Currency Wars

[dZeus]

...

Not so sure, I think it is more that banks and other parties became unwilling to extend further financing.

What about:
- central banks allowing banks to post bonds of potential/likely insolvent countries, valued at par, as collateral for funding? And the same for mortgage securities as far as I know.
- Removal of mark-to-market by the FASB

Sounds to me our system has a severe case of 'The Emperor's New Clothes'. In line with trying to make rating agencies shut up, we can probably expect other measures like:
- Forcing pension funds to invest in sovereign debt. Japan already has done this for some time, as far as I know.
- Nationalization of private pension funds. Argentina and Hungary already did this, directly or indirectly?

In my opinion, in a system where too much debt has been allowed to build up, this debt needs to be written off. Masking the issue (too much debt) will just drain valuable resources to servicing this unsustainable level of debt. Debt that cannot be paid off has to be written off. Austerity (Ireland, Greece, Baltic states/ Eastern Europe) or increasing public debt already at high levels (USA method) both lead nowhere without reducing the debt burden (the core issue).

If we insist on austerity without fixing unsustainable debt levels, soon we'll find ourselves in a situation where debtors have nothing left to lose. That's when they really lose it.

[VJ]

Why? There is no contract between the countries and the rating agencies. They are not a public institution. How much reliance would you have on a rating agencies' opinion if you know that they warn debtors but not creditors?

It seems we have a slightly different view on what a rating agency should be. I tend to think that they should more be a watchdog for the debitors, warning them if they are at risk... You see them more as a body that *shoud* offer transparency between debtors and creditors. Different views...

Again, why? I think it is valuable information that a rating agency is going to asses recent developments and which direction they expect the assesment to take. In any case, these are private companies and I do not see why they should comply with politicians' folly.

I don't see it as a politicians folly, but knowing that a country is under watch without knowing when things might change makes the markets nervous IMO.

So countries took on to much debt and therefore the rating agencies should change behaviour? That's like telling a bank they should be more lax towards a debtor because they can't meet their obligations.

No, that is not what I meant. I meant that: yes, of course countries should not have such high debts; but the sad truth is that they have. Not implying that this is the reason things should change.

Any source? Way shorter than semi-annual. Moreover, why not then enforce a cease-trading on government bonds in certain circumstances as opposed to require something from the rating agencies? See what'll that do: option to cease trading at the whim of the debtor.

Well, I just said 6 months at random... Just some delay that allows things to stabilize a bit should be enough.

I don't mind parties taken to account for their mistakes. I do mind parties being accused without substance and I do mind parties being accused of wrongdoing when their behaviour has been rather consistent and the underlying cause lies elsewhere (and the parties making the accusations are the causing parties).

One problem is that the rating agency don't get punished for their mistakes. If they mistakenly give some junk thing an AAA rating today, people invest because of that, and the next day it gets the junk rating (which it already should have had), there are no consequences for the agency. The same goes in the other direction: if they give it too low a rating, it will cause people not to invest, making nearly impossible for the country to gain trust and take actions to increase its rating.

[Umfriend]

It is quite unlikely that Hellenic would ever need government support, [...]

All I can say is: start your own rating agency!

Quite unlikely? We'll see. In any case, that is the argument made by Moody's and is rather consistent with how they have rated banks since at least 1998 (when I became aware of such things) and may well date back decades further back.

[Umfriend]

dZeus, I don;t think I disagree with much you say there. I do think the austerity measures taken by Ireland are paying off and that it has a decent outlook. But them. Irelands' economy is quite a bit more flexible as compared to Greece and Italy. Austerity makes sense for the short term but what they really need to do is improve their economic structure (which, for instance, the Netherlands have done gradually since 1982 (Akkoord van Wassenaar).

[dZeus]

It seems we have a slightly different view on what a rating agency should be. I tend to think that they should more be a watchdog for the debitors, warning them if they are at risk... You see them more as a body that *shoud* offer transparency between debtors and creditors. Different views...


I don't see it as a politicians folly, but knowing that a country is under watch without knowing when things might change makes the markets nervous IMO.


