The European Union, continuing to struggle with a debt crisis among many of its members, had a busy if not surprising week of action. In a move that smacked of killing-the-messenger, the EU put significant restrictions on how, what and when the three biggest ratings agencies in the world could publicly assess the sovereign credit ratings of its member nations.

The EU's head-turner came in the official form of a reprimand against the “Big Three” ratings agencies (Moody’s Investors Service, Standard & Poor’s and Fitch Ratings), all of which are based in the United States. The EU is fast-tracking legislation that restricts the timetable in which any of them could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or “malpractice” on the agencies’ part. Some call the move an attempt at improved transparency and competence, while others liken it to censorship.

The three credit ratings agencies were criticized heavily for their performance in ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued criticism as the agencies routinely lowered ratings of and put on warning high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain)—all of which since proved to have deep-rooted fiscal issues, mind you—and, more recently, former economic powerhouse France, which saw its prestigious “Aaa” rating downgraded a step by both S&P and Moody’s in 2012. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.

- Brian Shappell, CBA, NACM staff writer

As noted in this week’s eNews, among many media outlets, the European Union debt and financial crisis is teetering on spinning out of control. The Spanish banking struggles are the latest piece appearing close to a fall, and represents much more that the proverbial pawn, in comparison, that was the well-publicized Greek problems.

New York University Professor and 2012 Credit Congress speaker Ed Altman, PhD, told NACM this week that the entire mess could have limited, from a perspective of U.S. businesses, if credit departments had a few years ago not relied so heavily upon data from ratings agencies (Standard & Poor’s, Moody’s, Fitch) and it own interactions with a limited number customers in said countries.

“For a year and a half, I’ve been arguing the typical and traditional way to analyze the health of sovereign debt is incomplete, at best,” said Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions. “It should be supplemented by a more in-depth analysis of the health of the private sector in each of the countries that are being analyzed.”

Altman, who developed the Z-Score bankruptcy predictor in 1968 and recently launched a Z-Score-Plus Smart Phone app, said running a check of public companies in the struggling European nations five years ago would have foretold some of the coming problems even as the sovereign ratings were good. Back then, Altman used the Z-score to determine that 13% of Greek companies were at least 50% likely to default. That number has spiked to upward of 25% in 2012. And fast-rising trend was also noticeable, but to a lesser extent in the rest of the “PIIGS nations:” Portugal and Italy both show that 25% of its public companies are at least 20% likely to default at present, not including financial institutions. Spain’s is much lower but, again, if factoring in financial institutions as well, no one save Greece is in worse shape than the Spanish, Altman suggested. All that gives credence to his outlook on the ratings agencies:

“Spain and Italy are still ‘A3’ from Moody’s and similar from S&P, but we all know these countries are no longer A-rating-worthy.  I’m not saying you should ignore the macro factors most people look at, but you need to look at the micro factors closely as well.”

-Brian Shappell,CBA, NACM staff writer

(Note: Altman will be speaking at the 2012 Credit Congress in Grapevine (Greater Dallas), TX next week on the topic of corporate distress prediction. Registration is still available (on-site only) as are discounts for NACM members on the new Z-Score smart phone app. For more information on the upcoming Credit Congress, visit http://creditcongress.nacm.org/).
 

Creditworthiness and paying habits along sovereign lines was, as expected, a recurring topic of interest throughout FCIB's Annual International Credit and Risk Management Summit in Hamburg in May. While sources noted the importance of weighing conditions within each region of a country and relationships with existing customers in such places, FCIB delegates still craved information at the national level, and not just about often-discussed problem nations like Greece, Spain and Russia. Based on panelist, speaker and delegate observations, here is a rundown of some of the latest risk and big-picture economic trends to keep in mind for some less-discussed nations:

Argentina and Bolivia: Concern is growing among those who do business in these nations as the threat of confiscation, such as in Venezuela in the recent past, continues to rise. As such, the short-term credit market is rife with risk, and options like credit insurance are in short supply. The key phrase here is "wait and see."

Bangladesh: Emerging as a manufacturing outsourcing destination because of lower wage demands than other production powerhouses such as China and India.

Egypt: Major changes to the banking system are taking place post-revolution. Hence, even timely payments are often subject to delays of a week or more. One panelist noted that Egypt resembles the Turkey, now a sub-BRIC emerging economy of note, of 25 years ago. Granted, the process of change and reaching potential is more likely to come over decades, not months or years.

Hungary: Those doing business here generally do so on open account following a short period of COD-type arrangements, and characterized Hungary as one of the better-paying European nations at present. However, it often takes three to five days for clearing and gaining access to the payment.

Italy: This PIIGS nation fell off media radar somewhat, but is doing a good job of quickly executing reforms. However, its debt burden remains tremendous, and the nation could struggle more if well-publicized problems in Greece or Spain escalate further.

Netherlands: Held up as the example of how a nation can progress from perennial debtor (up to the late 1990s, early 2000s) to creditor over the course of a decade. Few are in better a position financially, save Germany, in the European Union at present.

