Posts filed under “Analysts”

And then there were 4

And then there were just 4 Euro Zone countries who retain their AAA rating, according to S&P – no doubt less in time.

Personally, I believe that the importance of the AAA rating is way overrated, particularly in the current circumstances.

S&P downgraded 9 Euro Zone countries on Friday 13th, including France – don’t you just love the date/timing – pure drama.

Indeed, Italy, Portugal, Cyprus and Spain were downgraded by 2 notches, with Austria, France, Malta, Slovakia and Slovenia by 1 notch – Cyprus (BB+) is also now in junk territory – so much for those Russians who used Cyprus – they will learn. In addition, S&P suggests that, in the event of a default, investors in Portuguese and/or Cyprus debt would recover between 30% – 50% of their assets, at the most.

The ratings agency reiterated its rating on Belgium, Estonia, Finland, Germany, Luxembourg, Ireland and Holland. All 16 countries have been removed from CreditWatch, suggesting that there will be no further downgrades in the near term. However, 14 of the countries (ex Germany and Slovakia, who regain their stable outlook rating), remain on negative outlook, which imply a 1 in 3 chance that their rating will be lowered in 2012/2013. Basically, of the Euro Zone, only Finland, Luxembourg, Holland and Germany have retained their AAA rating.

S&P stated that the “rating actions are primarily driven by our assessment that the policy initiatives that have been taken by the European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the Euro Zone”.

Greece’s credit rating is CC – forget Greece – I will be amazed if investors recover even 25% of par.

The downgrades were widely expected and were leaked during market hours on Friday. In addition, it is actually not as bad as it could have been – there was a risk of Holland and, more importantly, Germany would be downgraded, with France’s rating being cut by 2 notches. The markets took the news in its stride. Sure, there is likely to be some selling first thing on Monday, but I’m not sure that it will be widespread and/or prolonged.

LCH Clearnet raised the margin requirement on trading on (3.25 – 30 year) Italian debt FYI.

However, the more important issue is the (certain) ratings downgrade to the EFSF/ESM, now that there are only 4 remaining Euro Zone AAA countries and with the 2nd most important Euro Zone country (France) having lost its AAA rating. Oops. Monsieur Sarkozy start getting real.

Personally, I believe this could be the final nail in the coffin for Greece. Negotiations between Greece and its creditors collapsed on Friday – there is a serious chance that Greece will have to have to default and indeed, exit the Euro. Contagion issues then arise. However, the ECB’s 3 year LTRO has helped enormously (particularly in respect of yields on shorter Euro Zone dated debt) and, as you know, I expect the ECB to introduce QE in the 2nd Q – possibly even in the 1st Q. In addition, the question is – will the Euro Zone be better without Greece – personally, I seriously believe it.

A recent watering down of the “fiscal compact” (supported by Germany, who wants more flexibility !!! – this really represents double standards by Germany, yet again – Germany FYI has not met its Maastrict treaty commitments for the majority of the time, I would add) has not helped the case for the ECB introducing QE, but I remain convinced that its inevitable – I suppose the ECB could demand that countries stick to pre agreed fiscal targets, in return for them buying the relevant countries bonds.

With the Sovereigns downgraded, a number of Euro Zone banks are next. Having said that, I reiterate, I remain bullish the European financial sector – particularly for those who do not need to raise equity capital – given the ECB’s 3 year LTRO programme. Yes, I know you think I’m crazy, but……….;

Just imagine what would have happened if the ECB had not introduced its 3 year unlimited LTRO programme. Bloomberg reports that US money market funds reduced their lending to French banks by 97% (yes that’s 97% – no typo) in 2011. US, Japanese and Swiss banks have benefited from this shift. However, I repeat, the ECB’s UNLIMITED 3 year LTRO is a game changer. There is NO LIQUIDITY issue facing (virtually all) European banks – even INSOLVENT BANKS COULD WELL SURVIVE. By the way, French banks increased their use of ECB funding by 62% in the 4th QW 2011, according to the Banque de France.

In addition, the ECB policy is effective QE, by the back door, as banks (in particular those in trouble) play the short term (less than 3 year) carry trade – the really bust banks will play the longer term carry trade;

The Euro traded closed at US$1.2676, well below the E1.30+ in December 2011, but even this rate is questionable. My forecast of sub E1.20 looks good and getting better by the day.

The 2012 game is beginning – fortunately, as I expected. However, let me just add that 2012 is going to be a particularly difficult year to forecast – I will respond accordingly.


The great news (or in your case, unfortunate news) is that my Internet problems, here in Goa, seem to be sorted out. Will need a few days to get back up to date though.

Have a great weekend. I am.

