Notes From Underground: Spanish MISSTEPS lead to MOODY’s downgrade

The ratings agencies are awakening to the idea that there are major problems in the European sovereign debt markets. Moody’s downgrade is insignificant as Spain still holds a comfortable investment grade, Aa2, so from a financial viewpoint the demerit is a mere mark on its transcript. Rather than affecting Spain, the move by Moody’s raises the question: where have you been?

Spain is toiling under the effects of a real estate bust that has crushed the Spanish banks and burdened the private and public sectors with a credit hangover. The Spanish policy makers have to rein in public spending while the economy is experiencing unemployment rates of more than 20 percent. Consumers are burdened by the debt left from the property crash, which made the U.S. housing bubble rational in comparison.

Following the Moody’s downgrade, the European policy makers will meet this weekend at another EUROZONE SUMMIT in Brussels. This meeting will be more prep work for the big SUMMIT taking place March 24-25, when the EU is to finalize some future EUROPEAN STABILITY MECHANISM. Beware, that with German elections being held on March 27, the BS that will be flowing from Brussels will be at least waist deep.

Frau Merkel has given in to Sarkozy at the last two summits, so I would expect that it is payback time and the Germans will “appear” to have their desires met. The German financial hierarchy wants to avoid the European Stability Mechanism from having carte blanche to buy bonds, for a Bernanke-type, European-wide bond program would make Germany, Holland and a few others the basic financial guarantor for the entire EU and place the German citizenry in the position of being a “TRANSFER AGENT” for the entire European project.

All of Germany’s current account surplus would merely be distributed to those countries in credit stress. Do you really think the Bavarian Burghers signed on to that program? Yes, the people of Germany want to send their hard-earned EUROS to Athens, Dublin and Madrid to support the profligate ways of their European brethren. The probable outcome will be more obfuscation and muddle, for the financial markets seem to have more to digest than just European debt.

The Bank of England held its overnight rate at 50 basis points. No surprise but the POUND was sold off as the DOLLAR was the favorite of the day. Currency markets have been heavily short the DOLLAR and as many profitable positions were unwound, the DOLLAR was bought back to close out positions. Markets are definitely in a risk-off mode as the news from the MIDEAST is beginning to take its toll. Friday’s RETAIL SALES number will be a good indicator of how far the position unwind will go, for if the number is very robust–the consensus is for headline of 0.8 percent and ex-autos 0.7 percent—and the EQUITY markets rally and fail it will mean that the risk off has further to run. Equity markets are not under pressure for fear of a rate rise for Chairman Bernanke will not use higher interest rates to curb higher oil prices.

Also, the Canadian unemployment number comes out Friday morning at 6 a.m. CST and the market is looking for a drop in the rate to 7.7 percent and a gain in jobs of 26,000. Remember, last month Canada had a blowout job increase of 69,200 so look for possible revisions. If the Canadian data is stronger than expected, it should provide a lift to the U.S. equity market but more importantly it should provide us with another clue as to whether fear is beginning to trump all else.

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3 Responses to “Notes From Underground: Spanish MISSTEPS lead to MOODY’s downgrade”

  1. Danny Says:


    IF by some crazy odds pension funds/institutions did their own risk work on all debt holdings…would it completely destroy the business model of moody’s and S&P (at least with respect to their credit ratings business)? It just seems to me there is no logical point of having credit rating agencies. The credit agencies seem to CONTRIBUTE to risk rather than MITIGATE risk.

    I understand the legal requirements of many of these institutions to hold only “highly rated securities” but it seems like everyone in the world would be better served by legal requirements (put onto pension funds, etc.) to undergo some sort of pre-approved credit rating process in-house vs. using these third party companies that at this point always seem to be behind the curve anyways.

    Also on a seperate note…how do you feel about the link between exporting inflation and the manufacturing boom that is currently going on in the U.S.? This sector seems to be the most robust area of the economy and I am starting to wonder if it is largely due to inflationary pressures that are cropping up in the rest of the world.



  2. yra Says:

    Danny –good point and questions. I have looked upon the ratings agencies basically like baseball with its anti-trust exemptions.The moody’s sp, fitch is a governement sponsored oligopoly–and their work reflects an oligopoly that is secure in its position—so what use are they except that they provide lazy asset managers with cover–hence the game is by definition corrupt.True smart money does not rely on the poorly timed output of the RATERS.The second question I think has more to do with the weakness of the dollar and enhanced U.S. competitiveness in the short term.Yes global inflation is playing a small part as wages rise in the emerging world but I still think that is insignificant at this point.Also some multinationals have grown tired of the lack of legal protections in some countries and have been bringing some production to safer borders–but this trend is to short in duration to be of significance yet

  3. Arthur Says:

    Yra, as we are following Russia, interesting Novatek-Total

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