The biggest US money market funds have slashed their exposure to Europe’s embattled banking sector to the lowest since at least 2006, the FT reports, underlining the spreading nervousness about the eurozone’s indebted periphery. The 10 largest US money market funds reduced their short-term lending to European banks to just $284.6bn by the end of August, or 42.1 per cent of their total assets, Fitch Ratings said in a report published on Thursday. That’s the lowest relative exposure since at least the second half of 2006, when Fitch’s records begin, and lower than the level reached during the nadir of the financial crisis. Since the end of June, these “prime” money market funds, which act as lubricants for the global financial system and invest mostly in highly-rated debt, have cut their European banking exposure by more than $55bn in absolute terms.
Fitch Ratings warned on Thursday that it might downgrade the credit rating of China within two years, Reuters reports, and there was a greater than even chance of a downgrade of Japan’s credit status. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, told the news agency that China’s local currency debt rating could face a downgrade over the next 12 to 24 months. ”We expect a material deterioration in bank asset quality,” he said. “If the problems in the banking system pan out as we expect or are even worse over the next 12 to 24 months, then that would incline us to take the rating downwards.”
We were as relieved as anyone that Fitch, as expected, declined to follow S&P’s lead on Tuesday, but here’s a chart that nevertheless gave us something to ponder:
Fitch, the Good to Moody’s Bad and S&P’s Ugly, on Tuesday morning reaffirmed its AAA rating on US sovereign debt and maintained a stable outlook. This is unsurprising: it said as much following the conclusion of the debt ceiling negotiations.
A quick read of the rationale (pasted below) highlights the differences in how Fitch sees the US fiscal picture. (It’s more William Hart than James Whistler.) Compared to S&P, it places more faith in Congress, current growth assumptions, and the special place of US currency and debt in global capital markets. Read more
On Tuesday afternoon Fitch reaffirmed its commitment to the US’s AAA rating.
The statement from the rating agency, which has been less critical of the US fiscal trajectory than Moody’s and S&P, describes the US’s debt ceiling deal as “commensurate with its ‘AAA’ rating”. Its timing was Chopinesque — at pixel time the President was set to sign the Budget Control Act, following the Senate’s Tuesday 74 to 26 vote in favour of the deal. Read more
The European Central Bank will continue to accept Greek debt as collateral for loans unless all the major credit rating agencies it uses declare it to be in default, a senior finance official told the FT. The ECB would rely on the principle of using the best rating available from the agencies – Standard & Poor’s, Moody’s and Fitch – the official said. The comments came after S&P on Monday said the plan, backed by France and Germany, for banks to roll over their holdings of Greek debt into new bonds would constitute a “selective default”. Fitch, the third-largest rating agency, has also indicated it is likely to call a rollover a default. But Moody’s has yet to comment. If only one of them does not downgrade Greece, the ECB could continue to prop up the Greek banking system. The ECB’s continued support for Athens is crucial given that Greek banks are almost entirely dependent on the European Central Bank for funding. Meanwhile Reuters reports that Asian stocks paused on Tuesday after several days of gains that were widely attributed to the Greek rollover deal.
Fitch was doing its best on Tuesday to not fall down dizzy while circling around the possible ways to separate Greek banks from the sovereign.
The logic is tortuous but at least Fitch is trying to provide fair warning. From a press release accompanying its latest report on European bank exposure to Greece, published Tuesday. Read more
The ratings agencies have left no one in any doubt where they stand on a voluntary rollover of Greek bonds.
Overnight from Reuters: Read more
Ratings agency Fitch said it would place the US credit rating on negative watch if the debt ceiling was not raised by August 2, Reuters reports, the date by which Treasury secretary Tim Geithner believes borrowing authority would be exhausted. Moody’s issued a similar warning this month, saying it would put the US on review if there was no agreement on the debt limit by mid-July.
The International Monetary Fund is blocking a critical €12bn ($17bn) aid payment to Greece just weeks before it is due, insisting it cannot go through without concrete assurances from European officials on a new Greek bail-out, reports the FT. European finance ministers went into a meeting on Sunday believing the two issues had been separated and that the payment would go ahead as planned in early July once a new austerity plan was approved by the Greek parliament. Meanwhile Fitch said it would regard a voluntary rollover of Greek maturities as a default, Reuters reports. The FT reports that while continuing uncertainty is weighing on market sentiment, the news that future bonds issued by the European Stability Mechanism on behalf of Greece, Ireland or Portugal will not receive “preferred creditor” status was welcomed by creditors.
Hypothetically, obviously. At this stage.
Its CUSIP number is 9127953B5. Read more
Fitch has revised Japan’s outlook to negative from stable, FT Alphaville reports. “Japan’s sovereign credit-worthiness is under negative pressure from rising government indebtedness,” Fitch said. FT Alphaville says stand by for commentators pointing at deflation-ravaged low JGB yields and concluding that Fitch is not being overly smart. Read more
Ratings firms won another victory against legal claims that they should be held responsible for billions of dollars in losses suffered by investors during the financial crisis, reports the WSJ. A three-judge panel of the US Court of Appeals for the Second Circuit ruled that Moody’s, Standard & Poor’s, and Fitch Ratings cannot be held liable for their ratings of mortgage-backed securities. In a decision upholding a lower court’s dismissal of the case brought by pension funds in Wyoming and Detroit, the judges wrote that ratings firms provided “merely opinions” about the credit-worthiness of the securities. Opinions are protected by the First Amendment, a defense the rating firms have often used in the past.
You know what we said lately about sovereign credit ratings turning on a dime?
Example du jour late on Friday: Read more
Moody’s on Monday:
For both securities, there is a persistent challenge for investors: how to determine the potential for loss when the triggers resulting in equity conversion are not transparent and allow for significant regulatory discretion. This same difficulty in predicting the loss associated with contingent capital securities is why we have decided not to rate such securities at this point in time. In addition, investors are taking equity risk with the upside limited to the return of principal at redemption or maturity. Read more
Cash-strapped US states and cities face the prospect of downgrades after Fitch Ratings changed the way it analyses their burgeoning pension bills, according to the FT. In valuing pension liabilities in its credit analysis of states and local governments, the rating agency will now assume a return on assets of 7 per cent, lower than the average return of 8 per cent used by most pension plans. That translates to an increase in the average plan liability of 11 per cent. Plans in Montana, Hawaii, Vermont and New Jersey are among those whose funding ratios fall under 60 per cent using Fitch’s assumptions. The Illinois State Employees Retirement System is the weakest at 37 per cent, compared with 44 per cent using its reported 8.5 per cent assumed rate of return.
Breaking pre-market news on Friday,
- Espírito Santo Financial terminates its contract with Fitch — statement. Read more