economy that is sputtering. Alas, there is little appetite in this country, and less in Congress, for more spending in light of the questionable results. A lost decade doesn’t seem like a good return on an $8.35 trillion investment. (For purists, only $6 trillion of the increase was in marketable debt, the kind of good old deficit spending Keynesians love.)
Maybe it’s time to try something new and different. In 2002 I wrote a column titled, "How About Some Tax Reform Along With Tax Relief?" How about it? Get rid of the loopholes. Better yet, scrap the entire tax code, which would decimate the lobbying industry. Implement a flat tax or a national sales tax. The time has come for what former Treasury Secretary Paul O’Neill calls "architectural change."
Can the Code
The current tax code is burdensome, inefficient and costly to administer. O’Neill says it costs the Treasury an estimated $800 billion annually, divided equally between administrative costs and uncollected revenue. Eliminate the corporate and individual income tax, he says, and replace them with a value-added or consumption tax, with tax refundability for lower-income households. "We should focus the tax system on raising revenue for the things we as a society need," O’Neill says.
Of course, what society needs is a matter of opinion. Without strong economic growth, the options are more limited, the choices more difficult. Fiscal stimulus can have only a short-term impact. The government taxes or borrows from Peter to pay Paul, reflecting a temporary transfer of resources, nothing more. What does the nation have to show for chronic short-term thinking and policies like these? Long-term problems and a mountain of debt.
Our financial system has become a madhouse. We need radical change
by Will Hutton - Guardian
As a new global crisis looms, and political paralysis worsens, genuinely bold solutions are required to overcome the malaise
There was fear this week – real fear. There was fear eliminating $2.5tn from the value of global shares in a mere five days. There was fear provoking the dumping of Italian government bonds at rock-bottom prices. And there was fear taking the yield on short-dated US treasury bills to below zero: investors were so anxious to park their cash somewhere safe that they were, in effect, paying the US government money to steward their savings – something not seen since the second world war.
Yet the credit ratings agency Standard & Poor's ended the week by casting a shadow over the creditworthiness of American government debt, unprecedentedly downgrading it from its AAA status, a monumental blow to the standing of the richest country on Earth and its political system. S&P's held its ground despite intense lobbying from the US treasury. Without tax increases, it said, the US could never recover its fiscal position – but tax increases, given the implacable opposition of congressional Republicans, have become impossible. The markets lurched downward.
Meanwhile in Europe, France's president, Nicolas Sarkozy, chair of the G20, finally managed to disturb German chancellor Angela Merkel's holiday and, with Spain's prime minister José Zapatero, discussed in a conference call how best to react. It was long overdue.
ven the president of the European Commission, José Manuel Barroso, described a week in which individual governors of the European Central Bank, and the German government, were openly saying different things about whether the ECB would support the Italian and Spanish stricken bond markets as "undisciplined communication". The ECB said it was "constructive ambiguity". To panicking markets, it looked what it was: hesitation and indecision that could only fan the flames.
What we have witnessed is a mass global flight from risk and an accompanying hoarding of cash on a huge scale. It was the worst week in the financial markets since the dark days of autumn 2008 at the height of the implosion of the western banking system – itself one of the worst periods since the early 1930s. But in important respects this week was worse. At least in 2008, governments could put their national balance sheets behind their respective banking systems to restore confidence. Now the fears are more deep-seated and far harder to counter.
The markets have lost confidence that western governments can successfully manage the legacy of vast private debt and broken-backed banks without imposing huge and nameless costs. They don't know what the costs will be – perhaps a series of chain defaults on government debt starting in Europe, perhaps worldwide debt deflation, or even helplessly printing money to pay off public and private debts, so generating unmanaged and volatile inflation. But they know the costs will be huge. And unpredictable.
After all, Greece's eurozone creditors, who were part of the EU deal two weeks ago, accepted that Greece might not be able to pay its public debts in full. What about other countries in the eurozone, such as Italy and Spain, with even bigger public debts? Will their creditors be similarly hammered if the contagion spreads? And if individuals, companies and governments have collectively got too much debt that they cannot repay, whether inside or outside the euro, what prospects for the banks – and indeed any of their creditors – who lent the money? What is the extent of their writedowns or even potential bankruptcy?
The markets have known these truths for some months but have trusted that policymakers in Europe and the US also knew the risks and also how to respond. In any case, it was hoped, global growth and the steady rebuilding of western banks' balance sheets would gradually allow the world to lower its massive debts and banks to remain solvent. But events of the past few weeks have shaken that faith to the core.
The scale of the economic challenges that the western industrialised countries now confront may be impossible to handle. The markets' judgments are brutal. For example, this week yields on American 10-year treasury bonds fell to levels – 2.2% – that only make sense in a world close to falling prices and economic stagnation. Meanwhile, the yield on Italian government debt rose at one time on Friday to 6.4%, meaning that the government would have to plan for vast and deflationary budget surpluses for years just to service its debts worth more than 120% of its GDP.
On Friday evening, prime minister Silvio Berlusconi bowed to the inevitable and promised to balance the Italian budget a year earlier than his government had planned only a fortnight ago.
"No major advanced economy is doing anything to promote growth and jobs," says George Magnus, a senior policy adviser to investment bank UBS. He is right. Wherever you look, it is an economic horror story. Put bluntly, too many key countries – the UK in the forefront, with private debt an amazing three and half times its GDP, but followed by Japan, Spain, France, Italy, the US and even supposedly saint-like Germany – have accumulated too much private debt that cannot be repaid unless there is exceptional global growth.
That looks ever more improbable. Yet without growth there are only three ways out. The first is to increase public borrowing to compensate for the collapse of private borrowing. Private spending is bound to be depressed as individuals and companies lower their borrowing – so for a time exports (as long as other countries are buying) and growing public debts are the only reliable avenue to promote economic growth. But now there is a veto on growing public debt – due to the Tea Party movement in the US, the collapse in confidence in the euro and Britain's conservative government – and export demand from Asia is slowing.
The lessons from history are clear. Without publicly or privately generated growth there are only two other ways forward to pay down private debt after credit crunches: default or inflation, either containably managed or dangerously unmanaged.
What has unnerved the financial markets is that if the world cannot grow we are moving ineluctably towards these options. In the US, where the recent downward revisions to its economic growth statistics show how alarmingly weak its recovery has become, there has already been $300bn (£183bn) of private debt write-offs, according to McKinsey Global Institute's research.
Now the Tea Party movement has vetoed any creative action by the federal government to stimulate growth, the pace of writing off consumer and mortgage debt can only accelerate. The impact on the American banking system, house prices and consumer confidence is bound to be serious.
In Europe the interconnectedness of public and private choices over debt is even more obvious – and being made more invidious with every hesitation by the EU's leaders about how to restore confidence in the euro. In July, the EU at last seemed to have come up with an effective response, proposing a nascent European Monetary Fund to police the economic policies of euro members and which could, alongside the European Central Bank, lend to governments and banks in trouble.
But having risen to the occasion, which heartened me, Europe is now moving at stately pace. To be told by the EU commissioner for monetary affairs, Olli Rehn (who at least broke off his holidays to engage with the crisis), that the technical work would start in September while the German government simultaneously insisted that no more need be done, reassured nobody. There is no political leadership, and worse, a paucity of original ideas about what to do even if there were.
The markets' reaction is made worse by herd effects – magnified by the many instruments, so-called financial derivatives, that have been invented supposedly to hedge and lower risks but which in truth are little more than casino chips. Long-term saving institutions such as insurance companies and pension funds now routinely lend their shares – for a fee – to anybody who wants to use them for speculative purposes. The financial system has become a madhouse – a mechanism to maximise volatility, fear and uncertainty. There is nobody at the wheel. Adult supervision is conspicuous by its absence.
What is required is a paradigm shift in the way we think and act. The idea transfixing the west is that governments get in the way of otherwise perfectly functioning markets and that the best capitalism – and financial system – is that best left to its own devices. Governments must balance their books, guarantee price stability and otherwise do nothing.
This is the international common sense, but has been proved wrong in both theory and in practice. Financial markets need governments to provide adult supervision. Good capitalism needs to be fashioned and designed. Financial orthodoxy can sometimes, especially after credit crunches, be entirely wrong. Once that Rubicon has been crossed, a new policy agenda opens up. The markets need the prospect of sustainable growth, along with sustainable private and public debt.
As the IMF's chief economist, Olivier Blanchard, has suggested, if the options are public and private default, continuing bank weakness, economic stagnation (perhaps depression), or inflation, then the least bad option is to accept inflation, but to manage it within bounds.
Since inflation will happen anyway as governments seek the least bad way out, the choice in reality is whether to accept and manage it or not. Once debt is at a sustainable level and growth has resumed, then the world's financial system can be redesigned to avoid a repeat, and price stability restored.
This is the truth that cannot speak its name: as a senior financial policy official told me, even to raise it at home or abroad merely as an issue for debate is to invite universal disapproval. But truth must be faced. Britain should provide a lead – both for its own economic fortunes and to set the new international standard. As a minimum it should announce a new programme of quantitative easing, in effect printing money; insist the Bank of England uses the money it prints to buy the broadest range of private debt; and immediately replace the 2% inflation target with a target for the growth of money GDP – so getting Britain off the hook of its unpayable private debts.
The markets have issued a stark warning. The old common sense is killing the western economy and Britain's with it. We must now act to save ourselves.
What Downgrade? Treasurys Rally as Safe Haven
by Min Zeng - Wall Street Journal
The U.S. rating downgrade barely put a dent on the allure of Treasurys as a safe haven. Bond prices rallied as the news added to worries about the global economic outlook, pushing investors out of risky assets and seeking safety in U.S. government debt.
The price move underlines the dilemma confronting global investors from the Chinese central bank to pension funds and Japanese housewives: There are few alternative safe-haven assets out there that can match the depth and liquidity of the Treasury market, which has more than $9.3 trillion debt outstanding.
The downgrade from triple-A to double-A-plus by Standard and Poor's isn't a big surprise to investors, as the ratings firm had signaled such a move in recent weeks. Fears about the U.S. economy faltering and euro-zone's debt crisis spinning out of control already had spooked investors, and many are now worried that the downgrade could further undermine confidence by U.S. consumers to spend and businesses to expand.
"Treasurys are up because they are still the flight-to-quality instrument despite what S&P says," said Thomas Roth, executive director in the U.S. government bond trading group at Mitsubishi UFJ Securities (USA) in New York. "All that has occurred is more uncertainty which drives money out of risk assets."
As a reflection of economic worries, the five-year Treasury note led the rally. Its yield posted the biggest drop—about 0.10 percentage point—in the bond market. In contrast, the 30-year bond, which typically has been the whipping boy when investors fret about U.S. deficits and credit rating outlook, was a laggard. Its small price yield decline resulted from some investors selling long-dated Treasurys and moving to shorter-dated notes.
In recent trade, the benchmark 10-year note rose 20/32 in price, pushing the yield down to 2.485%, from 2.554%. The 30-year bond was 10/32 higher to yield 3.805%. The two-year note was 2/32 higher to yield 0.260%. "Stocks are getting hit because of the slowing economy and the rating cut hurts every U.S.-based triple-A corporation and [municipal bond]. So you put your money in gold, but that has made its downgrade move, so treasuries get the flows," said Michael Franzese, head of Treasury trading at Wunderlich Securities in New York.
Germany says eurozone can't save Italy
Economic advisors told the news magazine Der Spiegel on Sunday that the European Financial Stability Facility (EFSF) is only capable of helping smaller countries, not economies the size of Italy's. Government experts say Italy's eurozone partners cannot cover the guarantee for Italy's state debt of over €1.8 trillion. The report says Berlin is now insisting that Italy find its own way out of its crisis through budget cuts and reforms.
Economists already believe that the EFSF needs to be increased anyway. At the moment, the eurozone has agreed to put €440 billion into the fund, but once Greece's bailout has been withdrawn, there won't be enough money to support other ailing economies like Portugal. A new system, the European Stability Mechanism, will replace the EFSF in 2013.
Italian Prime Minister Silvio Berlusconi said Friday that Italy would speed up its reform programme. He said the new aim is to balance the state budget by 2013, one year earlier than previously planned. The Italian government presented a savings package in July.
The Curse of the Triple-A Rating Is Still Haunting the U.S.
by David Reilly - Wall Street Journal
Standard & Poor's has fired a warning shot across Uncle Sam's bow.
That could be a blessing if it helps the U.S. start to escape the curse of its former triple-A rating. The danger is, if the country fails to alter course, markets will eventually have to administer their own cure, which could hurt a lot more than a downgrade.
Just as a triple-A rating cursed the likes of American International Group and Fannie Mae by allowing them to build up crazy financial positions without any short-term effects, the U.S. had a similar problem. It has been able to run up huge deficits, large off-balance-sheet positions in the mortgage market, and huge future liabilities while still borrowing extremely cheaply. With the dollar also enjoying reserve currency status, the U.S. has simply put off tough decisions on curbing entitlements or overhauling the tax system.
One hope is that S&P's downgrade will start to change that, in Washington at least, by spurring new urgency to tackle deficits and thorny economic issues. The recent debt-ceiling debacle was one reason S&P concluded the U.S. wasn't likely in coming years to get debt under control. The trouble is, the downgrade could even fuel political dysfunction and finger pointing between entrenched Republicans and Democrats.
