Moody’s threatens ALL Euro Zone countries with downgrades

Kiron Sarkar is an investor and advisor in London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.


Moody’s threatens to downgrade ALL Euro zone countries – hey, that includes Germany does it not. Off course it does. I really wonder what officials in the German Finance Ministry think of that – a bit of a shock – well, possibly stronger emotions than that, I suspect. However, why the surprise – in my view Moody’s is just reflecting the reality of the situation.

French newspaper reports (La Tribune) suggest that S&P may downgrade the country’s outlook to negative in the next few weeks – personally, I do not believe that France will be able to maintain it’s AAA rating, so no surprise. French unemployment rose to the highest since December 2009. Looks increasingly as if Sarkozy is “French toast” in next years Presidential elections – no great loss, but the likely winner (a socialist) – who knows what he will be up to. Basically, more
uncertainty – just hope (likely) that the euro zone issues will be sorted out before that – making it more difficult for the potential Socialist candidate to complicate the process.

The far more important point is that Germany is finally recognising that it is not financially immune. The other big issue is whether Germany comes up with a credible solution re the Euro Zone and, by default (maybe not the right word to use, given the current situation) for themselves.

I am in Goa, India at present and last night had dinner with 2
delightful people with strong German connections. I was, in
particular, impressed by their honesty, openness and desire to find a
solution. The even better news is that a mutual friend has been
promoted – good news – must travel to Berlin. Congrats Mr M. Whilst
the Internet/electricity does not work in Goa, it’s quite amazing what
you pick up over here.

By the way, don’t mention the Greeks – it’s as I suspected, including
the passion in the statements, when explaining the German point of
view – I suspect that is a view held by many of us.

Whilst we are on the subject of the peripherals. Andy Lees of UBS (one
of the best analysts around) reported that Italians were the richest
(individually), certainly in Europe(probably excluding
Luxembourg/Monaco). It’s the Government, that is indebted – though I
will continue to maintain that Italy has bumbled along with that level
of debt for decades, a large part of their economy (GDP) is, how shall
I put it, unrecognised (grey economy), the country has a primary
surplus, and likely to have a budget surplus before other Euro Zone
countries. Indeed, I have added to my 10 year Italian bonds.

Mrs M is apparently not too far off from my assessment of her, though
has a sense of humour. Personally, I was told that – based on an
amusing joke that Merkel shared with Cameron. Actually it was quite
funny. However, I suspect that my observation that she may need more
“clued up advisers” – well it did not go amiss – my interpretation

Had power cuts/ no Internet 4 times before 1.30pm local time (UK
Market opening – so important for me) yesterday. How can India develop
with such poor systems/infrastructure. The frightening issue, is that
no one objects – it’s par for the course they say. Indeed, it’s
likely to get worse, given that India is not allowing utilities to
raise tariffs, even though coal prices have soared. Same issue in
China – it’s the old game of trying to keep down inflation/avoid
politically unpopular utility price increases.

Heard that Germany is to propose more details re the EFSF by end
December – whoops – how do you make a “dead duck” fly? Well
politicians are hot air specialists, but even that’s not good enough.
I’m now nervous, though need to check on market expectations. As far
as I’m concerned, the Dutch Finance Minister said it all – basically,
it close to a waste of time – my non diplomatic interpretation of his

Rumours of a downgrade to France’s outlook will also weigh on the EFSF.

Schaeuble apparently stated that the Euro Zone would pursue an
alternative path (with the IMF), also suggesting the “dead duck” EFSF
scenario. I really hope that I am wrong, but……..

The ECB announced yesterday that it had bought E8.5th of Italian and
Spanish bonds (most likely), still far too low. However, in total the
ECB has bought E203.5th – a huge amount, but totally ineffective,
given the tepid and spasmodic buying. Bond yields of the PIIGS remain
at near record levels. However, they are the ECB – what else can you

OK so a decent Market rally yesterday – not unexpected given that
markets were grossly oversold. Too much in one day – likely. However,
in spite of all the silly rumours of massive financing by the IMF for
Italy – total rubbish. – E600 bn is way beyond the IMF’s resources – I
believe the Market is getting the sense that there will be some
positive movement within the Euro Zone – personally, so do I.

US markets closed slightly off their highs – profit taking, but
nothing serious. Asian markets have continued to perform today, in
spite of lower Australian GDP forecasts(likely to be reduced further)
and weaker employment in Japan. Likely modest positive follow through
in Europe.

Importantly, the Euro is picking up – good for markets, though still
around US1.3365 – though drifting at present – blast.

US economic data was marginally better -Chicago Fed, though Fitch
downgraded the US outlook to negative (still AAA though). Lack of a
policy to reduce debt (US15tr) was the reason cited – no great
surprise. I really wonder what would happen to the US dollar, if it
were not the sole global reserve currency. I suspect we all know.

I understand from a brief report, that Stephen Roach, a passionate fan
of China, in spite of being a serial bear, is becoming more cautious
on China – need to read his comments. Anyone got them – please forward
if you do. In my view, Mr Roach is one of the most clued up people on
China ( with clearly excellent high level connections), even though I
have disagreed with him. His views MUST be taken into account

Can the rally last – key question.

The answer I suspect, (ex other issues), is whether by and/or at the
9th Dec EU Summit, the Euro Zone (Germany and, i suppose, France, for
the time being) can finally come up with a credible plan.

Sorry, but not enough info yet, but, I’m still leaning towards giving
the guys the benefit of doubt. Today’s Euro Zone Finance Minister’
meeting will shed some light and an Italian bond auction will be
closely watched.

Extraordinary statement for me, but I feel that Euro Zone politicians
(in particular, Germans) have understood that they need to deliver
and, in addition, have a greater sense of urgency.

The real problem is that I’m unsure (do you blame me) as to whether
they are financially clued up enough.

However, I will, as usual, stick my neck out and suggest that it will
be better than current very low expectations and therefore positive –
I just hope that expectations do not rise.

Still believe in the views re the Euro Zone expressed in my last note,
even though there are a number of sceptics amongst you.

Crossing my fingers that the electricity/ Internet continues to work –
unlikely to do me any good though.

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