Standard & Poor’s Rains On Europe’s Parade by Rick Ackerman on December 7, 2011 1:36 am GMT · 4 comments
No sooner had Merkel and Sarkozy put the finishing touches on the latest bailout rumors than Standard & Poor’s was threatening to downgrade the debt of 15 of the 17 euroland nations. Recall that as the week began, France and Germany were talking up the latest supposed solution to the debt crisis. Bigger and better than their last supposed solution, it drew a rave from the always-discerning Tim Geithner, who pulled out all the stops in making much ado about nothing. “The eyes of the world are very much on Europe now,” he told reporters in Berlin, adding that he was “very encouraged by developments in Europe in the past two weeks, including reform commitments in Italy, Spain and Greece.”
Nothing like a little more austerity to resuscitate the economies of Europe’s deadbeats, right? The prospect seems to have swayed no one at Standard & Poor’s, which is out to show the world that it matters after having missed a hundred signs a few years ago that the banking system was in imminent danger of collapse. The ratings agency has been doing its vengeful best to atone for the oversight, distancing itself from borrowers with whom it used to sleep around. The threatened downgrade would affect the long-term rating of Europe’s bailout fund, the European Financial Stability Facility. A decision reportedly is pending a review by S&P of the sovereign members’ books, and there’s a possibility that ratings could come down a couple of notches. That would put even more pressure on the ringmasters of Europe’s dog-and-pony show, including the U.S. Federal Reserve, to counterpunch with sufficient easing to offset the increase in borrowing rates that would otherwise occur.
While an S&P downgrade would be a mere formality, it would explicitly warn private capital away from public debt. Not that any such warnings are needed, since no one actually believes that there are any sovereign borrowers left, even Germany, whose debt deserves to be rated as nearly riskless. In the meantime, the widening schism between the ratings agencies and sovereign borrowers can only heighten the public’s skepticism toward the latter. In time, this skepticism will harden into cynicism, which in turn will extinguish the last vestige of credibility the central banks may still possess. All of it rests with officialdom at this point, the public having long since ceased to believe that the bankers know what they are doing.
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Kabuki
ECB Confirms Shadow Banking System In Europe In Tatters
Submitted by Tyler Durden on 12/07/2011
Yesterday we reported that the freeze in the Europe repo, asset backed paper and money markets is a broad indication that the shadow banking system - the primary conduit to broader disintermediated financial stability or in this case distress - on the continent has now locked up, which means that the three traditional bank transformations of risk, maturity and liquidity now have to be undertaken by the very non-shadow banks whose existence relies day to day on the ECB and the Fed, without any 3rd party market intermediaries (incidentally we are looking forward to tomorrow's quarterly update of the US shadow banking system and will post promptly). Today, the ECB has just confirmed our worst fears, in that the shadow situation is likely worse than expected. From Bloomberg:
ECB SAID TO CONSIDER LOOSENING RULES ON ABS AS COLLATERAL ECB SAID TO PLAN LOOSENING OF COLLATERAL CRITERIA FOR LOANS ECB SAID TO CONSIDER TWO-YEAR LOANS FOR BANKS ECB SAID TO LOOK AT ALLOWING MORE UNCOVERED BONDS AS COLLATERAL Incidentally none of these announcements were unexpected: Goldman predicted they would all happen (odd how that happens).
More from Bloomberg:
The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.
Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.
And here is what the market wanted NOT to hear:
The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union.
And more:
The ECB has indicated it will act to prevent a credit shortage as this falls within its monetary policy remit.
Policy makers may seek to broaden the pool of eligible collateral for ECB loans by loosening rules governing the use of asset-backed securities, the officials said. They may also increase the amount of uncovered bank bonds that can constitute a lender’s collateral portfolio from the current 10 percent limit, they said.
The ECB is already lending banks as much money as they want against eligible collateral for periods of up to a year. It is likely to add two-year loans to its arsenal, two officials said.
While a three-year loan has been discussed, it is unlikely at this stage, they said.
One official said longer-term loans might encourage banks to lend to companies and households, and they would also help financial institutions meet new Basel rules on holding longer- term liquidity.
As a reminder: liquidity stopgaps only make the insolvency gangrene even worse as it allows banks to NOT address the underlying issues and mask the symptoms. But everyone knows that by now... Or should. |