Politicians have shown little willingness, or ability, to tackle the thorny issues vital to restoring long-term economic growth. Consider that more than four years after the bursting of the housing bubble, the U.S. has yet to come up with a plan to revamp the vital housing-finance market; Washington has essentially decided nothing will happen until after the 2012 elections.
More immediately, the downgrade itself should, theoretically at least, not have a huge impact. Investors already knew there was a good chance S&P would act following the debt-ceiling deal. Moody's and Fitch haven't so far followed suit. U.S. bank regulators were quick Friday night to say the downgrade wouldn't affect banks' capital ratios. At the same time, S&P left short-term U.S. ratings unchanged, implying "no effect on money market funds," Goldman Sachs economists wrote in a note late Friday.
The bigger risk is confidence. Stripping the ultimate risk-free asset of the triple-A label is a potent reminder of how profoundly the world has changed since the financial crisis. Markets are already unsettled. And there are even bigger problems hanging over global markets, in the form of slowing global economic growth and Europe's still-unfolding debt crisis.
Policy makers rode to the rescue of markets during the 2008 financial crisis. They are again doing so, as the European Central Bank moves to purchase Italian and Spanish bonds. But the events of recent days are a troubling reminder for investors that, on both sides of the Atlantic, overindebted governments are themselves becoming the biggest threat to markets.
Fannie Mae to ask US Treasury for $5 billion
Fannie Mae, the mortgage company controlled by the US government, is to ask the Treasury for $5.1bn after reporting that its second-quarter loss had widened.
The news is likely to add to concerns that the US recovery is failing to gain traction after the country narrowly avoided a default on its debt earlier this week week. It also comes after the Dow Jones Industrial Average of leading US stocks fell 500 points on Thursday.
Along with Freddie Mac, Fannie, which received nearly $100bn from the Treasury to stay afloat during the financial crisis, owns or guarantees about half of all mortgages in the US - nearly 31m home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90pc of new mortgages over the past year. In the second quarter ended June 30, Fannie Mae lost $5.18bn, or 90 cents per share. That compares with a loss of $3.13bn, or 55 cents per share, a year earlier.
The quarter included $6.1b in credit-related expenses tied to its pre-2009 book of loans. Fannie anticipates that future loan defaults and related charge-offs tied to this book of business will occur over several years. But there is a bright spot, as these loans are becoming a smaller percentage of its guaranty book of business, declining to 34pc at quarter's end compared with 39pc of its guaranty book of business as of December 31, 2010.
"We remain the largest source of liquidity for the US mortgage market, and we are committed to creating long-term value by helping to build a stable, sustainable housing market for the future," president and chief executive Michael J. Williams said in a statement.
S&P Lowers Fannie, Freddie Citing Reliance on Government
by Lorraine Woellert - Bloomberg
Standard & Poor’s lowered credit ratings on debt issued by Fannie Mae, Freddie Mac, and other lenders backed by the federal government, citing the U.S. loss of its AAA status. The mortgage finance companies were lowered one step from AAA to AA+, S&P said in a statement today. The downgrade reflects their “direct reliance on the U.S. government,” S&P said.
Fannie Mae and Freddie Mac were placed into government conservatorship in September 2008 as losses tied to subprime mortgage lending pushed them toward insolvency. Since then, the two government-sponsored enterprises, or GSEs, have drawn almost $170 billion in federal aid. The GSEs own or guarantee more than half of U.S. mortgage debt.
The downgrades of Washington-based Fannie Mae, Freddie Mac of McLean, Virginia, and other government-backed debt was predicted by some analysts after S&P lowered the U.S. sovereign credit rating by one level on Aug. 5. On Friday, banking regulators including the Federal Deposit Insurace Corp. said that government-issued securities would be “unaffected” by the sovereign downgrade.
Yields on GSE bonds jumped to their highest relative to U.S. Treasuries in more than two years. The downgrade was only part of the reason for the wider spreads, said Walt Schmidt, a mortgage strategist in Chicago at FTN Financial, in a note to clients. He said the spreads are “based on uncertainties regarding prepayments and supply, not credit-based downgrade fears.”
The credit rating company today also downgraded the senior debt of 10 of the nation’s 12 Federal Home Loan Banks, from AAA to AA+. The home loan banks sell bonds and provide liquidity to banks and mortgage investors. The banks’ debt has an implied government guarantee. “The FHLB system is classified as being almost certain to receive government support if necessary” S&P said.
The home-loan banks of Chicago and Seattle are already rated AA+ and did not receive a further downgrade from the rating company. S&P also lowered, by a notch, debt issued by the Farm Credit System, which guarantees agriculture-related loans, the FDIC, which guarantees bank deposits, and the National Credit Union Association, which guarantees credit union deposits.
French CDS hit record high after U.S. downgrade
by Marius Zaharia and Emelia Sithole-Matarise - Reuters
The cost of insuring French debt against default rose on Monday after a Standard & Poor's downgrade of the United State's triple-A ratings raised questions over how long other countries could hold onto their top-notch ratings.
"After the U.S. downgrade, others stand out as likely candidates too," BBH analysts said in a note. "We have long advocated downgrades for much of the periphery, but the U.S. move takes us outside of that and into 'core' countries." "France has slipped into borderline AA+/Aa1/AA+ territory, so risks to its AAA are rising as stresses spread. "
Five-year credit default swaps (CDS) on French government debt rose 15.5 basis points on the day to 160 bps -- a record high -- according to data monitor Markit. This means it costs 160,000 euros to protect 10 million euros of exposure to French bonds.
If the market settles at those levels on Monday, France will see its largest daily jump since July 11, when CDS rose 14.7 bps. An S&P official said France's rating was AAA and the outlook was stable, according to an interview published on Monday by French daily newspaper Liberation.
France will feel the impact of US AA+
by Neil Hume - FT
Where will the impact of the of the US AA+ downgrade be felt most? The US or Europe?
Europe, of course, reckons Gary Jenkins of Evolution Securities.So why might the impact be felt more strongly in Europe? Well, now that S&P no longer rates the US at the highest level they may start to look more carefully at other AAA rated sovereigns. With the turmoil in Europe there have been many politicians suggesting that the size of the EFSF has to be increased. But any suggestion that the EU is turning into a Fiscal Union (even if by default) could well have an impact on individual sovereigns’ ratings as well as the EFSF /ESM structure.
And nowhere more so than France, where debt to GDP (let us not forget) is estimated to reach 85-95 per cent by 2013, depending on fiscal reforms, interest rates and growth, but not counting contingent liabilities from the EFSF.
Indeed, that point has not been lost on other commentators. Pimco’s Mohamed El-Erian:It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.
Of course, it’s worth pointing out here that S&P affirmed France’s rating over the weekend and there was a very specific reason for the USAA+ downgrade — the dysfunctional political system. However, the figures on French GDP/debt speak for themselves, particularly in light of an extra eurozone bailout contributions.
Anyway, the task facing the ECB is difficult enough as it is. They are going to have to buy enough Italian and Spanish bonds at a yield level that encourages others to buy in alongside.
Gary Jenkins again:That’s a tough trick to pull off because if the market is not confident of ultimate full repayment then it will eventually just allow the authorities to fund and bail out as in the cases of Greece etc. and as above, the more that the likes of France and Germany are committed then eventually the more pressure on their own ratings and bond yields. Still, it might alleviate the pressure in the short term and that has been the approach from the EU all along in this crises and the reality of the situation is that they have to stop the ever rising Italian and Spanish bond yields or its game over.
RBS reckons the ECB will have to buy on average around €2.5bn of bonds a day — equivalent to an annualised rate of €600bn — consistently.Any signal that the ECB is only intervening on an interim period – that is until the EFSF is up and running – will give the market a sentiment that there is a finite limit on purchases (that of the EFSF buying power). In this context, uncertainties about the ECB’s ability to defend spread levels at any cost will be challenged. The discussion around the upscaling of the EFSF around the end of the year could be the time when spreads reach new wides.
And that’s the real problem.
ECB bond buying is temporary solution. A more permanent solution lies with up-scaling the EFSF so it has the fire-power to deal with Spain and Italy. However, that will threaten the rating of the guarantors – France and Germany – and could be unacceptable to their electorates.
This crisis ain’t over. Not by a long shot.
At pixel time, the 10-year spread on France/Germany was 74bps.
And here, via The Baseline Scenario, is a handy list of AAA sovereigns and their 10-year yields.• Switzerland: 1.17
• Singapore: 1.79
• Germany: 2.34
• Sweden: 2.34
United States: 2.56
• Denmark: 2.58
• Canada: 2.63
• Norway: 2.63
• United Kingdom: 2.68
• Netherlands: 2.77
• Finland: 2.90
• Austria: 2.97
• France: 3.14
• New Zealand: 4.50
• Australia: 4.64
We face recession without shock absorbers as Berlin loses patience with the eurozone
by Ambrose Evans-Pritchard - Telegraph
The Great Reprieve is exhausted. The world has used up the three years' grace gained by extreme stimulus after the debt bubble burst in 2008. This time we face the risk of double-dip recession without shock absorbers. Interest rates are already at or near zero in much of the OECD club. Fiscal deficits are stretched to the limits of safety.
Far from loosening, the US is on track to tighten by 2pc of GDP next year, and Europe by 1pc to 2pc, into the slowdown. China has already pushed credit to 200pc of GDP. It cannot repeat the trick.
The Anglo-Saxons can print more money, but the gains in asset prices for the rich are offset by losses from fuel and food inflation for the poor. This is a destructive trade-off. The decision to throw everything we had at the crisis after Lehman-AIG was a legitimate gamble at the time, given the near certainty of depression if shock therapy had been tried – as in 1931.
It is too early to say the policy has failed, and failure is a false term when leaders confront cruel choices. Yet last week's drama has brought home the truth that suffocating debt has not gone away; it has merely hopped on to the shoulders of sovereign states, threatening just as much damage.
Standard & Poor's downgrade of the United States to AA+ is a detail in this greater drama, albeit of poignant symbolism. S&P should have acted six years ago when the rot was setting in. To do so now is fatuous. The US Treasury is right to disregard the verdict and keep risk weightings unchanged to avoid a cascade of forced debt sales. Note how quickly Japan, Korea, France, and even Russia, have closed ranks behind Washington.
As for China's bluster, it is chutzpah and self-delusion. We all agree that the US needs to "cure its addiction to debts", but so will China soon. China buys US debt in order to recycle $200bn a quarter in foreign reserves, hold down the yuan, and continue its mercantilist export strategy. If China had not distorted world trade in this fashion, the US would not be in such a mess.
Unlike America, Europe still has stimulus cards it could play. Yet EMU politics prevents the use of these cards. Germany still fails to understand the logic of monetary union: that (Teutonic) surplus states have a duty to boost demand in order to offset austerity in (Latin) deficit states until equilibrium is restored. Instead, Berlin is imposing a 1930s Gold Standard formula of deflation decrees through the EU machinery, with the burden of adjustment falling on debtor states.
We may learn over coming days whether the European Central Bank is at least willing to stop the bond crisis in Italy and Spain from spiralling out of control. "The ECB should stop hiding behind its monetary orthodoxy and remember that if there is no more Union, there will no longer be an ECB either," said ING's Peter Vanden Houte.
Umberto Bossi, the leader of Italy's Northern League, claims that a grand bargain has been agreed. The ECB will buy bonds in exchange for Italy's pledge to pull forward austerity cuts. He added that it had been a "historic mistake" to join the euro.
Investors know that the ECB did not succeed in stemming the crises in Greece, Ireland, and Portugal, despite buying almost a fifth of their debt. So any intervention would have to be massive to convince the markets, pushing the bank ever further beyond its legal mandate and treaty authority.
Yet we know that the ECB's two German members and the Dutch governor have refused to endorse such a quantum leap. It would be impossible to "sterilise" large bond purchases. The action would amount to Fed-style QE, anathema to Berlin. Can the ECB ram through such a high-stakes policy in defiance of Europe's chief power, in breach of Maastricht's sacred contract, and still hope to preserve German acquiescence in EMU?
Berlin is losing patience. Der Spiegel cites unnamed officials warning that Italy is too big to save, and that escalating demands may "overwhelm" Germany itself. The search for a scapegoat has begun. German MEPs and officials have begun to blame Brussels for triggering this crisis, though all it did was admit that the €440bn bail-out fund is too small to restore confidence, and that EMU is in systemic danger as contagion spreads to the core.
Even Germany's most ardent pro-Europeans seem to have given up trying to find a solution. They are building an alibi for EMU break-up instead. This is a dangerous moment for the world. It is still possible that the growth scare of recent months will prove a false alarm.
Yet the Bank for International Settlements is surely right that we are pushing ever closer to the limits of a model that relies on artificial stimulus to keep stealing extra prosperity from the future. There is ever less to steal.
Trichet Draws ECB ‘Bazooka’ to Stem Contagion
by Matthew Brockett and Jeff Black - Bloomberg
European Central Bank President Jean- Claude Trichet signaled he’s ready to start buying Italian and Spanish bonds in his riskiest attempt yet to tame the sovereign debt crisis. In a statement issued in the name of the ECB president after an emergency Governing Council conference call last night, the Frankfurt-based central bank welcomed the two nations’ efforts to reduce their budget deficits and said it will "actively implement" its bond-purchase program.
Italian and Spanish bonds surged this morning, sending 10- year yields down more than 70 basis points. The euro rose to $1.4385 at 9:25 a.m. in Frankfurt from $1.4277 at the close of European trading on Friday. With governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro.
Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty. Germany’s Bundesbank opposes the move.