Category: Analysts, Think Tank

Bank Earnings Forecast: +57%

Today’s howler comes from the fundamental banking analyst community. Recall that this is the group who once existed to help investors decide where to place their monies. When that did not work out, their bosses morphed their business model towards generating IPO and syndicate business. When that failed, they moved towards driving short term institutional…Read More

Category: Analysts, Earnings, Really, really bad calls

Sarkozy: French Rating Downgrade “Difficulty, not Insurmountable”

Following a drop of factory output by -5.1% in October YoY, as compared with a forecast decline of just -0.7%, the Indian Rupee is tumbling – its down over 15% against the US$ YTD. The SENSEX is down approx 23% YTD, making it one of the worst performers of the Bric countries, though China is down roughly around the same percentage;

Well, you heard it first from Sarkozy – basically he is trying to defuse the impact of the impending French ratings downgrade, likely imminently. Remember that S&P suggested a possible 2 notch downgrade for France. A downgrade is considered a near terminal event for Sarkozy’s Presidential reelection hopes. The current favourite to replace Sarkozy is Francois Hollande, leader of the French Socialist Party, who may add a further complication to the recent Euro Zone “fiscal  compact”.

Other euro Zone countries will be downgraded, including Germany, if S&P carries out their threat Fitch joined S&P and Moody’s in threatening a downgrade for a number of Euro Zone countries, warning of a “significant economic downturn” in the region;

It looks as if Commerzbank needs a 2nd state bail out since 2008, according to German political sources, though Government officials have denied the story – the EBA suggests that Commerzbank will need E5bn. The EBA has ordered European banks to raise E115bn by June next year which, whilst not enough, will still prove to be a struggle. European banks continue to reduce leverage – current estimates suggest that the need to reduce their balance sheets by at least E2tr;

Read More

Category: Analysts, Credit, Think Tank

Fitch comments on EU summit results

After Moody’s did earlier today, Fitch is giving its thoughts on Friday’s EU summit. “It seems that a ‘comprehensive solution’ to the current crisis is not on offer.” They acknowledged the initiation of an “institutional and policy framework for a more viable eurozone and ultimately greater fiscal union, but taking the gradualist approach imposes additional…Read More

Category: Analysts, MacroNotes

QOTD: Ratings Agencies Jobs

What is the function of Ratings Agencies? The answer to that question was most pithily expressed thusly: might “The function of a ratings agency is to visit the field at the end of the battle and shoot the wounded.” -John Heimann, Spring 1998 (former U.S. Comptroller of the Currency and later vice chairman of Merrill…Read More

Category: Analysts, Really, really bad calls



Category: Analysts, Bailouts, MacroNotes

Do Ratings Agencies Still Matter?

Old joke about Analysts: You do not need them in a Bull market, and you do not want them in a Bear market. > I was thinking about that in light of the S&P’s mass EU downgrade threat. As always, the Credit Rating Agencies are quite late to the party. And consider that the European…Read More

Category: Analysts, Really, really bad calls

Over Rated

Source: Over Rated, Bloomberg Businessweek, Nov/Dec 2011

Category: Analysts, Bailouts, Think Tank

The Con Man’s Lament: Equity vs Commodity Firms

There may be no honor among thieves, but there has always been some small measure of dignity — even respectability — amongst the con men of the equity markets. Apparently, there is no such corresponding code of honor amongst commodity trading firms. I refer of course to the debacle that is MF Global. How on…Read More

Category: Analysts, Legal, Really, really bad calls, Trading

Moody’s threatens ALL Euro Zone countries with downgrades

Kiron Sarkar is an investor and advisor in London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.


Moody’s threatens to downgrade ALL Euro zone countries – hey, that includes Germany does it not. Off course it does. I really wonder what officials in the German Finance Ministry think of that – a bit of a shock – well, possibly stronger emotions than that, I suspect. However, why the surprise – in my view Moody’s is just reflecting the reality of the situation.

French newspaper reports (La Tribune) suggest that S&P may downgrade the country’s outlook to negative in the next few weeks – personally, I do not believe that France will be able to maintain it’s AAA rating, so no surprise. French unemployment rose to the highest since December 2009. Looks increasingly as if Sarkozy is “French toast” in next years Presidential elections – no great loss, but the likely winner (a socialist) – who knows what he will be up to. Basically, more
uncertainty – just hope (likely) that the euro zone issues will be sorted out before that – making it more difficult for the potential Socialist candidate to complicate the process.

The far more important point is that Germany is finally recognising that it is not financially immune. The other big issue is whether Germany comes up with a credible solution re the Euro Zone and, by default (maybe not the right word to use, given the current situation) for themselves.

Read More

Category: Analysts, Bailouts, Think Tank