The chatter on Friday's downgrades of European sovereign ratings debt is all over the place -- from those dismissing it as old news (especially given that S&P warned back on December 5th) to those viewing it as part of a larger and consequential transformation of the international monetary system.
What follows is an attempt to provide a guide to the multifaceted implications.
It focuses on three types of consequences: (i) those that are unambiguous and already reflected, albeit not fully, in market valuations; (ii) those that are less well understood but will become clearer in the next few weeks; and (iii) those that are consequential but where the analytics are still largely unknown at present.
The sovereign debt of European sovereigns was already trading at yields consistent not only with what S&P announced today, but also with more draconian downgrades -- thus the view that the impact on overall yields and spreads would be contained.
Yet there are some differences between signaling an action and actually taking it. First you remove residual uncertainty about the action, including timing and scale. Second, you encourage others to follow. Third, you impact the pattern of investment flows, especially those subject to guidelines and restrictions defined in terms of ratings.
All three are relevant for Europe. The net result has both a quantity and price angle: a decline in future investment flows into the Eurozone, and incremental market pressure that, other things being equal, would be more persistent than would have otherwise been the case.
This speaks to a weaker Euro and recurrent volatility in sovereign spreads.
In introducing a rating wedge at the very inner core of the Eurozone, the downgrade of France in particular impacts Pan-European vehicles. This includes the EFSF which the European Union uses to bailout countries and, in future, banks.
While there is some short-term uncertainty, the scope of these vehicles -- and, therefore, their effectiveness in countering the region's debt crisis -- will be undermined. It also has implications for the ECBs continued willingness to contaminate its own balance sheet.
That takes us to known unknowns, and they are consequential.
It is unclear the extent to which the downgrades will alter the function of the international monetary system over time. It is also unclear how material the incremental headwinds blowing out of Europe will be for countries already facing internal fragilities.
It is unclear the extent to which the downgrades will materially impact the asset quality and capital adequacy of banks and other financial institutions. And there is little clarity on the range of reactions on the part of companies, depositors and households.
Over the next weeks, months and years, we will learn a lot more about the consequences of today's historical downgrades in Europe. What is clear at this stage is that the balance of risks is to the downside, for Europe and for the global economy.
This post originally appeared on CNBC.com.
to the economies unto which they are proportionate. Assets denominated by weak currency should still find sizable ballast in future months.
Why have our leaders not reinstated The Glass Steagall Act?
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) swept away all state barriers to interstate banking. It allowed financial institutions to locate branches in other states and to purchase or merge with banks headquartered in other states.
Created banks to big to fail!
The Gramm-Leach-Bliley Act (GLBA), also referred to as the Financial Services Modernization Act of 1999, repealed part of Glass-Steagall, tearing down the walls between banking, insurance and investments. Companies could now merge, partner and operate freely within each other's industries. The act also made it possible for the financial industry to group mortgage and other portfolios, selling them as investments.
Allows them to throw the dice with our money with them knowing our government will be forced to cover their losses!
Read more: The History of Bank Deregulation | eHow.com http://www.ehow.com/about_5413083_history-bank-deregulation.html#ixzz1jZzP0v1k
NoBailouts The world derivatives bubble amounts to approximately $1.5 quadrillion ($1,500 trillion or $1, 500, 000,000,000,000), which adds up to about 25 times the total world gross domestic product of perhaps $65 trillion, although this latter figure would need to be deflated to remove speculative hot air. The European share of the world derivatives bubble is certainly in excess of one third, meaning more than $500 trillion. This sum alone exceeds the capacity of Earth to generate credit and liquidity. It is a black hole capable of eating up the exertions of all of the central banks of the globe. It cannot be bailed out. Derivatives can only be disintegrated, in practice shredded or deleted. The fate of civilization itself rides on understanding this problem. Mrs. Merkel is on the wrong track."
http://tarpley.net/2011/10/01/europe-must-fight-back-against-us-uk-speculative-attacks/
Given their track record selling junk debt as AAA rated asset backed securities, it’s unconscionable that such irresponsible actors have any influence on global markets. To the same degree that the ratings agencies were complicit in ginning the mortgage/ asset backed securities markets, it is highly likely that they have a similar role and conflicts of interest in this European debt business.
LAUGH. Unfortunately President Obama is running up trillion dollar per year plus deficits and it's going to take an awful toll on all of us at some point. But what does he care as long as he can shower money on the groups that can get him re-elected. Unions, environmentalists, teachers, etc etc. He's trading our future for his job security.
Obama is going to DOUBLE the Bush deficits and do it in HALF the time. If you thought Bush was a big spender....then Obama is bl0wing your mind!
The problem we have is the IRRESPONSIBLE massive amounts of debt that progressive liberal politicians are spending.
This will eventual lead to a bond melt down and will with in the next 6 months lead to a number of poorer Euro Zone countries leaving and decamping to other currencies, leaving the richer ones to their own devices.
There is no way out for Greece. It can't cut spending enough to balance it's budget, it just reduces tax revenues more. Not a pretty picture for tax payers in Greece and the rest of the ECU.
Americans need to watch and learn from the failure of the ECU.