No, that is not what I meant. I meant that: yes, of course countries should not have such high debts; but the sad truth is that they have.


Well, I just said 6 months at random... Just some delay that allows things to stabilize a bit should be enough.


One problem is that the rating agency don't get punished for their mistakes. If they mistakenly give some junk thing an AAA rating today, people invest because of that, and the next day it gets the junk rating (which it already should have had), there are no consequences for the agency. The same goes in the other direction: if they give it too low a rating, it will cause people not to invest, making nearly impossible for the country to gain trust and take actions to increase its rating.

Blaming the rating agencies for warnings or downgrades of sovereigns has nothing to do with what you're saying. It's just a ploy by politicians to divert attention from their own incompetence that led to this situation. Credit markets already price in risk long before a downgrade occurs. For example, France sovereign bonds have been trading far below the level of other AAA countries for a while now.

The abrupt and violent swings are mostly observed in the stock markets, where I suspect that there are many more people trading on emotion (small/home investors) and/or anticipating people trading on emotion when such a downgrade has been announced.

Your solution to me sounds like that we can fix this problem by closing our eyes, or rather, preventing people from opening their eyes. I don't think that ever helped (quite the contrary)!

[Brian Ellis]

It seems I'm not alone in my views. From the local rag:

A REFERENCE in a Moody's Investors Services report claiming that Cyprus may not only resort to a bailout, but also may have its debt restructured "someday", was the cause of much upset at the finance ministry.

It also led to a strong reaction by finance minister Kikis Kazamias, who compared it with a self-fulfilling prophecy.

"The Cypriot government’s loss of international capital market access has increased the likelihood that the government will need to seek emergency funding from official sources, which in turn increases the likelihood that private sector creditors to Cyprus may someday be asked to participate in a burden sharing arrangement, as have Greek private sector creditors," Moody's says in its unpublished report dated November 9, obtained by the Sunday Mail.

Kazamias expressed his displeasure about this reference on Thursday by pointing out that those rating agencies that make substantially unfounded forecasts "are part of the problem".

A ministry of finance source said on condition of anonymity that "Moody's acted in a very irresponsible way".

Note that S&P and Fitch have not downgraded Cyprus (yet???)

[dZeus]

dZeus, I don;t think I disagree with much you say there. I do think the austerity measures taken by Ireland are paying off and that it has a decent outlook. But them. Irelands' economy is quite a bit more flexible as compared to Greece and Italy. Austerity makes sense for the short term but what they really need to do is improve their economic structure (which, for instance, the Netherlands have done gradually since 1982 (Akkoord van Wassenaar).

Whether Ireland can grow out of this problem remains to be seen. In some of the Baltic states this austerity has led to a massive population flux out of their country. What it comes down to is what a debtor's society is willing to go through to repay debts. The UK has lived in extreme austere conditions for quite a while to pay off WWII debt to the USA.

I don't see support for similar austerity by the Greek population. There's a point they reach where they chose to either go through a depression with loss of financial autonomy to pay unsustainable debt levels, or to go through a depression where they keep their sovereignty by defaulting on this debt (e.g. by converting all sovereign debt into New Drachmas and devaluing those).

[Umfriend]

It seems we have a slightly different view on what a rating agency should be. I tend to think that they should more be a watchdog for the debitors, warning them if they are at risk... You see them more as a body that *shoud* offer transparency between debtors and creditors. Different views...

Man, this is wrong on a few levels. First, if anything, regulators and (thus) governments have for years now pressed the rating agencies for more transparancy. It is when they themselves are subject matter that that should be different? So we believe the issuer pays model is wrong but the service provided should be to the issuer?

I don't see it as a politicians folly, but knowing that a country is under watch without knowing when things might change makes the markets nervous IMO.

And sudden changes might not? Rating agencies, I say again, are private companies. They are not a public service that should be acting as such. I am not saying they should issue public warnings (i.e. putting issuers on watch negative/positive/neutral) but that it is up to them to establish a policy and act on it. Besides, as dZeus already stated, in most cases the agencies trail market developments, not lead them.

