Friday, January 13, 2012

Who's afraid of S&P?

S&P downgraded several European governments today. If anyone out there thought these governments were triple-A and bullet proof, they were surprised by the action. But for the vast majority of investors in the world, S&P was just playing catch-up. Anyone with money to manage and a brain has known for a long time that the risk of defaults in the Eurozone was rising, and they almost certainly took the appropriate measures to reduce their risk if they thought that was necessary. U.S. money market funds took their money out of French bank CP many months ago, for example.


Eurozone 2-yr swap spreads today fell to their lowest level in 2 months on the news, in a sign that S&P's decision was not only fully discounted but lagging, as usual, the facts on the ground. Swap spreads and euro basis swap spreads have been telling us for the past week or so that there has been some fundamental improvement in Eurozone liquidity conditions, and this is much more important than anything S&P might have to say.

If anything, the S&P announcement might be considered a positive, since it is equivalent to a public rebuke of governments that are reluctant to take the necessary steps to rein in spending.

14 comments:

Benjamin said...

The ECB needs to think stimulus, but it has only an obligation to fight inflation. How is that working out?

I see Europe going the way of Japan, without Japan's credit quality. Tight money just does not work. I wish it did. i wish for a lot of things.

Genuflect not to gold or other false gods. But our central bankers do.

Public Library said...
This comment has been removed by the author.
Squire said...

The market sould have responded negatively to the European news. It didn't. To me this is bullish. Today maybe the only pullback before the market breaks upward from S&P 1292 on the way to 1350. I really hope for a decent pull back and a clear point at which to buy. I don't chase rallies.

Maybe I don't understand monetary stuff but I do see on FRED graphs that M1, M2, and MZM are skyrocketing.

Charles said...

30+ years ago in business school I learned that the ratings agencies ratify what the markets say. They do not generate any information.

Dr William J McKibbin said...

Desperate economic times are coming to the southern flank of Europe -- let's hope that political stability can be maintained -- the stage is being reset behind a closed curtain -- exit the economists and enter the political scientists...

Hans said...

The rating agency are completely out-of-touch, with reality, however, they are 100% correct with their calls.

They should go into the odds making business.

test said...

We in Europe begin to treat our economic problems. You have not started yet to treat yours.

John said...

"If anything, the S&P announcement might be considered a positive, since it is equivalent to a public rebuke of governments that are reluctant to take the necessary steps to rein in spending."

No. It's a rebuke of governmets who refuse to collect the taxes that have been authorized by an elected government. It is a rebude ti countries who refuese to PAY for their spending.

Germany, Finland, and the Nertherlands remain triple A.

Nobody likes deadbeats.

Dr William J McKibbin said...

Hi John, how far should austerity measures be taken in Portugal, Italy, Ireland, Greece, and Spain (PIIGS)? -- should the austerity measures be used as a sort of "cold shower" that demolishes the social fabric of these countries? -- what level of public violence would be acceptable in the wake of austerity? -- I am asking because these new questions are not economic, but political -- the central issue in the PIIGS is transforming from macroeconomics into political stability -- if one or more of these countries became communist or fascist as a result of austerity, the economic calculus could change regionally overnight -- instability and war is very expensive -- I remain very concerned about the political stability of the PIIGS, which is something that macroeconomic theory does not fully consider or factor -- I fear that the risks of political instability will grow along the southern flank of Europe if austerity mesures are taken too far, and I further fear that the ECB is unequipped intellectually to deal with this transformation...

John said...

Doctor:
I find it hard to blame anyone in PIIGS countries for contemplating civil disobedience. They are seeing their democracies taken over by foreign financiers.

I agree that austerity measures alone will not fix the PIIGS. The governments need to plug the tax loopholes and collect the taxes that have been levied. The Eurozone may also need to go a 2-tiered currency. For awhile, China had two currencies, Foreign Exchange Currency, and People's Currency. When foreigners visited China, their currency was converted to Foreign Exchange currency. Most Chinese used People's currency, which was worth less, for their everyday purchases. I'm told by a co-worker who went there in the 90s that his contacts could find somebody on a back street who would swap dollars or FEC for People's currency. The dollars and FEC bought a whole of of PC.

Maybe the PIIGS need a cheaper currency to attract FDI and tourism.

sgt.red.blue.red said...

S&P Ratings downgrade--'Find a parade and get in front of it' type of timely analyses.

Another 'industry' going the way of EK.

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Jim said...

Wait till the Greek government changes hands in late Feb. The cow pies will be hitting the fan then.

Dr William J McKibbin said...

According to ECB Pres Mario Draghi, the situation in Europe is "very grave" -- Pres Draghi's choice for words is ominous...