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Unemployment is sky high, national debt is not far short of double the size of an economy which is still shrinking and its ruling coalition has a wafer-thin majority, yet there are glimmers of hope in Greece.
Having finally struck a deal with the EU and IMF to keep bailout loans flowing, Athens is preparing to dip its toe back into the bond market with a five-year bond for up to 2 billion euros.
The government has not said when the syndicated issue might be launched but having mandated banks for the sale the likelihood is sooner rather than later. It's a remarkably quick return two years after a debt restructuring which was essentially a default.
Today, there could be more good news. Moody’s will review its credit rating of Greece and it is possible that an upgrade – or a signal of future intention to do so – could be forthcoming. Moody’s upped Greece two notches to Caa3 late last year but it remains deep, deep in junk territory. It also has some catching up to do. Both S&P and Fitch already rate Greece three notches higher.
Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.
S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.
The European Central Bank held a steady course at its first policy meeting of the year but flagged up the twin threats of rising short-term money market rates and the possibility of a “worsening” outlook for inflation – i.e. deflation.
The former presumably could warrant a further splurge of cheap liquidity for the bank, the latter a rate cut. But only if deflation really takes hold could QE even be considered.
Sabine Lautenschlaeger, the Bundesbank number two poised to take Joerg Asmussen’s seat on the executive board, breaks cover today, testifying to a European Parliament committee. A regulation specialist, little is known about her monetary policy stance though one presumes she tends to the hawkish.
Moody’s Ratings made a big sector call last week in its U.S. Public Finance outlook:
Moody's Investors Service has revised its outlook for the US local governments to stable from negative as housing markets continue to stabilize, municipalities' fund balances remain stable, and cities and school districts modify their expenses.
As the debate continues over public pension funding levels, we have this headline from the Financial Times this week: “US States need $980 billion to fill pension gap, says Moody’s.” This is not exactly news. A number of studies, including ones from the Pew Trust and the Public Fund Survey, have identified a massive shortfall for public pension funds. In fact, the Pew Trust said that the shortfall in 2010 was $1.38 trillion, so perhaps we should be applauding state legislatures for improving the gap since then.
The shortfall numbers in these studies, to put it simply, are all over the place. There are many variables that go into these models, but the main factor that causes variation is the expected rate of return on the assets in the plans. The official assumed return on the assets that are held in trust to pay pension liabilities is 8 percent, according to the Public Fund Survey. Fiddling with this projected rate of return can cause swings in the amount of unfunded liabilities. The Moody’s study uses an unconventional assumption. According to the Adjustments to state pension liabilities document:
from India Insight:
Fitch Ratings revised India's sovereign rating outlook to "stable" from "negative" on the back of measures taken by the government to contain the budget deficit, it said in a statement on Wednesday. The rating agency had cut India’s outlook to negative in June 2012 and currently has a 'BBB-' rating for the country.
“Fitch expects the government to broadly meet its FY14 budget deficit target of 4.8 percent of GDP (including privatisation receipts) and to gradually reduce the high level of public debt over the medium-term,” the rating agency said.
from Global Investing:
We wrote here yesterday on how Turkish hard currency bonds have been given the nod to join some Barclays global indices as a result of the country's elevation to investment grade. Turkish dollar bonds will also move to the Investment grade sub-index of JPMorgan's flagship EMBI Global on June 28.
Local lira debt meanwhile will enter JPM's GBI-EM Global Diversified IG 15 percent Cap Index -- the top-tier of the bank's GBI-EM index. But the big prize, an invitation into Citi's mega World Government Bond Index, is still some way off. Requiring a still higher credit rating, WGBI membership is an honour that has been accorded to only four emerging markets so far.
Spanish government bonds have had a good run since the European Central Bank said it would protect the euro last year. But some analysts say the threat of a rating downgrade to junk remains an important risk.
Credit default swap prices are discounting such a move, according to Markit. Spain is only one notch above junk according to Moody's and Standard & Poor's ratings, and two notches above junk for Fitch. All three have it on negative outlook. Bank of America-Merrill Lynch says it sees a “high probability” of a sovereign rating downgrade in the second half of the year.
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The only question had been which rating agency would shoot first. Moody’s did the deed, removing the UK’s triple-A rating on Friday. It is a political humiliation for the UK government, but the downgrade also removes that lingering expectation of being gunned down. The irony is that the humbling may help the UK achieve recovery sooner - and without firing another monetary policy shot in the currency wars.
The credit rating agency Moody’s is in a very delicate position. Its arch rival, Standard & Poor’s, was recently charged by the U.S. Department of Justice alleging that S&P committed mail and wire fraud by defrauding investors with faulty ratings. Moody’s was not charged, but there are a lot of questions about why it was left out of the investigation. At the same time, Moody’s is responsible for judging the creditworthiness of the U.S. government’s debt. There is little wonder that the rating agency is being very transparent in the benchmarks it is using.
Moody’s current rating for U.S. debt is Aaa (negative), which means that it could be downgraded. Unlike Paul Krugman and others who want the nation to issue more debt to attempt to spur economic activity, Moody’s wants the U.S. to reduce its debt-to-GDP ratio to improve its credit quality. In a detailed analysis, Steven A. Hess, Moody’s Senior Vice President, lays out what the agency is watching and the metrics it will use to judge the actions of Congress and the President.