And then there were 4

And then there were just 4 Euro Zone countries who retain their AAA rating, according to S&P – no doubt less in time.

Personally, I believe that the importance of the AAA rating is way overrated, particularly in the current circumstances.

S&P downgraded 9 Euro Zone countries on Friday 13th, including France – don’t you just love the date/timing – pure drama.

Indeed, Italy, Portugal, Cyprus and Spain were downgraded by 2 notches, with Austria, France, Malta, Slovakia and Slovenia by 1 notch – Cyprus (BB+) is also now in junk territory – so much for those Russians who used Cyprus – they will learn. In addition, S&P suggests that, in the event of a default, investors in Portuguese and/or Cyprus debt would recover between 30% – 50% of their assets, at the most.

The ratings agency reiterated its rating on Belgium, Estonia, Finland, Germany, Luxembourg, Ireland and Holland. All 16 countries have been removed from CreditWatch, suggesting that there will be no further downgrades in the near term. However, 14 of the countries (ex Germany and Slovakia, who regain their stable outlook rating), remain on negative outlook, which imply a 1 in 3 chance that their rating will be lowered in 2012/2013. Basically, of the Euro Zone, only Finland, Luxembourg, Holland and Germany have retained their AAA rating.

S&P stated that the “rating actions are primarily driven by our assessment that the policy initiatives that have been taken by the European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the Euro Zone”.

Greece’s credit rating is CC – forget Greece – I will be amazed if investors recover even 25% of par.

The downgrades were widely expected and were leaked during market hours on Friday. In addition, it is actually not as bad as it could have been – there was a risk of Holland and, more importantly, Germany would be downgraded, with France’s rating being cut by 2 notches. The markets took the news in its stride. Sure, there is likely to be some selling first thing on Monday, but I’m not sure that it will be widespread and/or prolonged.

LCH Clearnet raised the margin requirement on trading on (3.25 – 30 year) Italian debt FYI.

However, the more important issue is the (certain) ratings downgrade to the EFSF/ESM, now that there are only 4 remaining Euro Zone AAA countries and with the 2nd most important Euro Zone country (France) having lost its AAA rating. Oops. Monsieur Sarkozy start getting real.

Personally, I believe this could be the final nail in the coffin for Greece. Negotiations between Greece and its creditors collapsed on Friday – there is a serious chance that Greece will have to have to default and indeed, exit the Euro. Contagion issues then arise. However, the ECB’s 3 year LTRO has helped enormously (particularly in respect of yields on shorter Euro Zone dated debt) and, as you know, I expect the ECB to introduce QE in the 2nd Q – possibly even in the 1st Q. In addition, the question is – will the Euro Zone be better without Greece – personally, I seriously believe it.

A recent watering down of the “fiscal compact” (supported by Germany, who wants more flexibility !!! – this really represents double standards by Germany, yet again – Germany FYI has not met its Maastrict treaty commitments for the majority of the time, I would add) has not helped the case for the ECB introducing QE, but I remain convinced that its inevitable – I suppose the ECB could demand that countries stick to pre agreed fiscal targets, in return for them buying the relevant countries bonds.

With the Sovereigns downgraded, a number of Euro Zone banks are next. Having said that, I reiterate, I remain bullish the European financial sector – particularly for those who do not need to raise equity capital – given the ECB’s 3 year LTRO programme. Yes, I know you think I’m crazy, but……….;

Just imagine what would have happened if the ECB had not introduced its 3 year unlimited LTRO programme. Bloomberg reports that US money market funds reduced their lending to French banks by 97% (yes that’s 97% – no typo) in 2011. US, Japanese and Swiss banks have benefited from this shift. However, I repeat, the ECB’s UNLIMITED 3 year LTRO is a game changer. There is NO LIQUIDITY issue facing (virtually all) European banks – even INSOLVENT BANKS COULD WELL SURVIVE. By the way, French banks increased their use of ECB funding by 62% in the 4th QW 2011, according to the Banque de France.

In addition, the ECB policy is effective QE, by the back door, as banks (in particular those in trouble) play the short term (less than 3 year) carry trade – the really bust banks will play the longer term carry trade;

The Euro traded closed at US$1.2676, well below the E1.30+ in December 2011, but even this rate is questionable. My forecast of sub E1.20 looks good and getting better by the day.

The 2012 game is beginning – fortunately, as I expected. However, let me just add that 2012 is going to be a particularly difficult year to forecast – I will respond accordingly.


The great news (or in your case, unfortunate news) is that my Internet problems, here in Goa, seem to be sorted out. Will need a few days to get back up to date though.

Have a great weekend. I am.

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