Nigeria: Continues to be a high-risk market although, because of the oil trade, can be lucrative as well. Financial problems at Pipelines and Products Market Company (PPMC) remain a concern with possible spillover effect. Fuel shortages have been blamed on PPMC woes, and it is estimated the private market has exposure well exceeding $1 billion.

Slovenia and Croatia: Cash-flow problems for companies there have been an issue for years, but that seems to be abating somewhat.

Tunisia: Showing no improvement, payments are continually late or delayed. A wait of a month for banks to make the money available is not out of the question even when payment is made on time.

United Arab Emirates: The UAE actually benefitted from the Arab Spring revolts. Like parts of Turkey, Dubai now has become a bit of a trading center between more Islamic-tied business, including those operating under Sharia Law, and the west.

- Brian Shappell, CBA, NACM staff writer

While testifying before the U.S. Senate in recent days, a Federal Reserve official defended the decision for the Fed and central banks from two other continents to try to help the European Union amid a debt crisis that threatens to hurt the economic rebounds of itself and trading partners alike.

Steven B. Kamin, director of the Fed’s Division of International Finance said in prepared testimony that measures taken in November, including the expansion of swap lines for European banking institutions, were a help not only to those receiving the aid, but business in nations backing the assistance. These include the United States, Japan, Switzerland, the United Kingdom as well as the European Central Bank. Kamin said the spillover from problems with the high-debt nations, most the “PIIGS nations” (Portugal, Ireland, Italy, Greece, Spain) would have caused greater problems, including tougher credit conditions, in the United States and Japan without the aid in the form of monetary policy.

However, it’s worth noting, Kamin’s speech wasn’t a virtual pep rally to decree that all crises had been averted:

“Many financial institutions, especially those from Europe, continue to find it difficult and costly to acquire dollar funding, in large part because investors remain uncertain about Europe's economic and financial prospects. Ultimately, the easing of strains in U.S. and global financial markets will require concerted action on the part of European authorities as they follow through on their announced plans to address their fiscal and financial difficulties. The situation in Europe is continuously evolving. Thus, we are closely monitoring events in the region and their spillovers.”

Brian Shappell, NACM staff writer

Stop us if you’ve read this before – worried about “contagion” spreading from the high-debt “PIIGS Nations,” a U.S.-based credit ratings agency has lowered the boom on the credit ratings and/or outlooks of several in said grouping as well as neighboring nations. While it may seem like a repeat, NACM assures you: it isn’t.

Moody’s Investment Services Tuesday downgraded the sovereign credit ratings of six European nations – Italy, Malta, Portugal, Slovakia, Slovenia and Spain (which fell multiple steps). Additionally, Moody’s wagged the proverbial finger at France, Austria and the United Kingdom – all holders of a prestigious ‘Aaa’ rating level – by publicly moving their respective outlooks from stable to negative.

As Moody’s and its counterparts at Fitch and Standard & Poor’s have alluded to in the past, the agency pointed to “uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework” as well as “increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.” Because of both – and, one could argue, because of the agency’s own increasing spotlight/scrutiny on debts levels in the EU – Moody’s fears the impact on market confidence and the negative cycle that could ensue.

Markets fell slightly on the news, though the announcement generated more of a yawn than the panic and/or debate such a move would have in years past. Economists, including NACM’s Chris Kuehl and The Conference Board’s Ken Goldstein, have made past comments to the tunes of “it didn’t tell markets anything they didn’t already know” or slights on the ratings agency’s own crisis in credibility it suffered after poor analysis and borderline conflicts of interest in business practices during the much discussed run-up to the global economic downturn a few years back. Still, even with less of a cache, the downgrades are likely to have some negative impact on the short-term credit prospects for the nations involved, even if the extent is yet to be established.

Brian Shappell, NACM staff writer.

The following are passages released by Fitch Ratings regarding its six-nation credit downgrade timed with the end of the U.S. business day Friday:

"Fitch Ratings has today concluded its review of the six eurozone sovereigns it placed on Rating Watch Negative (RWN) on 16 December 2011.

The rating actions on the long-term Issuer Default Ratings (IDRs) are as follows:

• Belgium downgraded to 'AA' from 'AA+'; Negative Outlook;
• Cyprus downgraded to 'BBB-' from 'BBB'; Negative Outlook;
• Ireland LT IDR affirmed at 'BBB+'; Negative Outlook;
• Italy LT IDR downgraded to 'A-' from 'A+'; Negative Outlook;
• Slovenia LT IDR downgraded to 'A' from 'AA-'; Negative Outlook;
• Spain LT IDR downgraded 'A' from 'AA-'; Negative Outlook;

"Today's rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB's three-year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures. Nonetheless, the intensification of the euro zone crisis in the latter half of last year undermined the effectiveness of ECB monetary policy and highlighted the financing risks faced by eurozone sovereign governments in the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises."

Source: Fitch Ratings

On the heels of negative press for France and the possibility of a downgrade from its top-notch credit rating, the third of the big three ratings agencies has weighed in with a favorable outlook for the European power…at least for now.

