13th July 2012
One of the features of rating agency action in the Euro zone crisis has been the suspicion that the timing is not random. Of course recipients of downgrades are often likely to call "foul" but the timing of many of them has made me wonder too. A ratings war? Well maybe not that but last night Moody's downgraded Italy and today she has 5 billion Euros of government bonds to issue. And yes recently her bond market had been showing some signs of an improvement. So Italy may well be considering the bad luck implications of Friday the 13th today.
Also in a more recent theme the Orwellian "some animals are more equal than others" may have concerns around the fact that Italian government bond prices fell yesterday with her ten-year bond yield rising from 5.81% to 5.91%. Did perhaps some sellers have what is euphemistically called the "early wire" or more bluntly inside information? Obviously there are other influences on the price but the day had started in the opposite direction of bond price rises and yield falls.
If we had any regulators worth mentioning they would investigate such matters but as the Liebor scandal has shown they have costs (salaries and expenses) but apparently little or no benefits. Should any of them be awake let me offer a little help:
The ratings have been disclosed to the rated entities
The possibility of them leaking it is where I would start.
What did Moody's actually say?
'Moody's Investors Service has today downgraded Italy's government bond rating to Baa2 from A3. The outlook remains negative.'
One reason for action I agree with entirely and have reported on this many times:
'Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets''
Moody's is now expecting real GDP growth to contract by 2% in 2012,'
Another seems rather circular to me:
'Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence'
I read that as essentially saying that the situation is worse because it is worse! However there is a little nugget here which may well resonate a little more:
'signs of an eroding non-domestic investor base. (for her government bonds…)'
Wait a minute
Let me remind you of the European Central Bank's three-year liquidity operation of late 2011 and early 2012 which in effect encouraged banks to buy their own countries sovereign debt. This was deemed a great success and those like me who point out that there are consequences from official intervention (which could also be described as manipulation) were in a very small minority. Now we see the likelihood that it may have given overseas investors an opportunity to sell their holdings of government bonds and in particular Italian ones. So an operation to make things more stable has the side-effect of increasing instability.
I am not saying that the LTRO has made things worse simply that there has been a backwash in the opposite direction and that with official intervention it is invariably thus.
Structural deficit theory has not had a good Friday the 13th either
The International Monetary Fund has reported this week that it thinks Italy will have a structural budget surplus of 0.5% in 2013. This concept is treated by some as something akin to a Holy Grail and yet as you can see moving to it has not released Italy from the shackles of contagion and high bond yields. And as the UK is aiming for such a target there are potential future implications for us too but after making your card we can move on as it can be quite some time before the consensus catches up with reality.
Politicians like the concept of structural deficits and one cannot avoid the thought that this is because they invariably give lower numbers than the actual deficit.
What actual damage is there from this downgrade?
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