"The ECB is once again intervening as the last line of defense," said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. "The intervention will put a halt to the bond-market crash that some member states faced. It will in our view bring an immediate tightening in Spanish and Italian bond spreads of the order of 100 to 150 basis points."
G-7 Conference Call
The ECB bought Italian and Spanish bonds this morning, according to five people with knowledge of the transactions, driving their 10-year yields down to 5.39 percent and 5.3 percent respectively from above 6 percent on Friday. Both reached euro-era records last week. Italy has 1.8 trillion euros ($2.6 trillion) in outstanding debt.
European stocks erased losses, led by a rebound in banks, with the benchmark Stoxx Europe 600 Index up 0.5 percent to 240.04 at 8:25 a.m. in London. U.S. futures on the Standard & Poor’s 500 Index slid 0.8 percent after earlier being down as much as 3.1 percent. The Group of Seven nations welcomes efforts by Spain and Italy to strengthen fiscal discipline, finance ministers and central bank governors of the group said in a statement early today after a conference call.
'All Necessary Measures’
"No change in fundamentals warrants the recent financial tensions faced by Spain and Italy," the G-7 statement said. The G-7 also said it will take "all necessary measures to support financial stability and growth." ECB policy makers were forced to step up their response to the debt crisis after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout.
"It looks like the ECB has decided to bring out the bazooka," said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading. Fears of a further slump when markets opened this week were compounded by Standard & Poor’s decision on Friday to strip the U.S. of its AAA credit rating for the first time. Asian stocks dropped today, extending the worst global slump since the bull market began in 2009.
Since starting its bond purchases in May last year, the ECB has bought about 74 billion euros of assets to help stabilize Greek, Irish and Portuguese markets -- the three countries of the euro area to have received bailouts from the European Union and International Monetary Fund.
Four months ago, the ECB ceased bond purchases and put the onus on governments to find a solution to their debt woes as it turned its attention to raising interest rates to curb inflation. Now it finds itself once again in the vanguard of efforts to overcome the crisis.
Because the ECB will have to spend considerably more to have an impact on the bond markets of the euro area’s third- and fourth-largest economies, it may not be able to continue to sterilize its purchases by absorbing the equivalent amount from banks via term deposits, said Carsten Brzeski, senior economist at ING Belgium in Brussels.
That would amount to swelling the money supply, or quantitative easing, which may in turn fuel inflation. "I don’t think that very large volumes -- like 50 billion a week -- can be sterilized," Brzeski said. "Then they risk throwing their very last principle overboard."
The ECB, which is also lending banks unlimited amounts of cash at its benchmark rate of 1.5 percent, has always said its so-called non-standard measures are "temporary."
Last night it reiterated that the bond program aims to help restore "a better transmission of our monetary policy" and "therefore to ensure price stability in the euro area." It also called on all euro-area governments to follow through on the steps they agreed to July 21, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.
Cailloux said he expects the ECB to buy on average around 2.5 billion euros of bonds a day, which would amount to about 600 billion euros if maintained over a year. While the ECB may be playing for time until the EFSF is ready to take over bond purchases, between them they may be forced to hold "close to half of the traded Italian and Spanish debt, or around 850 billion euros," Cailloux said.
While ECB bond purchases have the potential to act as a "circuit breaker," they are not a solution, said Michala Marcussen, head of global economics at Societe Generale SA in Paris. "The real solution is for the euro area to move to some form of fiscal union," Marcussen wrote in a note to clients today. "We see the next step in this process to increase the size of the EFSF to at least 1.5 trillion euros. This will be politically difficult, and all the more so at a time when the most recent adjustments to the EFSF are still pending ratification by national parliaments."
The 440 billion-euro rescue fund currently has about 323 billion euros left at its disposal. In a joint statement yesterday, French President Nicolas Sarkozy and German Chancellor Angela Merkel called Italy’s decision to balance its budget in 2013, a year ahead of schedule, of "fundamental importance." They also called for their parliaments to approve the strengthening of the EFSF by the end of September.
France May Face Downgrade After U.S. Cut
by Gregory Viscusi - Bloomberg
The decision by Standard & Poor’s to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say.
France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the state of Texas and the U.S. "France is not, in my view, a AAA country," said Paul Donovan, London-based deputy head of global economics at UBS AG. "France can’t print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets."
While all three major credit-rating companies have confirmed France’s top level in recent months, market measures indicate increasing investor skittishness over the country’s vulnerability to the European debt crisis. Euro-region central bank governors signalled after emergency talks yesterday that they would buy bonds from Spain and Italy to counter investor concerns and limit fallout from the U.S. cut.
"If Italy and Spain have difficulties, are we sure that, for instance, France can still be considered a ‘core’ country?" said Marco Valli, chief euro-area economist at UniCredit Global. ``‘Core’ is becoming a narrower group of countries."
While France’s debt of 84.7 percent of gross domestic product is less than Italy’s 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy’s since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy’s was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France.
France’s rating at Standard & Poor’s is in a "stable perspective," Jean-Michel Six, the firm’s chief economist for Europe, said in an interview with France Info radio yesterday.
AAA in Euro
In the euro area, Germany, Austria, Finland, Luxembourg, and the Netherlands also have the top rating. Neil Mackinnon, a strategist at VTB Capital in London and a former U.K. Treasury official, said that France is among the European nations whose credit quality now faces more scrutiny. "Countries like France, Italy and Belgium, and even the U.K., are vulnerable to downgrade," he said.
France is the most costly AAA country to protect against default. Credit default swaps on France trade at 143.8 basis points, almost triple the U.S. Spain is at 407.6 basis points and Italy at 386.8 basis points. Swaps on Switzerland, the safest country, are at 35.3 basis points. A basis point equals $1,000 annually on a swap protecting $10 million of debt.
French Finance Minister Francois Baroin has said that the government has taken action, such as raising the retirement age and not replacing one of every two retiring civil servants since 2007, to improve its public finances.
French 10-year bonds yield 3.14 percent, down from 3.48 percent since the start of June. Still, the difference between the yield of French and German 10-year bonds has risen in that same period to 81 basis points from 36 basis points.
Before going on holiday, President Nicolas Sarkozy on July 26 wrote a letter to every member of Parliament, making his case for adding a balanced-budget requirement to the constitution. He hasn’t yet called a joint session to approve such a measure because a three-fifths majority is required, and the Socialist Party is opposed to amending the constitution.
S&P confirmed France’s rating on Dec. 23, Moody’s Investors Service on May 4, and Fitch on May 31. They all cited a diversified economy and solid political institutions. They all warned that efforts to cut its debt must be maintained.
Sarkozy has committed to cutting the budget shortfall to 5.7 percent of output this year, 4.6 percent next year and 3 percent in 2013. The Socialist Party’s two leading candidates for next year’s presidential election have also pledged to reach the 3 percent deficit target in 2013.
"If French authorities do not follow through with their reform of the pension system, make additional changes to the social-security system and consolidate the current budgetary position in the face of rising spending pressure on health care and pensions, Standard & Poor’s will unlikely maintain its AAA rating," S&P said in a June 10 report.
Pub skittles, the Italian version
by Schumpeter - Economist
The metaphor of choice during the euro-area crisis has been that of dominoes falling. First came Greece, then Ireland, and then Portugal; next in line would be Spain. The fear now, with Italian government bonds suffering another day of widening spreads, is that contagion will strike less predictably. Less like dominoes, in other words, and more like pub skittles.
The latest jitters about Italy, whose debt ratio is second only to Greece’s in the euro zone, seem to have been sparked by speculation about the future of Giulio Tremonti, the Italian finance minister. But the inability of euro-area policymakers to resolve Greece’s debt crisis, and this week’s Moody’s downgrade of Portugal, have not helped. Spreads between Italian ten-year bonds and German Bunds have today hit another euro-era record. Domestic financial institutions have been hit, too: shares in Unicredit, a big bank, were suspended today after a sharp fall, and credit-default-swap spreads on Generali, an insurer, have surged as well.
If Spain has long been considered too big to fail, then a full-blown Italian debt crisis would be cataclysmic. The country’s bond market is the third-largest in the world, after America’s and Japan’s. That has been seen as a source of a comfort: bond investors find it hard to avoid a market that big and liquid. But it is also a source of widespread financial infection.
Take a look at the table alongside, drawn from the first-quarter results of Dexia, a Franco-Belgian bank with a very spotty record during the crisis. There are all sorts of reasons to be bearish about Dexia (as markets are): it is too dependent on short-term financing, it has lots of toxic legacy assets, its old business model of financing public entities looks shot to pieces, and so on. But investors have also been spooked by its exposure to peripheral sovereign debt, notably Greece's.
So long as countries like Greece, Portugal, Ireland and even Spain are the ones in the frame, banks like Dexia can try to argue that the size of their exposures is small enough to withstand disaster. Its exposure to Greece of €3.7 billion ($5.3 billion), for example, is the highest among European banks after that of France’s BNP Paribas, but at 19% of Tier-1 capital, you can just about make the case that it is manageable.
Italy is an entirely different story, for two reasons. First and most obviously, there is the scale of Dexia’s exposures. At close to €16 billion, Italian sovereign debt is the biggest of Dexia’s sovereign investments, amounting to 85% of the bank’s Tier-1 capital. No one is yet seriously talking about a Greek-style crisis in Italy, of course. These numbers are large and scary, but the danger of a meltdown still feels reasonably remote.
Horrors in the trading book
The second reason to worry, however, is more immediate. As with other European banks, most of Dexia’s sovereign exposures are held in the banking book, so fluctuations in the value of bonds do not have an effect on their carrying value in the accounts. That means, in effect, that things only get really hairy if there is a debt default or restructuring.
But banks also hold bonds in the trading book, where they are marked to market. Dexia holds €725m of Italian bonds in its trading book, compared with virtually no other peripheral-country debt. It is a similar story with other banks: the 2010 stress tests showed that Italian debt accounted for more than a third of European banks’ trading-book exposures to euro-area debt.
So if spreads on Italian debt keep widening, that will have a greater impact on banks’ results than moves in the value of other peripheral debt. It may also affect banks’ access to repurchase markets if Italian collateral is seen as less safe. And it also means that an obvious question for this year’s round of stress-test results on European banks, due out on July 15th, will be what assumptions regulators have applied on Italian debt.
The stress tests are widely seen as too soft because they impose haircuts only on banks’ trading-book holdings of sovereign debt. If Italy continues to judder, even that bit of generosity will have an edge to it.
Merkel faces a Hobson’s choice on eurozone
by Philip Aldrick - Telegraph
Muggings have been on the rise on the streets of east London, Scotland Yard said this week. And blood-stained necklaces have been turning up in pawnbrokers with alarming frequency.
It's no coincidence, police claimed. The surge in snatch-and-grab is all to do with the soaring price of gold. Gold has been hitting record high after record high because the precious metal is considered the ultimate safe-haven by nervous investors. And there are a lot of nervous investors in the markets. This week gold struck another record, at $1,681.67 an ounce. Nick Bullman, managing director of ratings agency CheckRisk, reckons it will not stop until breaking its inflation-adjusted peak of $2,300.
It's not just the shoppers of Canning Town who are getting a mugging. Fear is stalking the markets. Fear of a US downturn, fear of a sovereign debt crisis in Italy or Spain – countries considered "too big to bail", fear of another global recession. As those fears gathered into panic this week, the world witnessed an extraordinary series of events.
Stock markets did not just crash, they crumpled. Some £149bn was wiped off the value of Britain's blue-chip stocks as the FTSE 100 suffered the fifth largest fall in its history. Trading in the shares of the country's biggest banks were suspended after dropping more than 10pc. In just seven trading days from July 26, $4.5 trillion was wiped off the value of equities worldwide.
As investors fled to traditional safe-havens of the Swiss franc and the Japanese yen authorities were forced to act. So strong had panic buying made their currencies that it threatened growth. Both nations intervened. Japan sold about ¥4 trillion (£30bn) of its yen reserves and did ¥10 trillion of quantitative easing (QE). Switzerland cut rates to zero and launched Sfr50bn (£40bn) of QE. The moves bought temporary relief.
The hunt for safety created other bizarre distortions. Yields on US treasury bills – short-term government debt – turned negative. Similarly, Bank of New York Mellon, America's biggest custodial bank, started levying a fee on deposits of over $50m as it was flooded with cash. Market norms were turned on their head. Investors were paying to lend money. "When you do that, you are saying everything else is just too scary," said Mr Bullman.
What had the markets spooked was the dawning realisation that Spain and, in particular, Italy may not repay their debts. If that happened, the world would suffer another seizure. "It would be Lehman Brothers on steroids," as some traders have put it.
Italy has been worrying markets since mid-June, a month after Standard & Poor's put its credit rating on watch. Its benchmark 10-year bonds have been creeping higher ever since – the clearest sign of a looming crisis.
This week's panic, though, was the culmination of weeks of frayed nerves and political paralysis. "Politicians keep scaring the hell out of people as they seem to be burying their heads in the sand," Mr Bullman said. Which is why, if there was an original tipping point, it can be traced to July 21. That was the day the second Greek rescue was agreed and further measures unveiled to prevent another eurozone country being sucked into the crisis – following Ireland and Portugal as well as Greece. The backstop was dangerously weak, though.
The size of the eurozone bail-out fund, the European Financial Stability Facility (EFSF), was increased from €250bn to €440bn and the terms of its operations broadened to make it more nimble. But the agreement needed a vote, due in September, and seemingly ignored the risk of a Spanish or Italian crisis.