One problem is that the rating agency don't get punished for their mistakes. If they mistakenly give some junk thing an AAA rating today, people invest because of that, and the next day it gets the junk rating (which it already should have had), there are no consequences for the agency. The same goes in the other direction: if they give it too low a rating, it will cause people not to invest, making nearly impossible for the country to gain trust and take actions to increase its rating.

This is not true. Their business has been damaged and they have to deal with far more regulation now. Claims have been made against them and it remains to be seen whether they will not be granted by courts.

Moreover, they provide opinions with respect to creditworthiness, not investment advice. Never ever has a rating agency stated that their opinions would be correct. Never have they asked anyone to rely on their opinions and certainly not only.

In fact, I have met only one type of "investor" and one type of party who chose to rely on credit ratings only: Central banks and governments/bank regulators!

[VJ]

Moreover, they provide opinions with respect to creditworthiness, not investment advice. Never ever has a rating agency stated that their opinions would be correct. Never have they asked anyone to rely on their opinions and certainly not only.

They provide opinions; but the opinions have a direct impact on the interest rates at which a country can get loans. So the markets don't consider them as merely opinions.

[VJ]

Besides, as dZeus already stated, in most cases the agencies trail market developments, not lead them.

If they trail, then what is the point of them? They "publish" the market developments, but then the markets respond to the publication... The whole mechanism feels to me as a mechanism for self-fulfilling prophecies.

[Umfriend]

It seems I'm not alone in my views. From the local rag:

Note that S&P and Fitch have not downgraded Cyprus (yet???)

If they all had the same opinion they might have been just one agency...

In any case, of course a politician would say that and lay the blame elsewhere. The representation of Moody's analysis is flat-out wrong. The downgrade is due to:
- The expectation that Cyprus will have to contribute to the ESFS (surprise, huh?)
- That increased probability that Greece will have to support its banking system due to the higher write-offs on Greek debt
- Debt-to-GDP already rising and lacking structural changes to change that trend.

What is the self-fulfilling prophecy here? Of course rating agencies are forward looking, but these are real threats obervably by everyone.

[Umfriend]

They provide opinions; but the opinions have a direct impact on the interest rates at which a country can get loans. So the markets don't consider them as merely opinions.

Apparantly, their opinions are at the mark more often then not then. A job well done I'd say.

@Brian, the Cypriotic banks may have reduced exposure to Greek national debt but about 40% of their exposure is to Greek private sector.... With a threatening collapse of the Greek economy that is a real real issue.

I did not know this. Thank you, Mr. Moody's!

[Umfriend]

Whether Ireland can grow out of this problem remains to be seen. In some of the Baltic states this austerity has led to a massive population flux out of their country. What it comes down to is what a debtor's society is willing to go through to repay debts. The UK has lived in extreme austere conditions for quite a while to pay off WWII debt to the USA.

Yeah, outflow is seen from Greece and Ireland as well. We'll just have to see.

I don't see support for similar austerity by the Greek population. There's a point they reach where they chose to either go through a depression with loss of financial autonomy to pay unsustainable debt levels, or to go through a depression where they keep their sovereignty by defaulting on this debt (e.g. by converting all sovereign debt into New Drachmas and devaluing those).

I think we would all be better off if they simply defaulted and enterend into a club-of-paris/brady bonds-style phase. But the Greeks will suffer terribly and won't ever recover unless they structurally change their economic structure and even then it'll take a long long time.

[VJ]

Perhaps a stupid question, but how can a country get out of the "default" state? Almost nobody will lend it money... but it needs money to invest to get out of the default state... or what am I missing?

[Umfriend]

@Brian: Fitch may not have downgraded Cyprus but had it rated at BBB, Moody's went from Baa1 to Baa3 so basically from 1-notch higher to 1-notch lower. Where's the outrage on Fitchs BBB rating?
Moreover, 5-years CDS spreads imply a BB-rating equivalent probability of default so the market is even more pessimistic. Courtesy of Fitch.