Global Economic Crisis

The largest of the so-called PIIGS nations ( those members of the European Monetary Union most impacted by the sovereign debt crisis plaguing the Eurozone) is Italy.  Moody’s Investors Service has  just handed the government in Rome a wet blanket of bitterness.  Italian sovereign debt has been downgraded by Moody’s two notches, from A3 to a level barely above junk bond status, Baa2. No matter how artfully the politicians in the Eurozone spin the news, this is a clear manifestation by the market of complete lack of faith in the credit worthiness of the largest PIIGS nation.

Putting the latest downgrade in perspective, it is clear that the contagion stemming from the Eurozone debt crisis was never contained in Greece, or subsequently ring-fenced in Ireland and then Portugal by massive taxpayer-funded bailouts. It’s clear that this devastating sovereign debt crisis is now corroding the fiscal life of Spain and Italy, and bear in mind that not even all the printing presses of the European Central Bank can impede the coming revolt of the bond vigilantes. We are facing a sovereign debt crisis, not a liquidity crisis, and money printing by central bankers is as useful in such  a crisis as are water pistols in an artillery duel.

To view the YouTube music video for “Wall Street Kills,” click image below:

As further proof of the continuing global economic and financial crisis, Moody’s cut the credit rating on fifteen major banks, including the most powerful investment bank in the world. The list included  Goldman Sachs, JP Morgan Chase, Citigroup and Bank of America. The European Banks on Moody’s list included Deutsche Bank, HSBC and Barclays.

The Eurozone debt crisis, raging out of control, was clearly a  factor in the Moody’s downgrade. However, volatility and exposure to weak econometrics in the U.S. and China, questionable risk management and the negative outlook for profitability of these banking institutions amid the continuing  global economic crisis were also linked to the Moody’s downgrade. It should be recalled that since the crisis emerged, the ratings agencies have tended to be a lagging as opposed to a leading indicator of economic turmoil. It is likely that the financial risk to major banks is even worse than suggested by the most recent Mood’s downgrade.

In an earlier blog piece, I reported on the fact that ratings agency Fitch had dumped Madrid’s credit rating. Standard & Poor’s had also cut the Spanish government debt rating. Now Moody’s, the other major credit ratings agency, has joined the parade by dropping Spain’s rating by two notches. Furthermore, Moody’s added that France, currently with a AAA rating, faces acute danger that its rating may be dropped in the future.

The Eurozone debt crisis is clearly not being alleviated by the desperate machinations of the bumbling politicians. The crisis is getting worse, it is spreading, and along with that somber reality goes a rising tide of public anger and protest.  The sovereign debt crisis is currently impacting Europe with dire consequences for the entire global economy.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

As the Eurozone sovereign debt crisis worsens (joined by the U.S.A. and U.K.), the ratings agencies are at it again, with their lagging indicator of choice; the credit worthiness downgrade. This time, Italy got hammered. Moody’s cut the Italian credit rating by three levels, from A2 to Aa2. That is a lower rating than Moody’s rates the credit worthiness of the Baltic republic of Estonia.

According to Moody’s, “the negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets.”

The downgrade of Italy’s public debt will translate into widening spreads on Rome’s government bonds, making it even harder to service the multi-trillion dollar public debt accumulated by successive Italian governments. This all happens as the inept European politicians still clamor over another ill-fated effort to “ring-fence” the Greek debt crisis, pretending that is has not yet spread to other PIIGS countries, including Italy. The Moody’s downgrade is more concrete evidence that policymakers in Europe are totally disconnected from economic, financial and fiscal reality.

In a move that is no longer a surprise, one of the leading credit rating agencies, Moody’s, did the downgrade routine. This time it was two leading French Banks; Societe Generale and Credit Agricole. The cause was their significant exposure to sovereign debt from crisis-ravaged and virtually insolvent Greece. Moody’s made clear that these two French banks may be due for future ratings downgrading.

The Eurozone politicians, especially in France and Germany, are in a panic over Greece and its insoluble debt crisis. They are currently doing what they have done repeatedly since the crisis erupted; reassuring the markets that the brilliant, highly competent politicians in Europe have the situation under control, and Greece will not default. At this point, no one with an iota of common sense believes them. Furthermore, the markets are increasingly aware of-and frightened by- the near certainty of a Greek debt default, perhaps followed by Portugal, Ireland, and in a worst case scenario, Spain and Italy. What this means is that the major banks in Europe, in particular France and Germany, are sitting on a mountain of worthless assets. This crisis is far from over, and the ratings agencies are far from done with the downgrading.

The ratings agencies, which facilitated the 2008 financial disaster by rating subprime securities as grade A investments, have not been known for being out in front on warning of looming catastrophes. Now, however, with the Greek debt crisis raging, the ratings agencies are outdoing each other in releasing their downgrades. Moody’s is back with a downgrade on Greece, lowering it three levels to CA, just slight above an actual debt default.

What Moody’s and others are saying is that they have no faith in the second massive EU and IMF bailout plan, with it being funded by borrowing by other sovereigns that are also in difficulty, and involving bizarre formulae for debt exchanges which may or may not involve the private sector. As Moody’s puts it,  “the announced EU program… implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent.”

Any doubt that the Eurozone debt crisis is no longer contained, but has now metastasized into a full-blown global calamity, is rapidly being erased by fast-moving events.   With the second bailout of insolvent Greece in the works, followed by a ratings downgrade to junk by Standard & Poor’s, Moody’s has now weighed in with a double whammy. Ireland’s sovereign debt has been downgraded to junk status, with a clear signal that the marketplace expects the Irish Republic to require a second bailout package, as was the case with Greece.  Moody’s has now followed up on its action regarding Ireland with a warning that for the first time in its history, the AAA rating on U.S. government debt is under review for a possible downgrade. This inauspicious development is in connection with the political dysfunctionality that has afflicted Washington policymakers in both the executive and legislative branches over extending the national debt limit.

With ratings collapsing and bond spreads widening throughout the developed world, it now appears that another member of the infamous PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) is descending into fiscal anarchy. Italy is on the verge of requiring a  bailout of its own, one which would exceed what has already been allocated to Greece, Ireland and Portugal. In desperation, the Italian senate has voted in favor of austerity measures. Based on the failure of the austerity measures in Greece to prevent a second bailout being required, the desperate action by Italian decision makers is unlikely to work, and has the look of panic rather than thoughtfulness.

Like a tsunami wave that can travel thousands of miles from the epicenter of a major seismic event,  the cascading sovereign debt crisis, which had its origins in policy responses to the global financial implosion of 2008 and Greek debt crisis of 2010, is now ravaging public finances on both sides of the Atlantic. A point may soon be reached where private investors, Eurozone taxpayers and the IMF can no longer cobble together ever-larger “rescue packages,” all of which, with perverse logic, require even larger levels of public debt to construct. A dark truth may soon permeate this ballooning crisis; the policymakers have no real solutions, and have just about run out of gimmicks and short-term fixes. The global economic crisis that began with the financial collapse of 2008, far from being resolved or a clear path to recovery being underway, is entering a more dangerous phase, in which sovereign debt reaches the level of unsustainability. The result could very well be paralyzing insolvency among the advanced economies, which could destroy the economic future of an entire generation.