To provide a real firebreak, the EFSF needs about €2 trillion, analysts reckon. Italy's national debts are €1.8bn, the third largest debt market in the world behind the US and Japan. Spain's are €640bn. An EFSF with €440bn was woefully inadequate. Europe's leaders, though, simply closed their ears to the siren voices and turned to planning their summer holidays.
Alarm bells should have already been ringing. At 4.8pc on June 21, Italian bonds had surged to 5.68pc shortly before the Greek bail-out. The lesson from Greece, Ireland and Portugal was that once bonds top 5pc, they soar to 7pc within 30 to 60 days without intervention. At 7pc, the debt problem becomes a full-blown crisis – as markets decide the country can no longer pay its bills. With no credible backstop, market fears were allowed to burn out of control.
Already wearied by the drawn-out deal to raise the US debt ceiling, which only entrenched political cynicism, and unnerved by evidence that the global recovery is stalling, the second tipping point came this week.
First the President of the European Commission, José Manuel Barroso admitted in a letter to European heads of state that the size of the EFSF needed to be increased. Hours later, the European Central Bank intervened in the markets – but instead of buying distressed Spanish and Italian debt it targeted Portuguese and Irish bonds. Seemingly, political divisions within the ECB were neutering its powers.
Holger Schmieding, economist at Berenberg Bank, said the ECB's move "may go down in history as its worst blunder yet". "What would we make of a fire brigade that responds to a major emergency but then drives to the wrong place and refuses to turn around and douse the real fire?" Traders scented weak political will and rounded in fear on Italy. Its bonds rocketed to 6.189pc – a fresh euro record.
If it can't raise funds, Italy has until the end of September before it runs out of cash or Europe comes to its aid. Spain has until February. The problem is now purely political. Italy needs more austerity to reduce its debt burden, and to push through structural reforms to make its labour market more competitive. Spain must recapitalise its banks, and accelerate its own austerity plans. In return, Europe has to make the EFSF a viable safety net.
As usual in Europe, it all comes back to truculent Germany. Only Berlin can provide the guarantees needed to restore confidence. But it is too late to buy confidence cheaply. Angela Merkel, the German Chancellor, faces a classic Hobson's choice. Put taxpayer money on the line and lose her job, or risk a catastrophe. That's a mugging in all but name. Unsettling parallels are being drawn between the current panic and the market meltdown in 2008. Then, as now, oil had blown sky high. It hit $145 a barrel in July 2008 before coming back down. This time it struck $125.
Inflation, too, was out of control - at around 5pc – in line with most economists' forecasts for the next few months. Stock markets had moved sharply lower and growth had started to slow.
More pertinently, the country had been wrestling with a looming crisis for months - that time with the banks.
Seized by similar indecision, policymakers took five months to nationalise Northern Rock and failed to recapitalise other lenders until too late. Then, a political decision not to bail out Lehman Brothers triggered panic that paralysed markets. This time, it is again in politicians hands. The parallels are not surprising. Ultimately, the current crisis is the latest manifestation of the last one.
ECB fumbles between fire hose and sprinkler
by Paul Taylor - Reuters
The European Central Bank waved its big fire hose at blazing bond markets, then turned on a puny sprinkler.
Unsurprisingly, the fire refused to go out. Indeed, the flames grew higher, licking the feet of Italy and Spain, the currency area's third and fourth largest economies. Three days later, the bank's governing council decided in an emergency Sunday night conference call to change course abruptly and resort to the big fire hose after all. The ECB may now become the reluctant owner of tens of billions of euros in Italian and Spanish debt in a high-risk strategy to avert a European financial meltdown.
It wasn't the first time since the euro zone's sovereign debt woes began in late 2009 that the guardians of Europe's single currency had been forced by events into a U-turn. The hesitant response to the latest and most dangerous turn in the crisis illustrates how political constraints are making it ever harder for Europe to find effective solutions. The 17-nation euro area lacks a lender of last resort, and its politicians and central bankers continue to argue over who, if anyone, should play that role.
European leaders thought they had erected a firewall at a July 21 emergency summit by agreeing on a second bailout for Greece, the weakest link in the euro chain, and approving new steps to prevent contagion to other countries. Yet after a 24-hour relief rally, investors gave the complex deal the thumbs-down, judging it insufficient to stop the rot, and spying a window of vulnerability before the measures took effect.
Faced with a massive selloff of Italian and Spanish debt that was forcing those countries' borrowing costs up toward unsustainable levels, the ECB decided last Thursday to buy small amounts of Irish and Portuguese bonds only. "What would we make of a fire brigade that responds to a major emergency but then drives to the wrong place and refuses to turn around and douse the real fire?" asked economist Holger Schmieding of Germany's Berenberg Bank.
There were three possible reasons for the strange decision, which ECB president Jean-Claude Trichet communicated without his usual assurance:
- a dissenting minority on the bank's governing council opposed to any bond-buying has grown from one last year to four of the 23 members last week, ECB sources say;
- most ECB policymakers thought Italy needed to do much more to put its public finances in order and liberalize its sclerotic economy before it deserved any support;
- and anyway, the ECB wanted euro zone governments to take over the burden of buying risky bonds with their own rescue fund, which ECB sources say central bankers believe should be at least doubled in size to fit the purpose.
By deciding on a half-measure, the ECB deliberately or accidentally heightened bond market pressure on Rome and Madrid. The downgrading the United States' credit rating last Friday did the rest.
Without decisive action by the central bank, the euro zone crisis was set to spiral out of control on Monday morning, EU officials agreed in frantic weekend telephone consultations. Under fierce pressure from his European peers, Italian Prime Minister Silvio Berlusconi agreed hastily on Friday to bring forward budget balancing measures by a year to 2013. He also pledged to anchor a balanced budget rule in the constitution and to push through long-deferred reforms of the welfare system and labor markets after talks with trade unions and employers.
Seasoned Italy-watchers are skeptical of such vague promises by a shaky government to "fast-track" reforms through a fractious parliament, where Berlusconi's authority is waning as he stands trial for alleged fraud and sex with a minor. Some central bankers hoped that leaving Italy to twist in the wind a bit longer at the mercy of bond market vigilantes would concentrate minds in Rome on finally breaking the habits of a lifetime.
That was before Standard & Poor's lobbed a hand grenade into the markets by downgrading the United States' AAA credit rating to AA+ with a negative outlook on Friday, sending perhaps the strongest tremors around the global financial system since the 2008 collapse of Lehman Brothers.
The ECB has now been forced into a major commitment, which it insists is temporary, to buy Italian and Spanish bonds to try to stabilize markets. Euro zone leaders agreed last month to allow their 440-billion-euro European Financial Stability Facility to buy bonds on the secondary market under strict conditions and to give precautionary loans to countries in difficulty.
But those new powers won't apply until national parliaments approve the changes, probably in late September. Moreover, the two leading euro zone nations, Germany and France, don't want to increase the EFSF's size out of concern for their own finances. To ease the ECB's policy shift, German Chancellor Angela Merkel and French President Nicolas Sarkozy promised that the EFSF would take on responsibility for bond-buying in the secondary market as soon as its new powers were in force.
But markets may not be convinced that either institution has the political stamina and the financial fire-power to shield Italy durably from danger unless it achieves an improbable twin conversion to fiscal discipline and economic growth. Critics say past ECB bond-buying has had only temporary calming effects and did not prevent Greece, Ireland or Portugal from requiring bailouts.
"Over time, we believe that ongoing selling pressure will force the ECB/EFSF to eventually hold close to half of the traded Italian and Spanish debt or around 850 billion euros," economists at RBS bank said in a research note. Such a huge holding of southern countries' debt could amount to a de facto mutualization of euro zone debt risk, potentially heightening a political backlash in northern Europe. Even if the fire subsides for now, prepare for more blazes.
U.S. Loses AAA Credit Rating as S&P Slams Debt, Politics
by John Detrixhe - Bloomberg
Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.
S&P lowered the U.S. one level to AA+ while keeping the outlook at "negative" as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based firm said yesterday.
Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics," S&P said in a statement late yesterday after markets closed.
The U.S. immediately lashed out at S&P, with a Treasury Department spokesman saying the firm’s analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn’t elaborate, saying the mistake speaks for itself.
Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
"This move should not be much of a surprise to markets, though the timing is at a point where market sentiment is fragile after the drop in stocks this week," said Ajay Rajadhyaksha, a managing director at Barclays Capital in New York. "What really matters is whether the markets are willing to ‘downgrade’ the U.S. bond market. As this week’s move showed, U.S. Treasuries remain the flight-to-quality asset of choice."
Asian investors are likely to retain their Treasuries holdings for now, with options limited by the region’s foreign- exchange rate policies. Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.
Policy makers from China to Japan to Southeast Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion in the securities and the nation’s official Xinhua News Agency said in a commentary that the U.S. must cure its "addiction" to borrowing.
"They won’t be happy about it, but Asian central banks will just have to hold on and stick it out," said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. "There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets."
S&P’s action may hurt the U.S. economy over time by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. The U.S. spent $414 billion on interest expense in fiscal 2010, or 2.7 percent of gross domestic product, according to Treasury Department data.
"It’s a reflection of the fact that we haven’t done enough to get our fiscal house in the order," Anthony Valeri, market strategist in San Diego at LPL Financial, which oversees $340 billion, said in an interview before the cut. "Sovereign credit quality is going to remain under pressure for years to come."
The agreement between Republicans and Democrats raised the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce the $2.4 trillion in spending reductions over the next 10 years. Even with the accord, S&P said the U.S.’s debt may rise to 74 percent of gross domestic product by year-end, to 79 percent in 2015 and 85 percent by 2021.
S&P also changed its assumption that the 2001 and 2003 tax cuts enacted under President George W. Bush would expire by the end of 2012 "because the majority of Republicans in Congress continue to resist any measure that would raise revenues."
"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating," S&P said.
S&P put the U.S. government on notice on April 18 that it risked losing the AAA rating it had since 1941 unless lawmakers agreed on a plan by 2013 to reduce budget deficits and the national debt. It indicated last month that anything less than $4 trillion in cuts would jeopardize the rating. "There was still a very narrow cross section of common ground between the parties and we don’t think that this agreement really changes that equation," David Beers, a managing director of sovereign credit ratings at S&P said in a Bloomberg Television interview.
The treatment of Treasuries and other securities backed by the U.S. in terms of risk-based capital weightings for banks, savings associations, credit unions and bank and savings and loan companies won’t change, the Federal Reserve and bank regulators said in a statement following the downgrade.
Obama has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Fed research and data.
"The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid," Mohamed El-Erian, chief executive and co- chief investment officer at Pacific Investment Management Co., said in a Bloomberg Television interview before the announcement.
Ten-year Treasury yields fell to as low as 2.33 percent in New York yesterday, the least since October. Yields for the nine sovereign borrowers that have lost their AAA ratings since 1998 rose an average of two basis points in the following week, according to JPMorgan. Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.
Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating. "Yields are low in the face of a downgrade because there is nowhere else for people to go if they don’t buy Treasuries because they want to be in safe dollar assets," Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed, said before the announcement.
The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency "appears to be slipping" in quarterly feedback presented to the government on Aug. 3. The U.S. currency’s portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.
"The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’," page 35 of the presentation made by one member of the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pimco. "The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate."
Members of the TBAC, as the committee is known, which met Aug. 2 in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. "None of the members thought that a downgrade was imminent," according to minutes of the meeting released by the Treasury.
S&P gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt to GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in the statement yesterday.
New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.
A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 basis points to 70 basis points over the "medium term," JPMorgan’s Terry Belton said on a July 26 conference call hosted by the Securities Industry and Financial Markets Association. "That impact on Treasury rates is significant," Belton, global head of fixed-income strategy at JPMorgan, said during the call. "That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services."
S&P’s Analysis Was Flawed by $2 Trillion Error, Treasury Says
by Ian Katz and Vinny Del Giudice - Bloomberg
The Standard & Poor’s decision to downgrade the U.S. credit rating was flawed by a $2 trillion error, according to a Treasury Department spokesman.
S&P lowered the nation’s AAA credit rating one level to AA+ yesterday, after warning on July 14 that it would reduce the ranking in the absence of a "credible" plan to lower deficits even if the nation’s $14.3 trillion debt limit were lifted. The outlook was kept as "negative." The ratings company said that the deficit-cutting plan signed by President Barack Obama this week after months of wrangling with Congress falls short of what "would be necessary to stabilize the government’s medium-term debt dynamics."
The Treasury disagreed with S&P’s assessment and judged the analysis was carried out hastily, said a person familiar with the matter who declined to be identified because the discussions were private. The ratings firm erred in estimating discretionary spending levels at $2 trillion higher than what the Congressional Budget Office estimates, the person said.
After being alerted to that, S&P lowered its calculations by $2 trillion and then relied largely on judgments about the U.S. politics to support the downgrade, the person said. The Treasury was presented with the S&P analysis shortly before 2 p.m. yesterday.
In response, S&P concluded that using the Treasury’s approach to the CBO’s figures didn’t materially change its assessment of the U.S. financial condition, according to a person familiar with the talks between S&P and the Treasury. David Wargin, an S&P spokesman, declined to comment.
S&P said in its statement that it may lower the long-term rating to AA within the next two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt.
The wrangling over raising the nation’s debt ceiling indicates that "further near term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process," S&P said.
Amid Criticism on Downgrade of U.S., S.&P. Fires Back
by Nelson D. Schwartz and Eric Dash - New York Times
The day after Standard & Poor’s took the unprecedented step of stripping the United States government of its top credit rating, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a "debacle." It warned that further downgrades may lie ahead.
