Wednesday, 6 July 2011

Markets and Macro Update - Dude where is my Risk?

Trigger happy rating agencies strike again.

4 notches downgrade yesterday from Moody's for Portugal straight from Investment grade to junk. Moody's clearly in a downgrade mood, racing against S&P in the cutting contest...It's getting nasty.

Same rating agencies that were handing out AAA ratings like candies on dodgy structured credit transactions before 2008 (can you spell Abacus?), collecting big fees paid by the investment banks.

As a reminder: 11 Apr 2007 – Landsbanki received a 5 notch upgrade, from A2 to Aaa, when Moody's announced its new JDA rating methodology on 24th of February 2007. We know what happened to Landsbanki bank in Iceland. Can you spell default? This was one year after Icelandic banks experienced a liquidity scare and their 5 year CDS went through the roof in 2006.

JDA analysis: Moody’s fights back -

And it wasn't only a joke on Landsbanki's rating...

"Glitnir was one of three Icelandic banks that found themselves at the centre of the JDA furore after receiving multi-notch upgrades that placed them above European heavyweights such as ABN Amro. Glitnir was promoted from A1 to Aaa in the first round of the JDA rollout on February 23, and then down to Aa3 when the refined methodology came out in April."

Funding was the issue for Icelandic Banks, the market knew it at the time, except Moody's:

Icelandic Banks - Not what your are thinking - Merrill Lynch - 7th March 2006.

And the rating agencies are failing again:

Iceland Credit Raters Miss Resurrection After Failing to Predict Collapse - Bloomberg

"While Moody’s kept a Aaa rating on Iceland until five months before its banks collapsed, reluctance to raise the island’s credit grade now is blocking the country’s access to a broader investor base. Debt derivatives show the low ratings may be unwarranted as credit default swaps on Iceland indicate it’s less likely to default than euro member Spain."

"CDS on Iceland’s debt have eased 14 percent this year. Contracts on five-year debt were 229 basis points last week, compared with 257 basis points for Spain, the fourth-largest euro member."

But back to the Portugal story:
Two-year Portuguese yields jumped 3.8% points to a new record high of 16.74%.

Leading to European Banks stocks getting hit and CDS 5 year spreads widening as well.

Ireland and Portugal 5 year CDS, displaying a correlation of 1 and moving up in tandem. Here is the picture, courtesy of CMA:
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And the picture for the rest of Europe - wider:
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Contagion to Italy?
Daily Focus Graph

Portugal Sovereign CDS wider than some Portuguese corporates:
Daily Focus Graph

Portugal and Ireland cumulated probabilities of default according to their respective 5 year CDS levels amount to around 50% chance.

CDS market watch: Think you are protected on Greek default risk because you're long CDS protection? Think again...

Greek debt rollover plan unlikely to be credit event-ISDA - Reuters

"Current proposals tabled by France to involve the private sector in sharing the burden of a second bailout for Greece are unlikely to trigger the payout of default insurance, ISDA's general counsel David Geen told Reuters on Monday."

Macro picture:
US ISM Non-Manufacturing PMI, not 53.9 verus previous number of 54.6.

China raised its benchmark interest rates for the third time this year, to 6.56 percent from 6.31%. The nation’s first audit of local-government debt found liabilities of 10.7 trillion yuan (1.7 trillion USD) at the end of 2010 and warned of repayment risks. The heat is on...but The World Bank forecasts the Chinese economy will expand 9.3% this year, compared with 8%for India, 2.6% for the U.S. and 1.7% for the euro area.

Good news for Estonia upgraded to A+ by Fitch. The rating is the second-highest in eastern Europe, behind the Slovenia at AA and on a par with the Czech Republic and Slovakia. Estonia’s 19 billion USD economy grew 8.5% from a year earlier in the first quarter of 2011.

Estonia’s Credit Rating Raised to A+ by Fitch on Economy, Public Finances - Bloomberg

"The government implemented austerity measures equal to 9 percent of GDP in 2009, preventing the budget shortfall from ballooning and keeping the country on course to adopt the euro. Estonia had the EU’s only budget surplus, 0.1 percent of GDP, and lowest public debt, 6.6 percent, last year."

Follow up on previous post "Stuck in the middle with you" part.
Bank of America's 8.5 billion USD settlement on Countrywide legacy mortgages with players like BlackRock, Pimco, New-York Fed and co, looking increasingly in jeopardy:

Primary Prosecutors of Mortgage Fraud? Pension Funds And Plaintiffs’ Lawyers - "Just when you think you’re caught up on all the troubles Bank of America is having with mortgage-related fraud, there’s another story. A group of bondholders calling themselves Walnut Place challenged the bank’s most recent settlement with bondholders for $8.5 billion."

Walnut Place, the nutcrackers:

Bond investors challenge $8.5bn BofA settlement - by Suzanne Kapner

“…The Walnut Place investors said that as many as two-thirds of the loans in two Countrywide trusts failed to meet underwriting guidelines, according to their own investigation. Extrapolating that failure rate to the 530 trusts covered by the bank’s settlement, the Walnut Place investors concluded that BofA could be liable to repurchase loans with unpaid principal balances of as much as $242bn.”

Bank of America stock currently 2.59% to 10.71 as I write this post.

July 19, 2011, we will get Q2 2011 Bank of America Corp Earnings Conference Call.
To be continued...

Liar's Poker winner à la Michael Lewis way: Goldman Sachs

Goldman Took Biggest Loan in Fed Program - Bloomberg

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