With apologies for the angelic imagery, here’s BNP Paribas on Wednesday (our emphasis):
In our analysis, six EM sovereigns are at risk of becoming fallen angels this year or next. Three of these we consider ‘high risk’. As much as USD 259bn of sovereign and corporate bonds is at high risk of being cast down into speculative grade perdition. This accounts for 9% of all EM bonds outstanding (USD 2.87trn).
… it is little surprise that the peak of credit quality for EM appears to be over. After having hit the BBBthreshold in 2013 and improving another 1/6th of a notch over2013 (Figure 2), the credit quality of the EM benchmark has begun to slide downward. Already it has lost 1/6th of a notch and we forecast the index to slide another half notch by the year end.
By Theo Casey, marketcolor
Half nine (GMT) is seldom a cheery time of day for the Chancellor.
Mid morning, several times a week, the Office for National Statistics releases worse-than-expected parcels of economic gloom, which serve to undermine HM Treasury and George Osborne’s Plan A.
At least that’s what it normally does. Read more
So, would a sovereign downgrade hurt sterling? And if so, how much? It’s hard to model this as historic comparisons are muddy and sterling crosses each obviously carry their own difficulties. Consider this chart from Morgan Stanley, by way of illustration:
New York, September 11, 2012 — Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook… Read more
(Alternate title: Fitch junks incoming EU president.)
Fitch has cut Cyprus’ credit rating to ‘BB+’ from ‘BBB-’. That’s a junking and, shockingly, it’s down to the banks. From Fitch (with our emphasis): Read more
UPDATE: The below is an accidental exaggeration and ignores the role of the fourth rating agency, DBRS, which Joseph recently posted about. For a collateral hike to take place DBRS would have to reduce its rating on Spain to BBBH/BBB. It is currently at A (high) with a negative outlook having been downgraded in May.
As JPMorgan’s Flows & Liquidity said in May: Read more
Fitch has just cut Spain’s rating to ‘BBB’ from ‘A’… Outlook Negative. (That’s the same rating as Kazakhstan, for those keeping score).
And, in a seperate report also just released, Fitch estimated that the Spanish banking system will need require additional capital of between €50bn and €60bn to cover potential stress losses on their domestic loan portfolios. Under a more extreme scenario, based on what occurred in Ireland, these amounts rise to between €90bn and €100bn. Read more
Not a huge deal, but one to file away for May lest bank stakeholders get complacent after the recent stress test results.
We vaguely remember some people getting caught a little off guard when S&P downgraded a slew of banks last November because of a methodology change. Read more
On Monday, S&P warned that the downgrades of sovereigns in Europe may well impact credit ratings in the Asia-Pacific region, the WSJ reports. While governments in the region may have recourse to strong balance sheets, the “dislocation in global funding markets” means that any fallout would be more challenging to deal with than it was in 2008. However, S&P is also of the view that China will manage to avoid a hard landing. Asian economies on the whole have bit hit by waning demand from the European countries that they export to. The IMF has also lowered its global growth forecast for 2012, highlighting that no country is isolated from the crisis in Europe.
The downgrade of nine European nations continued to reverberate across global markets. However, traders grew increasingly more positive as the session progressed, adding to racier bets despite underlying fears that the eurozone debt crisis could sap sentiment, hobble the banking system and thus denude economic growth worldwide, reports the FT. Main US markets were closed on Monday for the Martin Luther King Jr holiday and this has added to the reticence of some investors to take fresh bold positions, leaving trading fairly thin. S&P 500 futures were active in the electronic market, and they point to Wall Street adding 0.5 per cent when it returns to action on Tuesday. The euro, unsurprisingly, is in focus. The single currency has fallen below Y97 for the first time in 11 years but later pared its losses to trade at Y97.25. Separately, the FT reported that Jun Azumi, Japan’s finance minister, has raised the prospect of the government’s first intervention in the euro currency market for nine years after warning that the yen’s gains against the euro were “a bit rapid”. Europe’s struggle to resolve its debt crisis led to a 15 per cent appreciation of the yen against the euro in the second half of last year. This year, as tensions have persisted, the yen has gained another 2.4 per cent.
How significant is the downgrade of France by Standard & Poor’s?
According to some commenters, like the WSJ’s Simon Nixon, not that significant. Read more
Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in. – Wolfgang Münchau.
And sure enough, that’s precisely what’s happening. Analysts, strategists, and commentators across Europe are asking: ‘Where is the fiscal union?’ Read more
Standard & Poor’s has downgraded Spain’s sovereign debt rating, citing slowing growth and a weakening financial system, reports the FT. In an announcement late on Thursday, the rating agency knocked Spain’s rating down one notch from double A, where it has been since last April, to double A minus. It also kept the country’s rating on a negative outlook. S&P’s statement, which you can read in full on FT Alphaville, said that despite “resilience” in Spain’s economy this year, there were “heightened risks to Spain’s growth prospects” due to high unemployment, tighter financial conditions, a high level of debt and a broader eurozone slowdown. Earlier in the day analysts and government economists warned that Spain would be unlikely to meet its ambition of reducing its budget deficit to six per cent of GDP by the end of the year, writes the FT. Meanwhile Fitch downgraded several European banks on Friday morning and put several others on watch as part of a global review, reports Bloomberg.
Una sgradita sorpresa:
On Sept. 19, 2011, Standard & Poor’s Ratings Services lowered its unsolicited long- and short-term sovereign credit ratings on the Republic of Italy to ‘A/A-1′ from ‘A+/A-1+’. The outlook is negative. The transfer and convertibility assessment remains ‘AAA’, as it does for all members of the eurozone. Read more
So much for a quiet August.
Just a week after eurozone authorities announced a new bailout package for Greece (and just before the start of Europe’s traditional August holiday period), Moody’s has put Spain on review for downgrade. Read more
A few, final thoughts on the negative outlook for the USA from Jan Hatzius and his team at Goldman Sachs.
First they look at the somewhat confusing market reaction — Treasuries were remarkably resilient following the move by S&P: Read more
Nomura’s sceptical strategist Bob ‘the bear’ Janjuah is feeling very pleased with himself, following S&P’s decision to revise its long term outlook on the USA to “negative”.
As well he might. Read more
Moody’s has cut Ireland’s sovereign rating by two notches to Baa3 on Friday and with the outlook on negative the Irish find themselves one step from junk.
From Moody’s: Read more
Ahead of Friday’s meeting between Portugal’s political parties and President Aníbal Cavaco Silva and after S&P’s two notch downgrade, we thought this chart (from RBS) was worth an airing.
It’s not quite as forceful as the Greek response — not yet anyway — but Spain has hit back at Thursday’s Moody’s downgrade.
Via Reuters: Read more