In an unusual Saturday conference call with reporters, senior S.& P. officials insisted the ratings firm hadn’t overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating. "The debacle over the debt ceiling continued until almost the midnight hour," said John B. Chambers, chairman of S.& P.’s sovereign ratings committee. Another S.& P. official, David Beers, added that "fiscal policy, like other government policy, is fundamentally a political process."
Initial reactions from Congressional leaders suggested that S.& P.’s action was unlikely to force consensus on the fundamental divide over spending and taxes. Politicians on both sides used the decision to bolster their own long-standing positions. Officials at the White House and Treasury criticized S.& P.’s move as based on faulty budget accounting that did not factor in the just-enacted deal for increasing the debt limit.
Gene Sperling, the director of the White House national economic council, called the difference, totaling over $2 trillion, "breathtaking" and said that "the amateurism it displayed" suggested "an institution starting with a conclusion and shaping any arguments to fit it."
Even as the ratings agency insisted on Saturday that its move shouldn’t have come as a shock, it reverberated around the world. Officials from China to Europe scrambled to assess the downgrade’s impact on the already troubled global economy, and political leaders in the United States sought to frame the issue in their favor.
Republican presidential candidates on Saturday seized on the downgrade as a new line of criticism against President Obama, suggesting that ultimate responsibility rests in the Oval Office. "It happened on your watch, Mr. President," Representative Michele Bachmann said, drawing applause at an afternoon rally in Iowa. "You were AWOL. You were missing in action."
In a statement, the White House made no mention of the downgrade. "We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges," the White House press secretary, Jay Carney, said. The ratings agency’s action puts additional pressure on a still-to-be-named Congressional committee to find additional spending cuts, tax increases or both to bring down the inexorably rising national debt.
The debt-limit law agreement set spending caps in the fiscal year that begins Oct. 1 and calls for the bipartisan Congressional "supercommittee" to propose more deficit reduction — for up to $2.5 trillion in combined savings over a decade. Senate Majority Leader Harry Reid said the downgrade affirmed the need for the Democrats’ approach, balancing spending cuts with higher revenue from the wealthy and corporations.
The decision, he said, "shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S.& P. are demanding."
House Speaker John A. Boehner of Ohio, who runs the House with his anti-tax Republican majority, said that, "decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground."
While American politicians sparred, China, the largest foreign holder of United States debt, said on Saturday that Washington needed to "cure its addiction to debts" and "live within its means," just hours after the S.& P. downgrade.
Europeans had girded for a possible downgrade, but the news was received with a degree of alarm in the corridors of power across the Continent. Finance Minister François Baroin of France questioned the move Saturday, noting that neither Moody’s nor Fitch, the two other major ratings agencies, had reached a similar conclusion. The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for local governments, businesses and home buyers.
The wrangling over S.& P.’s downgrade to AA+ from AAA stretched on for days. But interviews with both officials from the administration and S.& P. reveal sharply differing perceptions on whether a downgrade was imminent. The rating agency argued that their intentions had been plain for months if the government didn’t take strong action to curb the debt; administration officials claimed they were blindsided.
The drama, which would culminate late Friday and into the weekend, actually began to gather speed Wednesday, when S.& P. executives came to the Treasury Department to meet with a group of administration officials led by Mary J. Miller, the assistant secretary for financial markets. At the meeting, the S.& P. executives walked the Treasury Department team through its analysis. Government debt was growing rapidly, they said, and the just-completed deal wasn’t going to do enough to slow it down, endangering the AAA rating.
As early as April, S.& P. had changed its credit outlook on the United States to negative. By July, S.& P. warned that if the government did not agree to a deficit reduction package of about $4 trillion, there was a one-in-two chance a downgrade. Still Treasury officials claim they were taken by surprise on Wednesday. Just the day before, Ms. Miller and her team met at the Hay-Adams Hotel with a group of senior Wall Street executives who advise the Treasury on its borrowing. None of the members believed that the government’s credit rating would be lowered in the near-term.
On Thursday, the ratings agency informed the Treasury that its seven-person panel would meet Friday morning to assess the creditworthiness of the United States government.
Even then, one administration official said, "We didn’t think they would actually do it." At 8 a.m. Friday, S.& P. convened a global conference call of its sovereign rating committee including Mr. Beers, Mr. Chambers and others. By 10 a.m., they’d reached a majority decision — the United States no longer was entitled to its top rating. Mr. Beers would not say whether the verdict was unanimous.
Rumors of a downgrade were already swirling in the markets — a prime reason the Dow dove more than 200 points at lunchtime, and at 1:15 p.m., the three men called the Treasury to inform them of the decision. "They were not pleased with the news," Mr. Beers said. Half an hour later, Treasury Secretary Timothy F. Geithner called William M. Daley, the White House chief of staff, as well as Mr. Sperling, according to administration officials. They delivered the news to President Obama in the Oval Office, before he took off to Camp David for the weekend.
Inside Treasury, meanwhile, John Bellows, an acting assistant secretary, flagged a concern over S.& P.’s methodology. In its analysis, S.& P. had projected the nation’s debt as a share of gross domestic product to reach 93 percent by 2021. That was around 8 percentage points higher than the figure administration officials believed the rating agency should have used — what they now call a $2.1 trillion error.
In a Treasury blog entry, Mr. Bellows wrote that the difference raised "fundamental questions about the credibility and integrity of S.& P.’s ratings action." Around 5:30 p.m., S.& P. officials called the group of Treasury officials. "You were right," Mr. Chambers told them, but said he was prepared to proceed because the revisions didn’t meaningfully affect S.& P.’s conclusion.
In one final effort to prevent what was once unthinkable from becoming inevitable, the Treasury officials again pressed S.& P. to reconsider. At 8 p.m., the ratings agency sent them the final press release on the downgrade. By 8:20 p.m., the news was out. "For those who follow the fiscal situation of the United States, this shouldn’t be news to anyone," Mr. Chambers said.
Hedgies lose hundreds of millions in UK banks
by Helia Ebrahimi - Telegraph
Crispin Odey, the hedge fund manager, is among a group of London based investors who drastically reduced holdings in UK banks yesterday amid the stock market carnage that sent Lloyds Banking Group and Barclays down nearly 10pc. "There is a long way down, especially for banks," said Mr Odey, who added the whole market was at risk of tumbling back to 2008 post Lehman Brothers-lows.
Lansdowne Partners and GLG were also big sellers of UK bank stocks, as hedge funds saw hundreds of millions wiped off their investments. UK-based fund managers have invested heavily in LLoyds and Barclays and have suffered the consequences as both bank shares have tumbled since the start of the year.
Hedge funds that have fallen bellow 10pc came under pressure yesterday to start an intensified round of sell-offs - reducing their positions by hundreds of millions of pounds. Insiders said bank stakes had been "halved" without remorse - but that market volumes had been too low to produce enough buyers to sell more. "The economy is choking at the hands of regulators and politicians and lots of people are simply in panic mode," said one London-based hedgefund manager.
Mr Odey said that equity markets had simply caught up with the bond markets and those bemoaning the macro economic outlook. "We are the last to be bearish - but that has been because shares have been cheap compared to its 8pc yield, with bonds getting only 2.5pc. But banks are going down and world growth is peetering out. "China is no longer giving enough umph to world growth and the UK is in no position to change the economic downturn," Mr Odey said.
"The world economy is like a very sick body after illness - it could die from something as simple as the common flu. This is going to be a very long hot summer and the problem is that many of the politicians are away on holiday but the markets don't go on holiday and are vulnerable," said Mr Odey.
Carlos Slim Loses $6.7 Billion in a Week
by Crayton Harrison - Bloomberg
Carlos Slim, the world’s richest man, lost about $6.7 billion this week.
The Mexican billionaire’s stock portfolio, measured in U.S. dollars, has dropped about 9.5 percent since July 29 and is valued at about $64.4 billion, according to data compiled by Bloomberg. That compares with a 7.2 percent slide in the Standard & Poor’s 500 Index.
Slim, 71, has taken a hit as Mexico’s benchmark IPC index dropped 6.4 percent and the peso slid 2.3 percent against the dollar on concerns that the flagging U.S. economy will hurt demand for assets in its southern neighbor. The removal of three of Slim’s companies from the IPC index has made matters worse for the billionaire.
"He’s been particularly hurt by those companies leaving the IPC," said Leon Cabrera, a trader at Mexico City-based Vanguardia Casa de Bolsa. "It reflects the nervousness out there. It’s part of being in the market."
America Movil SAB, the biggest wireless carrier in the Americas and Slim’s largest asset, has declined a relatively benign 6 percent this week. Its Telefonos de Mexico SAB unit has been Slim’s only gainer in Mexico, rising 11 percent on the parent company’s offer to buy out minority shareholders. The Standard & Poor’s index extended its decline today, falling 0.1 percent at close. The IPC rose 1.1 percent, and America Movil gained 1.1 percent.
The drop in America Movil, which has fallen 20 percent this year as regulators seek to put a dent in its 70 percent share of Mexico’s mobile-phone market, is an opportunity for investors to buy stock in a solid company, Cabrera said yesterday in a telephone interview.
Even measured in Mexican pesos, Slim’s holdings have dropped about 7.3 percent this week, a bigger decline than the broader Mexican market. Bolsa Mexicana de Valores SAB, the Mexican stock exchange operator, said Aug. 2 that it would drop Slim’s Grupo Financiero Inbursa SAB, Inmuebles Carso SAB and Grupo Carso SAB from the IPC index as part of an annual rebalancing.
Inbursa, Slim’s financial-services firm, slid 8.2 percent this week, while Inmuebles Carso, a real estate firm, declined 11 percent, and Grupo Carso, a holding company with retail and construction units, fell 14 percent.
Slim was named the world’s richest man for a second year in a row by Forbes magazine in March. Bill Gates and Warren Buffett, second and third on the magazine’s list, have had better weeks, at least for their biggest holdings. Gates’s Microsoft Corp. dropped 6.3 percent this week. Buffett’s Berkshire Hathaway Inc. slid 3.9 percent.
Euroggedon postponed again as ECB gains three weeks
by Ambrose Evans-Pritchard - Telegraph
Euroggedon is postponed again. Jean-Claude Trichet has saved civilization. There will not be a spiralling bond crisis in Italy and Spain in early August after all.
An imminent disintegration of Europe’s financial system has been averted. On balance, this is good, though not optimal. (Lancing the boil immediately by organising an orderly German exit from EMU would be better: it would halt the Fisherite debt-deflation spiral in Club Med and clear the way for recovery.)
Spanish 10-year yields dropped 85 points to 5.2pc, Italian yields fell 76 points to 5.32pc in the first hour or so of trading after last night’s announcement. Now for the hard part. Unless the ECB is willing to back up its new role as lender-of-last-resort with massive purchases of Italian and Spanish debt, it will inevitably be tested by markets. Weak hands will take advantage of rallies to offload holdings onto the ECB, i.e. onto eurozone taxpayers. Frankfurt will find itself underwater very quickly without a legal mandate or EU treaty authority.
RBS calculates that the ECB will have to buy roughly half the outstanding tradeable debt of the two countries to defend the line. RBS calculates €850bn. I would put it nearer €1 trillion. This is currently impossible. The ECB is acting as a temporary back-stop until the revamped EFSF bail-out fund is ratified by all parliaments over coming months. The EFSF will then take the baton.
Yet as we all know, the EFSF has no money. The parliaments have not even ratified the earlier boost to €440bn. As of today, the fund has barely €80bn left after all the commitments to Greece, Ireland, and Portugal. It remains a fiction.
As for boosting it further to €2 trillion or more – as suggested by Citigroup, RBS, and the European Parliament – we face a little local difficulty across the Rhine. Bavaria’s Social Christians said they will not back one bent Pfennig for extra bail-outs, and the FDP Free Democrats are almost of the same mood. Angela Merkel’s CDU base is more mutinous by the day. In any case, such an expansion of the EFSF would set off its own chain-reaction as France and then Germany lost their AAAs and slithered into the swamp.
So, obviously markets will turn very nervous once ECB purchases approach the level that corresponds to the EFSF ceiling. They know that the ECB’s Teutons will die in a ditch rather than cross that line, taking the bond risk directly onto the ECB’s own balance sheet.
That moment could come within three weeks. Gary Jenkins from Evolution Securities notes that Greek yields fell from 12.43pc to 7.35pc in the week following the ECB’s first bond purchases, only to fly out of control six weeks later.
Good template. Whether buying time can solve anything depends on whether investors believe that Italy and Spain can grow their way out of debt traps. If we are on the cusp of a new global boom, then Italy and Spain can make it within EMU’s current structure.
If we are going into a global double-dip (defined as global growth below 2.5pc), they have no chance at all unless the ECB throws all caution to the wind, defenestrates the two German members from the 36th floor of the Eurotower, and embraces QE a l’outrance.
Germany might not like that. I have a nasty feeling that nothing whatsoever has been resolved.
It's a time of control at Societe Generale
by Richard Tomlinson and Fabio Benedetti-Valentini - Bloomberg
In a locked room on the 33rd floor of Societe Generale's 36-story headquarters in western Paris, members of the bank's fraud-control team peer at their computers, scrutinizing the trades being executed by dealers in eight trading rooms on the floors below. They're searching for clues that Societe Generale might harbor another Jerome Kerviel, the junior dealer who bank officials discovered in January 2008 had amassed some $72 billion of unauthorized trades — which, when unwound, cost the bank $7.1 billion in losses.
