Moody's degrades more European nations

[Dr Mordrid]

Bloomberg....

Moody’s Cuts European Sovereigns Including Italy, Spain

Feb. 14 (Bloomberg) -- Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and revised its outlook on the U.K.’s and France’s top Aaa rating to "negative." John Dawson and Susan Li report on Bloomberg Television's "First Up."

Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and revised its outlook on the U.K.’s and France’s top Aaa ratings to “negative,” citing Europe’s debt crisis.

Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, Moody’s said. It also reduced the ratings of Slovakia, Slovenia and Malta.

“The uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework” and the resources that will be made available to deal with the crisis, are among the main drivers of Moody’s action, the ratings company said.

The euro slipped 0.2 percent to $1.3154, and the pound weakened 0.3 percent to $1.5723.

Standard & Poor’s took away France’s and Austria’s top credit ratings last month in a string of downgrades. Investors poured money into the government bonds of nations such as France and Austria even after the countries lost their AAA ratings at Standard & Poor’s last month.

Moody’s also lowered its outlook on Austria’s Aaa rating today to negative outlook. Malta’s rating was downgraded to A3 from A2 and given a negative outlook, and Slovakia and Slovenia were both downgraded to A2 from A1 and given negative outlooks.

[Brian Ellis]

These damned ratings agencies with their self-fulfilling prophecies because of short trading should be outlawed. They are a grave hindrance to economic recovery.

[dZeus]

These damned ratings agencies with their self-fulfilling prophecies because of short trading should be outlawed. They are a grave hindrance to economic recovery.

We've had this discussion before. The general gist is that they lag behind the markets rather than determine/front run them. If they don't offer any added value (for which an argument can be made if they focus too much on short term), then what we need to do is change the regulations for pension funds that rely on these ratings rather than just to pretend nothing is wrong with state finances (by banning the rating agencies).

[Dr Mordrid]

These damned ratings agencies with their self-fulfilling prophecies because of short trading should be outlawed. They are a grave hindrance to economic recovery.

Shooting the messenger?

[VJ]

We've had this discussion before. The general gist is that they lag behind the markets rather than determine/front run them. If they don't offer any added value (for which an argument can be made if they focus too much on short term), then what we need to do is change the regulations for pension funds that rely on these ratings rather than just to pretend nothing is wrong with state finances (by banning the rating agencies).

The lag behind the markets, but the markets still look at them:
1. markets see things are going down and react
2. rating agencies decrease the rating
3. markets react to decrease of rating

Step 3 is one that should not be happening, but it is. So in that sense, the rating agencies are providing a "double whammy". So the real problem is not the rating agencies, but the fact that their opinions results in an additional reaction.

[Brian Ellis]

IMHO, it's a scam, pure and simple. The initiated short sell their borrowed bond holdings (this is legal in most countries) and re-buy when the bottom has dropped out of the bonds, then repay the lenders, while keeping the profit. Result: value for nothing and, being initiated, at very little risk.

On the whole, many economists and analysts work on emotions and not on hard facts. Just because Mr Moody or Mr Fitch say something bad, they react negatively, even though the collateral value of the bonds has not changed by a bent cent. This is why VJ's 3. happens. I agree that it shouldn't but it's because of this that the initiated can make their fortune, while there is nothing illegal for a ratings agency (which is only an analytical opinion-maker, not an "initiated" in the sense of the stock market rules) or its employees to profit from a forthcoming announcement or within the first minutes after the publication of the announcement.

I suggest that one of the agencies changes its name to Non-standard and Rich's.

To illustrate another anomaly:

Moody's also put France, Britain and Austria on "negative outlook", which implies there is a 30% chance of a downgrade in the next 18 months...

...In its report the agency attributed its moves to "the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework".

Britain is not even in the "euro area"!!!

[UtwigMU]

I'm with dZeus here: the rating agencies lag the market and anyone investing millions into bonds (couple of weeks ago our country borrowed 1bn) should do his homework and evalaute the borrower thoroughly.

I would say the agencies are US biased since they rate USA on par with Austria and I would say Austria is in better shape than USA (lower debt to GDP, lowest unemployment in EU but USA has slightly higher growth). I think USA will inflate out of debt.

So they only affect lenders which have statute to lend only above certain rating.

How does shorting bonds look like? Can someone explain - I know how shorting stocks looks like.)

With bonds the value doesn't change (except with Greece and others who have defaulted) but the yields do. Next time country issues bonds they need to offer higher interest in order to attract lenders.

[Umfriend]

How does shorting bonds look like? Can someone explain - I know how shorting stocks looks like.)

With bonds the value doesn't change (except with Greece and others who have defaulted) but the yields do. Next time country issues bonds they need to offer higher interest in order to attract lenders.

Well, we all know where I stand I guess. I am a bit dissapointed by unsubstantiated claims. There is nothing wrong with short-selling and there is nothing wrong with forming and publicizing an opinion.

UK is not in Euro but they are in EU and affected by EU economic performance. Moreover, their debt/GDP is rising as well.

Utwig, shorting bonds works the same. The nominal value may not change but the price does. Assume a 5% one-year bond with 100 as face value. If the yield (or required return equals 6% then the value is 105/1.06. Simply put. As yield go up, price goes down, regardless that at maturity, barring default, you'll recieve a fixed value of 105.