The sleuths investigate when a trader triggers one of about 80 different alerts built into the bank's proprietary security system. They include exceeding a euro trading limit, deferring a transaction date or failing to take vacation — all behavior that Kerviel, now appealing a fraud conviction and a three-year prison sentence, displayed as he frantically tried to cover wrong-way bets on the direction of the stock market.
"We introduced specific controls to guard against what Kerviel did," says Severin Cabannes, the bank's deputy chief executive officer with responsibility for fraud and risk control. "We can now say that his kind of fraud is no longer possible."
With Kerviel in mind, SocGen CEO Frederic Oudea has made "growth with lower risk" his top priority since taking over France's second-largest bank in 2008, repeating the phrase almost every time he speaks to analysts, investors and reporters. Today, Oudea, 48, faces hazards from a different direction. SocGen and other French banks are heavily exposed to the sovereign-debt crisis enveloping Greece and other eurozone nations.
SocGen owns 88 percent of Athens-based Geniki Bank, whose stock was down 51.9 percent this year as of July 25, and held $3.6 billion of Greek debt at the end of March, SocGen reported. "A default by Greece would trigger a catastrophe for Societe Generale," says Jacques-Pascal Porta, who helps oversee $400 million, including SocGen shares, at a Paris-based investment firm. Oudea insists the bank has the resources to weather whatever happens in Greece. "Given our exposure to Greek sovereign debt, the direct impact of any restructuring scenario would be manageable for the bank," he said.
SocGen's Greek exposure was one reason Moody's Investors Service announced on June 15 that it was reviewing the lender's rating and that of two other big French banks in anticipation of a downgrade. France holds more Greek loans than any other European country: $56.7 billion, including $15 billion in sovereign debt, the Basel, Switzerland-based Bank for International Settlements says.
Shares plunge in July
In July, the panic spread from Greece to Italy after Moody's and Standard & Poor's said they were reviewing ratings for that country and its banks. As the Italian crisis unfolded, SocGen's shares plunged, falling 14.4 percent from July 1 to July 11. The lender's shares tumbled 5.5 percent more on July 18 after the release of the results of stress tests conducted by the European Banking Authority on 90 banks, including SocGen.
"The tests show that Societe Generale is at the tail end of large European banks, with a capital position that's more stretched than bigger rivals," says Francois Chaulet, who helps manage more than $290 million, including SocGen shares, at an investment firm in Paris.
European Union officials announced a new rescue package for Greece after markets closed on July 21 in which it would be given $231 billion of new aid with lower interest rates and longer repayment terms. Private banks agreed to participate in the rescue by writing down the value of their Greek bonds by 21 percent as part of a bond exchange and debt buyback program. "It's excellent news for banks, including SocGen," Chaulet says.
Beyond the sovereign-debt crisis, Oudea says he has addressed the issues that have caused 147-year-old SocGen to lose two-thirds of its market value since 2007. On the same day that bank executives announced Kerviel's fraud in January 2008, they disclosed they had taken $3 billion in writedowns, mostly against U.S. debt securities SocGen held. That turned out to be just a small part of about $16 billion in credit losses and writedowns the bank has reported since 2007.
And SocGen still has $43 billion of securities in its legacy assets division, which holds risky paper whose market value plummeted during the financial crisis. Oudea's fraud controls are part of a larger reorganization. The CEO has combined the once-autonomous equity derivatives unit, where Kerviel worked, with the fixed-income operation, grouping all of the bank's traders into a single capital-markets division.
In addition to strict, monitored trading limits, the bank has imposed a raft of other security measures, including biometric codes and frequent password changes for staff members seeking access to confidential financial data.
Overall strategy similar
Still, Oudea's overall strategy is little changed from that of his predecessor and mentor, Daniel Bouton, says Chaulet. Bouton resigned as CEO in 2008 in the wake of the Kerviel scandal. The lender relies for about half of its profits on its corporate and investment bank. That division has only one product in which it's a world leader: equity derivatives, which are options on stocks and stock indexes that the bank creates for customers and trades for its own account.
And Oudea, like Bouton, is looking for future growth in volatile emerging markets, including Russia and the Middle East. "My aim is to ensure that Societe Generale appears at the end of four years as one of the strongest banks in this landscape," Oudea says, grabbing a notepad and, with swift pen strokes, drawing a crude diagram showing Europe as the bank's hub and the Middle East, North Africa and Russia as the spokes.
At least for the short term, that commitment is hurting SocGen's bottom line. SocGen's 2004 acquisition of Geniki Bank has never earned it a penny. In 2010, the Greek lender's losses almost quadrupled to $597 million, as steep public-spending cuts slowed the economy. On May 4, Geniki reported a first-quarter loss of $143 million, double its deficit of a year earlier.
Affected by turmoil
Operations at SocGen's network of retail bank branches in the Middle East, including Egypt, Tunisia and four other countries, have been disrupted by the turmoil there. And the bank has a 700-branch retail network in Russia that from 2008 to 2010 cost it about 450 million euros, according to SocGen data. Partly because of its exposure to the Middle East and Greece, SocGen reported on May 5 that first-quarter profit fell 14 percent from a year earlier.
Meanwhile, SocGen continues to make money via equity derivatives. They contributed more than 25 percent of sales for the group's corporate-lending and investment-banking division in 2010, according to estimates by Kian Abouhossein, a London-based analyst at JPMorgan. "Societe Generale has a superb equity-derivatives business," says Abouhossein, who forecasts that in 2011, the French bank's unit will be No. 1 worldwide, ahead of Goldman Sachs Group.
SocGen will have $3.9 billion of revenue from equity derivatives this year compared with $3.4 billion for Goldman, he calculates. The bank itself doesn't break out separate numbers for derivatives. Striding around SocGen's 35th-floor CEO suite, which commands a view of the Arc de Triomphe three miles east, Oudea says SocGen's management board in 2008 shared collective responsibility for Kerviel.
And he insists that the scandal — and the bank's purchase of tens of billions of dollars of toxic debt — are in the past. If Kerviel hadn't happened, both Bouton and Oudea say, SocGen would have received praise for staying profitable during the credit crunch.
Some analysts disagree. SocGen's bankers give themselves too much credit for their handling of Kerviel and the market meltdown, says Jerome Forneris, who helps manage $11 billion, including SocGen shares, at Banque Martin Maurel in Marseille. "They told us at the time they had maximum risk controls, and they didn't see Kerviel," he says.
Forneris now says Oudea has done a good job of turning the bank around. Dirk Hoffmann-Becking, an analyst who covers European banks at London-based Sanford C. Bernstein, says SocGen management's confidence in its strategy is misplaced. He says Oudea should curb his ambitions and stick with what works. "Societe Generale should just try to be a decent retail- banking player in France, a corporate lender across Europe and do equity derivatives," Hoffmann-Becking says.
ECB Buys Italian, Spanish Government Debt
The European Central Bank intervened dramatically in bond markets on Monday, backing up a verbal pledge to support Spain and Italy with action in an attempt to avert a financial meltdown in the euro zone. Significant ECB bond-buying -- the only practical result of a weekend of frantic G7 and G20 crisis diplomacy -- forced down Italian and Spanish borrowing costs in an initial reaction.
But stock markets fell across the globe as investors rattled by a historic downgrade of the United States' credit rating piled out of shares and into safe haven assets such as gold and German bonds. Traders said the ECB had bought some 700 million euros (995.7 million pounds) in Italian and Spanish debt by 3:30 a.m. EDT, after it agreed on Sunday to broaden its controversial bond-buying program for the first time to include the bloc's third- and fourth-biggest economies. "We expect them to do billions today," said one trader.
Equity markets that had been in headlong retreat in Asia fell by some 2 percent across Europe -- with the notable exceptions of Milan and Madrid -- after a pledge by G20 finance chiefs and central bankers to take all necessary measures to support financial stability, growth and liquidity. European politicians voiced relief that the market turmoil was not worse.
British Deputy Prime Minister Nick Clegg said it was promising that statements from the French and German leaders, the ECB and finance ministers, had had "some effect at placating the markets and calming the markets" but governments had much to do restore their public finances.
The central bank action sought to change the dynamics on bond markets that had been pushing Italian and Spanish borrowing costs up toward unsustainable levels in the last two weeks. "Speculators will now have to think twice about selling or shorting Italian and Spanish bonds, knowing the ECB will be acting against them," said Shane Oliver, head of investment strategy at AMP Capital Investors, one of Australia's biggest fund managers.
But experts warned the ECB would have to make large-scale purchases for a significant period to have a sustained impact, uncharted territory for the ECB and a move which was opposed by influential members of its Governing Council last week. "The ECB will have to buy 320 billion euros of Italian and Spanish government bonds simply to maintain the same proportion of purchases made relative to the outstanding debt of Greece, Ireland and Portugal made through the 75 billion euro Securities Market Programme acquisitions to date," said Vincenzo Albano, Reuters Insider Fixed Income analyst.
Spreads of Italian and Spanish bonds over German debt narrowed sharply, the cost of insuring peripheral European debt against default fell and the euro initially rose against the dollar. Investors also turned their attention to what the Federal Reserve might say at its policy meeting on Tuesday, fuelling speculation it might soon have to consider a third round of quantitative easing to resuscitate the world's richest economy.
Counting On ECB, FED
After a rare Sunday night conference call, the ECB welcomed announcements by Italy and Spain of new deficit cutting measures and economic reforms as well as a Franco-German pledge that the euro zone's rescue fund will take responsibility for bond-buying once it is operational, probably in October. "It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme," ECB President Jean-Claude Trichet said in a statement.
The central bank had been reluctant to step up its buying of distressed debt, fearing it would be seen as a blank check to spendthrift governments. Since the program began in May last year it has bought just 76 billion euros of bonds, while Italy and Spain alone issue around 600 billion a year.
Berlin denied that Germany and France had made any stronger promises about the euro zone rescue fund's (EFSF) commitment to purchase the bonds of weak member states in the secondary market, after the ECB singled out that pledge. But the fact that German Chancellor Angela Merkel and French President Nicolas Sarkozy stressed on Sunday that the EFSF could soon buy bonds on the secondary market may have encouraged doubtful ECB policymakers to step into the breach in the interim.
They face a difficult balancing act. "The trick is (for the ECB) to buy enough to show such a commitment to a certain yield level that investors feel comfortable in buying alongside the ECB," said Gary Jenkins, head of fixed income at Evolution Securities. "That's a tough trick to pull off because if the market is not confident of ultimate full repayment then it will eventually just allow the authorities to fund and bail out as in the cases of Greece etc."
A bailout of Italy would overwhelm the EFSF's existing resources. Germany has so far opposed expanding it but French Finance Minister Francois Baroin said: "The allotment is 440 billion and we've already said if we need to go further we will go further." The Group of Seven major industrial nations -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said they would take joint action if needed in foreign exchange markets because "disorderly movements ... have adverse effects for economic and financial stability."
A G20 communique along similar lines followed shortly after European markets opened. The Japanese intervened to restrain their currency last week while the Swiss National Bank surprised with a new round of easing as it fought a rapidly rising franc.
Pressure is now growing on the Fed to try further easing -- dubbed QE3 by the market -- though few expect anything dramatic as early as Tuesday's policy meeting. "We are probably a little bit closer. But I don't think we're there yet," said Nomura's chief global economist Paul Sheard. "I think the Fed would have to get a little bit more concerned that financial markets were spinning out of control before accepting with QE3."
China Not Happy
None of which was enough to reassure Washington's single biggest creditor, China. "It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibilities and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy," said a commentary in the People's Daily newspaper, the mouthpiece of China's ruling Communist party.
China holds well over a trillion dollars worth of U.S. government paper and was not pleased when Standard & Poor's cut the U.S. debt rating to AA-plus from AAA -- a move that also angered Treasury Secretary Timothy Geithner.
In an interview on NBC and CNBC, Geithner said the rating agency "has shown really terrible judgment" and claimed its downgrade wouldn't affect investors' faith in U.S. debt. Japanese Finance Minister Yoshihiko Noda put a brave face on it on Monday, saying that market trust in the dollar and U.S. Treasuries has not wavered and indicated Tokyo's readiness to maintain its massive holdings of U.S. government bonds.
Britain braced for Credit Crunch Two as widespread euro losses could force fresh squeeze on banks
by Simon Watkins and Dan Atkinson - Daily Mail
Fears are growing that the downgrade of America's debt coupled with the mounting eurozone debt crisis will spill over into the banking system, sparking a second credit crunch at least as bad as the one that followed the collapse of Lehman Brothers.
A fresh credit crunch would cripple the flagging economic recovery and could heap yet more pain on companies in need of lending and on homebuyers struggling to get a mortgage.
Ray Boulger at mortgage broker John Charcol said: 'In the short term, interest rates will have to stay low for even longer. But what would be worrying would be a banking crisis on even half the scale we saw after Lehman Brothers. In that case we'll see the banks find it hard to get funding and the lenders will pull in their horns.'
The crisis that has gripped world markets is expected to worsen after the decision of ratings agency Standard & Poor's to downgrade America's credit rating from triple-A to AA+.
Prices plunged last week after European Commission president Jose Manuel Barroso admitted the euro crisis may spread, and the markets continued to squeeze Italy and Spain, driving down the price of their bonds. This means the effective interest rate on those bonds - the yield - rises and this indicates the likely cost to that country of any future borrowing.
The impact of the US downgrade will become apparent tonight as markets in Asia open. There will be pressure on all dollar assets, including bonds and equities, as well as the dollar itself.
The downgrade was widely expected, but with international markets in febrile mood, knee-jerk sell-offs are likely.
Justin Urquhart-Stewart, a director at fund manager Seven Investment Management, said: 'We are dealing with a European debt problem, a US debt problem and a lack of political leadership. These are all known factors and a downgrade was a known known. It was inevitable. So there's no real reason why it would have any impact on the markets. But we're not in a normal market. We are in a fret and the market will react irrationally. Will the market fall? It shouldn't, but yes it will.'
US authorities are expected to allow banks to continue using Treasuries as if they were top-notch assets for solvency purposes. Europe's regulators are likely to follow suit.
But it is now seen as inevitable that Greece and possibly other states will have to restructure their debts, in practice meaning banks that hold their bonds will take losses. Royal Bank of Scotland set aside 733 million for losses on its 1.4 billion holdings of Greek bonds last week.
Losses by banks would put further pressure on their capital and raise fears for their solvency. Capital markets have already been moribund for the past two months, making it extremely hard for banks to raise capital needed for lending.
The crisis is seen as the first big test for former French finance minister Christine Lagarde as head of the International Monetary Fund (IMF). She replaced Dominique Strauss-Kahn last month.
Analysts at investment bank Morgan Stanley warned last week that it was 'critical for funding markets to reopen in September', adding that they took a negative view of the whole banking sector, with a handful of international exceptions such as HSBC. One London share trader said: 'It does not matter that the direct exposure to Europe is small, it's the possible indirect effects that are hurting the banks.'
Lloyds Banking Group - mostly UK-focused - said last week its total exposure to government debt in the troubled eurozone was just 189 million, but it was one of the worst-hit shares in the market meltdown, down 24 per cent for the week. Traders said the main causes were the risk of a general economic slowdown in Britain sparked by a eurozone crisis, and Lloyds' need for more financing from wholesale markets.
Lloyds raised 25 billion in the first half of 2011, a valuable step in cutting its dependence on credit from the Government and the Bank of England. But analysts say this figure shows how crucial it was to Lloyds that wholesale capital markets were not hit by the eurozone implosion.
British Bankers' Association chief executive Angela Knight insisted her members can weather the euro crisis. 'What Britain has done very publicly is require its banks to recapitalise,' she said. 'It made banks hold more liquid cash in a way some other countries have not.'
Knight rounded on Europe's politicians, who agreed a plan to stem the euro crisis in July that has yet to be put into action. 'It's almost as if there is an assumption that they can make an announcement, then go away on holiday and everyone will wait for them to come back. That is not how markets work,' she said.
The sell-off of Spanish and Italian government bonds is an unsettling echo of the pressures that have forced Ireland, Greece and Portugal to seek a rescue from eurozone partners and the IMF and raised the prospect that these countries could actually default on their debts.
But some argue that the pressure on Spain and Italy is misplaced. One banker said: 'The market attacks on Greece, Ireland and Portugal were fair. But ltaly has quite a strong economy and Spain, while it has its problems, is doing something about them. It has stepped up to the plate. 'Spain is not just about a property bubble on the costas and there's more to Italy than Berlusconi and bunga bunga parties.'
Nations walking the like of debt
For heavily indebted eurozone members, seven per cent is the 'line of death'. That is the yield on Government bonds - in effect, the price demanded by investors - above which the country concerned is believed to be in deep trouble.
Investors want the extra yield because they fear those countries may default on their debts. The trouble is, the more they demand, the more likely such a default will become.
Our map marks in red the four nations already in that position - Greece, Ireland, Portugal and Cyprus. Two further countries thought to be in danger, Italy and Spain, are in orange.
But as all but the hardier investors dump these nations, they are pushing up the value of the 'safe havens' to which they have run for cover.
Gold is the obvious winner here. During the last year its price has risen from $1,195 a troy ounce to $1,659.
And three currencies, the Swiss franc and the Canadian and Australian dollars, have been on the receiving end of a flood of hot money.
The specific attractions differ from one currency to another, but all share one underlying characteristic, their issuing nations are seen as relatively immune from the global infection of excessive sovereign debt.
France and Italy stand by to bail out biggest banks as euro crisis worsens
by Daily Mail (which pulled the article around noon, August 8)
Fears are growing this weekend that two of Europe’s largest banks may require a bailout, having been hugely damaged by the worsening crisis across the eurozone. In France, President Nicolas Sarkozy is having to confront the possibility that the country’s second-biggest bank, Societe Generale -commonly known as SocGen - is on the brink of disaster after huge losses over loans made to Greece.
The chilling possibility of the largest bank in Italy, UniCredit Banca, suffering a similar collapse if a bailout is not implemented comes as Silvio Berlusconi already faces an increasingly dangerous national economic situation.
In Britain, a senior Government source described the position of the two banks as ‘perilous’, although an official Treasury spokesman declined to comment. Should either bank collapse, British customers with deposits of up to about £85,000 would be protected by the Financial Services Compensation Scheme. As ministers of the G7 nations - Britain, France, Italy, Germany, Japan, the U.S. and Canada - prepare to meet to discuss the mounting euro crisis, the French and Italian governments are believed to be standing ready to rescue the banking giants.
But it is thought the mechanisms they have in place to rescue financial institutions are less developed than those in Britain, which was far worse affected by the credit crunch in 2008 and as a result put in place fuller contingency plans. The merest hint a major bank might fall is likely to reignite panic tomorrow in the stock market, which is already feared to react badly to the credit downgrade of the U.S. by rating agency Standard & Poor’s.
Last night Chancellor George Osborne, whose Treasury officials have ‘war-gamed’ various scenarios ahead of the markets opening, was due to discuss the crisis with Christine Lagarde, head of the International Monetary Fund (IMF).
SocGen reported a loss of £350million on Greek debt last week. It has a total of £2.2billion of Greek debt and also owns 88 per cent of the Greek bank Geniki, whose value has collapsed in recent months.
For Italy, damage to UniCredit, in which Barclays has a two per cent share, would be a bitter blow. Its strategy of caution has led it to invest heavily in Italian government bonds which were until recently seen as safe, but as these have come under pressure the bank’s shares have plummeted.
Experts fear that if any single bank is seen to be in trouble, all lending could freeze up in the resultant climate of fear, with devastating consequences. It was a similar situation which led to the run on Northern Rock in 2007 that required a Government bailout. The European Central Bank has already reported banks unwilling to trust each other with overnight funds.
David Cameron last night broke off from his holiday in Tuscany to talk to President Sarkozy about the crisis in the markets. News of the planned talks emerged as Business Secretary Vince Cable appeared to back calls from China for the dollar to be eventually replaced as the main global reserve currency by a new international currency unit to be based around the IMF.
'Italy could be much better off being in a currency union with Japan rather than Europe'
by Andrew Cave - Telegraph
Asset Protection Agency chief Stephan Wilcke reveals his thoughts on the eurozone debt crisis and how retail banks can be protected from risky investment banking operations.
As chief executive of the Asset Protection Agency (APA), Stephan Wilcke is the man with the unenviable task of whittling down the Royal Bank of Scotland’s toxic debts. But what exactly does he do? "It gets complicated quite quickly," laughs the bearded German.
It’s easy to agree. "The APA effectively runs the world’s largest synthetic collaterised debt obligation," explains Wilcke, 41. "It sounds pretty scary but technically that’s what it is." The APA is an arm of the Treasury which operates the Asset Protection Scheme (APS). In layman’s terms, the APS is a huge insurance policy covering the bank against losses topping an amount that would make it unviable. Set up in 2009 to reassure financial markets, the APA started off guaranteeing £600bn of assets.
However, Wilcke, whose previous job was advising the European Central Bank, Germany’s Bundesbank and the Luxembourg Central Bank on Lehman Brothers and Icelandic banks Glitnir and Landsbanki, is not easily overawed. "I’ve been in financial services all my life, working on what to buy, what to sell and how to restructure," says the former financial services head at private equity firm Apax Partners. "I’ve been in quite a few places where there were financial messes to clean up."
But this one is clearly his biggest challenge to date. Soon after arriving, Wilcke negotiated Lloyds Banking Group’s exit from the APA’s control with the bank’s former chief executive Eric Daniels after it raised enough capital from a rights issue to pass the Financial Services Authority’s (FSA) stress tests and avoid being in the finalised APS. That realised a £2.5bn fee but RBS’s debts, spanning overleveraged corporate credit, commercial real estate, negative equity residential mortgages and other financial instruments, constitute the worst third of the bank’s portfolio.
The problem portfolio had already been reduced from £286bn to £182bn by the end of March through run-offs, disposals and defaults, while the APA, which has the final decision on any action proposed by RBS for assets of more than £50m, claims to have realised "several hundred million pounds" by insisting on amendments to what the bank was planning to do.
So how many bust-ups have there been between Wilcke and RBS’ famously combative chief executive Stephen Hester? Diplomatically, Wilcke won’t say. "I would not like to personalise this with Stephen," he replies carefully. "But no organisation likes to have another organisation put in charge of looking over their shoulder and having veto rights. "If you want a recipe for stressful relations, certainly at the start before you work out where each other’s boundaries are and what the objectives are for both of the organisations, then that’s it. "Certainly, in the first six to 12 months of operations, there were tensions but the relationship has got a lot better and a lot more constructive."
Wilcke even goes as far to intimate that Hester deserves the £2.04m bonus he was granted earlier this year for meeting 2010 targets. "I have a lot of respect for Stephen," he adds. "I think Stephen’s job is probably the most difficult job in banking worldwide. You need really, really high quality people to take on these difficult tasks. "It doesn’t mean I have agreed with him on everything or that he’s agreed with me on everything but I think we’re both professionals and respect each other. I think the team he’s put together is a good team and a big break from the past."
He’s not so forthcoming about Daniels. How did he get on with the American? "No comment" is his only reply. Neither will Wilcke proffer a direct opinion on former RBS chief executive Sir Fred "the Shred" Goodwin. He was clearly not impressed by what he found at the bank, however, "Under Stephen’s leadership and huge efforts from many others, RBS has got better at things it wasn’t that good at when we started, such as loss forecasting, managing complex restructuring cases, stress-testing and just being in control of their data systems," he says.
"In many cases they did not have basic information about borrowers. If you’re sitting at the top of a food chain of people amalgamating information and the information you put in at the start of the chain is garbage then the decision-making tends to be too. "There were many things that I was quite shocked at: the extent of the problems, the size of the concentrations. "You think: 'How can you have ever got yourself into that situation? Why on earth did you grant that loan?’"
Most critically, the question is why RBS, under Sir Fred, signed off the takeover of parts of Dutch bank ABN Amro that led to many of its problems. Wilcke expects RBS to leave the scheme by the end of the third quarter of 2012, while the APA is forecasting a cumulative loss for the RBS portfolio of £45bn – well below the £60bn threshold at which the bank would start to receive an insurance payout.
RBS does not need to pay down all the £182bn to zero to exit but will need to satisfy the FSA’s stress tests, as well as pay the rest of the minimum £2.5bn insurance premium. So far, it has paid £2.1bn. Then the APA will be wound up, but there’s plenty of work ahead – although Wilcke won’t comment on individual assets.
"My team is less than 50 people so it’s a big management job, he says. "The assets here are more than the entire balance sheet of Standard Chartered. "I always thought this would either be a task of a short number of years or we’re going to be in a Great Depression scenario which is going to be horrible, in which case it could possibly take a decade. "But it’s definitely not going to take a decade. We’re much closer to the end of it than to the beginning."
So what’s the negotiating style of Wilcke, who was born in Germany but has lived in the UK for more than half his life? "I think people would generally say of me that I am quite robust but rational and that I try not to get too emotionally involved," he says. "I’m sometimes portrayed as a hard man but when I was a student I was a counsellor for the Samaritans. I used to train people in picking up the phone and talking to people on suicide watch. Often there was silence for up to an hour before they started talking. It gives you perspective on life."
Compared with that, the issue of mitigating future financial crashes might seem rather meaningless. However, Wilcke, who has given evidence to Sir John Vickers’ Independent Commission on Banking, which reports next month , is concerned that there is little consensus among banks on how to ring-fence retail banking from risky investment banking operations.
How would Wilcke do it? He suggests the model that Iceland retrospectively introduced to protect consumers and business customers after its own financial crisis. "Iceland is the poster child for a banking sector that was so large that it couldn’t possibly be bailed out by a tiny country," he says, "while the British problem is that we are a smallish country relative to the size of our banking sector.
"Iceland has got three banks in administration and those three bust banks in turn own three ring-fenced domestic banks in Iceland, which are good banks. "Inside the ring-fence, they have not only retail banking but also corporate banking, including the provision of credit and crucially payment services to corporate, so suppliers and employers can be paid if their bank goes bust.
"If you want to let a big UK bank go bust [in the next crisis], surely you want to say to consumers your deposits are safe. But if you’re talking about one of the big clearers, then roughly 25pc of the corporates in this country are going to be banking with that clearer, and if they can’t pay their employees or their suppliers then it’s a disaster."
Wilcke doesn’t believe financial crisis can be averted, however. Indeed, judging by the past seven days, it may already be here. "I’m very worried about the eurozone," he says. "It has some very, very deep structural problems which require political solutions. "You could easily argue that Italy would be much better off being in a currency union with Japan rather than with Europe. Japan has an ageing population, low growth and very high government debt, and therefore the bank of Japan has very low interest rates.
"Those things are all true for Italy as well, only they haven’t got very low interest rates because their rates are being set by the ECB for the whole of the eurozone. "Over time, I think the eurozone will need to move to fiscal union and issue its own bonds guaranteed by all the governments. But that’s a political decision."
It’s also probably not his next job, with Wilcke much more likely, to return to the private sector at a hedge fund or investment bank. "I have no predetermined views but I want it to be interesting and challenging," he says.
'Some European Countries Are Fundamentally Bankrupt'
by Gregor Peter Schmitz and Thomas Schulz - Spiegel
Fears of a double-dip recession are growing following turmoil on the stock markets and Standard & Poor's downgrade of the US. In a SPIEGEL interview, Harvard economist Kenneth Rogoff criticizes President Obama for giving in to the Tea Party in the debt-ceiling negotiations and argues that the euro zone has to become a transfer union.
SPIEGEL: With the turmoil on the global stock markets, is the world staring into a new financial abyss?
Rogoff: Mainly, the markets are simply adjusting to the reality of a continuing slow and halting recovery. They realize there will be no boom anytime soon. Wall Street forecasters, and many central banks, had been starting to think that there was going to be a sharp uptick in the recovery. But they have got this wrong again and again because they keep wanting to use normal postwar recessions as a frame of reference. But this is a post-financial-crisis recovery, a rarer and very different animal.
SPIEGEL: What effect has that perception had?
Rogoff: The mentality that this is just a big recession, "the Great Recession," has led to wrong policy decisions, such as the premature end of quantitative easing by the US, and the belief in Europe that there is a brisk recovery around the corner that will save the day and enable policymakers to avoid tough decisions on periphery country debt. In reality, this was a different kind of downturn, which would have been better termed the "Second Great Contraction," because it involved a prolonged shrinking of overextended global balance sheets and a tightening of the credit system. Right now, the recovery from this needs more monetary stimulus, especially in the US.
SPIEGEL: Is that likely? The current debate in the US is focusing on cutting back government expenses and reducing debt. Would higher inflation be a way out?
Rogoff: If you happen to be on the board of a central bank, you have to be willing and able to stand up to popular opinion. Many people even consider moderate inflation heresy. But we are in a perfect storm here. I am not saying we should have hyperinflation or double-digit inflation, but I believe that central banks should accept somewhat elevated core inflation for several years, higher than the normal 2 percent. Whereas I believe monetary stimulus is coming, I am worried that it will not be forceful enough to have any material effect on balance sheets.
SPIEGEL: Does the US also need another stimulus program? Larry Summers, a former top adviser to President Barack Obama, says that cutting back on government spending in the middle of a downturn will kill economic growth and employment.
Rogoff: People asking for a fiscal stimulus are looking at the wrong model. They think this is just a big, but typical, recession. But it is not. Policymakers need to focus on relieving overextended private balance sheets in the short run, and stabilizing public debt in the long run. A fiscal stimulus cannot be the main solution. It may provide temporary relief, but there will be no traction without some normalization of private debt levels. In Europe, of course, government debt itself needs to be sharply written down in some countries. The US will eventually come to the realization that something similar has to happen to some mortgages. Homeowners who accept this relief will have to make some significant concession, perhaps giving away some future appreciation if home prices go up.
SPIEGEL: Why would a selective default for some European countries be less harmful than say, a US government default?
Rogoff: Greece, Portugal and Ireland are tiny. Greece and Portugal in particular are at the early stages of being advanced economies; they are still closer to emerging markets. And emerging markets default all the time without bringing down the global economy. If the United States or Germany were to default, it would be an entirely different matter. I don't mean the kind of technical default the US faced if Congress had not raised the debt ceiling. Had that blunder occurred, it would have been quickly corrected, albeit there would have been some lasting damage. Most likely, the US would have had to pay slightly higher interest rates for decades after. But the US situation is very different from Europe where some countries are fundamentally bankrupt.
SPIEGEL: If you look at the hysterical reaction of the financial markets, do politicians even still have a chance to rein in the power of speculators?
Rogoff: The stock markets had built in pretty rapid growth. Now they see they were too optimistic. Wall Street, the Federal Reserve and others had all bet on pretty brisk growth and that was plain wrong.
SPIEGEL: What have politicians done wrong on both sides of the Atlantic during the latest financial crisis?
Rogoff: I just cannot understand how President Obama made so many concessions in the latest negotiations over the debt ceiling. He was holding all the cards and he was still stared down by the Tea Party. He should have said: "I do not negotiate with terrorists. If you want to bring down financial markets, it will be on your head. I am going to behave normally and responsibly." Instead, he got gamed into making giant concessions, and this has weakened the presidency. Perhaps the damage will not be lasting, but then next time the president may have to prove him or herself willing to accept a short technical default rather than give in.
SPIEGEL: And the Europeans? Chancellor Angela Merkel was very reluctant to agree to a bailout for Greece.
Rogoff: It is not easy for a politician to do what needs to be done if it is unpopular. Greece needs a massive restructuring plan, Portugal as well, probably Ireland, too. Ultimately, Germany has to guarantee all the central government debt in Spain and Italy, and that will be very painful. If Italy and Spain are to be kept in the euro area, then unfortunately the Germans will have to acknowledge that Europe is going to be a transfer union for some time to come.
SPIEGEL: Is there an alternative?
Rogoff: Clearly it was a mistake to accept some of the southern countries prematurely into the euro zone, but there is now no other way to pay for their debt than through transfers. I would like to say it is only a one-time payment, but I do not think anyone in Germany still believes that and they should not. This is a long-term problem. Of course, Germany should extract major political concessions on the way, like the installment of a powerful European president or a European finance minister.
SPIEGEL: Growth is currently slowing in China as well. Where will global growth come from in the near future?
Rogoff: Emerging markets are slowing only mildly for now. But policymakers have to get the idea out of their heads that there is going to be big rebound every time we see an uptick. That will not happen as long as debt levels are so high. We may see moderate growth averaging only 1 or 2 percent in many advanced countries for much of the next three to five years. That is not the end of the world.
A.I.G. to Sue Bank of America Over Mortgage Bonds
by Louise Story and Gretchen Morgenson - New York Times
The American International Group is planning to sue Bank of America over hundreds of mortgage-backed securities, adding to the surge of investors seeking compensation for the troubled mortgages that led to the financial crisis.
The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor. It claims that Bank of America and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the mortgages placed in securities and sold to investors, according to three people with knowledge of the complaint.
A.I.G., still largely taxpayer-owned as a result of its 2008 government bailout, is among a growing group of investors pursuing private lawsuits because they believe banks misled them into buying risky securities during the housing boom. At least 90 suits related to mortgage bonds have been filed, demanding at least $197 billion, according to McCarthy Lawyer Links, a legal consulting firm. A.I.G. is preparing similar suits against other large financial institutions including Goldman Sachs, JPMorgan Chase and Deutsche Bank, said the people with knowledge of the complaint, as part of a litigation strategy aimed at recovering some of the billions in losses the insurer sustained during the financial crisis.
The private actions stand in stark contrast to the few credit crisis cases brought by the Justice Department, which is wrapping up many of its inquiries into big banks without filing any charges. The lack of prosecutions — the Justice Department has brought three cases against employees at large financial companies and none against executives at large banks — has left private litigants, mainly investors and consumers, standing more or less alone in trying to hold financial parties accountable.
"When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law," said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. "To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general."
Though many in the public have called for more accountability for parties involved in the financial crisis, criminal charges on complex financial matters can be difficult to prosecute. A spokeswoman for the Justice Department said the government was vigorously pursuing cases where appropriate, and she pointed to a recent jail sentence for the chairman of the mortgage company Taylor, Bean & Whitaker. The spokeswoman, Alisa Finelli, declined to say how many people the government had assigned to that task.
"Prosecutors and agents determine on a case by case basis the importance of relevant evidence developed in private litigation and how such evidence should be pursued," Ms. Finelli said. "Civil litigation involves a lower standard of proof than is required for a criminal prosecution, where prosecutors must have sufficient evidence to prove beyond a reasonable doubt that a crime has been committed."
On Friday, the department announced it had concluded its investigation into Washington Mutual, the Seattle-based bank that nearly collapsed because of its risky mortgages, without finding evidence of criminal wrongdoing. The Justice Department has also concluded its investigation into Countrywide’s conduct leading into the financial crisis, according to a person with knowledge of that case.
Even more investigations may soon be shut down because the Justice Department is heavily involved in negotiations between big banks and state attorneys general that may give the banks broad immunity against future claims. The state attorneys general are weighing these requests in the mortgage servicing and foreclosure cases, even though the government has not pursued the most basic investigation of these practices.
As it has in similar cases, Bank of America is likely to dispute A.I.G.’s claims, in the suit, which is expected to be filed on Monday in New York State Supreme Court. When asked generally about the quality of mortgage bonds issued by companies that are now part of the bank, Lawrence Di Rita, a spokesman for Bank of America, said the disclosures were robust enough for sophisticated investors. He said many of the loans lost value because housing fell. "Now you have a lot of investors and lawyers who are seeking to recoup the losses from an economic downturn," Mr. Di Rita said. The bank has not yet seen A.I.G.’s suit.
On Monday morning, in response specifically to A.I.G.'s planned suit, Mr. Di Rita said in an e-mail: "AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets. AIG is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors. We reject AIGs assertions and allegations."
A.I.G. also plans to file a request to intervene in the $8.5 billion settlement proposed in June by Bank of America and Bank of New York Mellon, which represents mortgage security investors including BlackRock and Pimco. Mr. Di Rita said on Sunday that large sophisticated investors have signed on to that deal. A.I.G. plans to object to the deal because it believes the amount is too low and that Bank of New York’s role was rife with conflicts, according to the people with knowledge of A.I.G.’s plans.
A spokesman for A.I.G. declined to comment. but the company’s chief executive, Robert H. Benmosche, told shareholders in 2010 that he was considering litigation to recover losses. Cases like A.I.G.’s may turn up information in interviews and document discovery that could be helpful to the government, though it is unclear if the Justice Department would seek to reopen closed cases.
Already, the private suits are revealing dubious activities. One case against Bear Stearns indicates that its employees put troubled mortgages into securitization trusts that it sold to customers, while simultaneously receiving reimbursement — known as apology payments — from the companies that originated the loans. And a recent case against Morgan Stanley cited a witness saying that the bank would receive mortgages with documentation of a buyer’s income and then shred that documentation so that it could call it a "no doc" loan and pay less for it. Those banks dispute the accusations.
Lawsuits have long been a crucial method for shareholders to recover losses. A February letter to the Securities and Exchange Commission from the general counsel of the California Public Employees’ Retirement System noted that private litigants in the 100 largest securities class action settlements had recovered $46.7 billion for defrauded shareholders.
But the costs of these recoveries are often borne by the companies’ insurers or stockholders. It is exceedingly rare that such deals require money to come from the pockets of corporate executives or directors. As a result, the lack of criminal inquiries by the government means that restitution is often paid by innocent parties — shareholders — who have already been hurt by the questionable conduct.
Lawyers involved in the lawsuits, who stand to share in any financial recoveries, say that there are plenty of unknown facts related to the crisis that should be exposed. "We continue to discover new information," said Gerald H. Silk, a lawyer with Bernstein Litowitz Berger & Grossmann. "The private litigations that have been brought on behalf of investors paint a very strong picture that many of the financial calamities were caused by fraud."
Mr. Silk’s firm has filed dozens of cases related to the financial crisis, and the government has contacted the firm with requests for information in a few of them, Mr. Silk said. The government could look to private litigation and the law firms bringing the actions for potential witnesses and new information. A recent case against Wachovia, for instance, included 51 confidential witnesses. Lawyers say, however, that many witnesses in private litigation cases have not been contacted by the government.
A.I.G. faced some limits on the lawsuits it could bring, because during the bailout the company signed a waiver that it would not sue big banks over mortgage bonds it had insured. But it did not sign such a deal on a series of Goldman Sachs securities called Abacus, nor for mortgage bonds it bought outright, like the $28 billion worth of securities included in its suit against Bank of America. The company is working with the law firm Quinn Emanuel Urquhart & Sullivan, which is bringing many financial crisis cases.
According to the people with knowledge of the litigation, the roughly 200-page complaint relies on more than 1,900 pages of exhibits. Quinn Emanuel interviewed former Bank of America employees and conducted forensic analysis on more than 262,000 loans inside 349 deals. They found that 4 out of 10 mortgages, on average, differed significantly from the descriptions of the loans in the marketing materials.
For instance, the number of loans said to cover owner-occupied properties was lower than investors were told, and the amount of the loans compared with the value of properties was often higher.
The complaint describes the loan files of one mortgage security, where 82 percent of the loans did not comply with the underwriting guidelines as marketed to investors. For instance, a borrower in that deal who said she was a builder with 25 years of experience was born in 1971. Another borrower inflated his income by about $90,000 on his application, though his tax return in the loan file showed the true figure.
The suit against Bank of America involves mortgage bonds that A.I.G.’s securities lending unit bought using savings from its insurance subsidiaries, which relied to some degree on the high ratings on the mortgage bonds. A.I.G. will contend that Countrywide, Merrill Lynch and Bank of America provided false information to the ratings agencies, resulting in false ratings. And the insurer will describe the steps it took to understand the mortgages that were placed in the deals, like requesting spreadsheets with data about all the loans in the deals from the banks that created them.