Fitch affirmed France’s long-term foreign and local currency issuer default ratings and its senior debt at “AAA” status. Additionally, its outlook was upgraded from negative to stable. From Fitch:

“The affirmation of France's 'AAA' status is underpinned by its wealthy and diversified economy, effective political, civil and social institutions and its financing flexibility reflecting its status as a large benchmark euro area sovereign issuer. In addition, the French government has adopted several measures to strengthen the creditability of its fiscal consolidation effort.” However, based on problems in other European Union nations, Fitch predicted the chance of a French credit rating downgrade within the next two years at about 50%.

Fitch wasn’t so kind to everyone in Europe on Friday as six – "PIIGS nations" members Italy, Spain and Ireland as well as Belgium, Slovenia and Cyprus – were put on a new downgrade watch on debt and growth concerns.  

In recent weeks, Moody’s Investment Services had placed France on notice that it is in danger of losing its long-held AAA sovereign credit rating on concerns that aren’t so much based on its own situation, but those of rising borrowing costs/bond yield activity tied to collateral damage from problems in other high debt European nations. It is the second time this year Moody’s has released a public warning about France, which along with Germany has been forced to carry the load for a cluster of debtor nations. Standard & Poor’s later put both France and German on warning on a day when 15 European Union members simultaneously were placed on its negative watch. The rational was over “systemic stresses in the euro zone that have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.”

Brian Shappell, NACM staff writer

Some in the mainstream media tripped over themselves early Tuesday to predict the Federal Reserve would emerge from its latest policy meeting with dampened talk of an extended period of low rates and Treasury purchases as the U.S. economy appears to be back on track for somewhat improved growth levels. While the improving economy was noted, the Fed did not take anything that resembled a step back from its rates or Treasury policies.

The Fed’s Federal Open Market Committee unsurprisingly opted to hold the federal funds rate at a range between 0% and 1/4% and reiterated that conditions “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” The announcement indicated the Fed expects moderate growth through 2012 despite problems in global markets, notably high-debt “PIIGS nations” and those in the European Union affected by their struggles. The Fed admitted such global strains remain the largest threat to an improved 2012. Meanwhile, once again, it downplayed the threat of inflation on the U.S. economy:

“The committee anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate [to foster maximum employment and price stability].”

Part of fighting off inflation as well as continuing a “stronger economic recovery,” than found over the last couple of years,  the committee intimated, is part of the reasoning between continuing its policy of reinvesting principal payments from its Treasury holdings (debt and mortgage-backed securities) back into more securities holdings.

Brian Shappell, NACM staff writer

For months the contest has been between the Germans and most of the rest of the European Union over the debt situation and potential influences on one-another's budgets. The deal is finally in place, and it's notable that Germany’s chancellor held her ground despite the near panic that set in throughout the euro zone.

The Germans were (and are) the only nation that has the resources to pull Europe out of the mire, and they were not going to lift a finger until getting what they wanted. Some concessions were made in the end, but the core structure of the German plan is intact and will be the strategy pursued going forward.

The plan as it stands is based on four key elements and, at the moment, it does not look as if these are all that negotiable.

• The first is that there will be strict limits on a nation’s budget deficit as well as their spending-to-GDP ratio.
• The second point is that there will be a system imposed to reduce the existing debts and deficits to no more than 60% of GDP. This is the imposition of some strong austerity plans on those nations that have run up the highest debts.
• The third part of the plan is the enforcement part—severe and inescapable sanctions if nations fail to adhere to the new rules. Germany wants a club with which to beat the members into financial submission, especially the 'PIIGS Nations.'
• The fourth element is a common language and strategy as far as budgets are concerned. The consolidation of national budgets will make the task of coordinating policy far easier.

 
Analysis: There is a very long path between the creation of this plan and its fruition, and there will be many battles ahead. The point is that Germany refused to waver on key points and, now, it becomes a matter of bringing the other nations in the euro zone on board. Germany, which will have to start ponying up the money needed to bail out the southern EU economies, will retain the upper hand on the issue as long as its economy is the only one that has the ability to rescue the others.

Source: Chris Kuehl, NACM economist

It appears only a matter of time now before members of the “big three” credit ratings agencies pounce on yet another economic power in the form of a credit rating cut, as problems stemming from the “PIIGS Nations” continue to grow and spread throughout Europe.

On Monday, Moody’s Investment Services put France on notice that it is endanger of losing its long-held AAA sovereign credit rating on concerns that aren’t so much based on its own situation, but those of rising borrowing costs/bond yield activity tied to collateral damage from problems in other high debt European nations. It is the second time this year Moody’s has released a public warning about France, which along with Germany has been forced to carry the load for a cluster of debtor nations, most recently the third-largest economy on the continent (Italy). All of this could affect the new bailout fund for struggling European nations and continue to have a domino effect through the economy and credit markets.

France got a previous downgrade scare earlier in November in what was later chalked up as an “error” by Standard & Poor’s.  S&P had released notice to a group of subscribers that France’s top credit rating was to be cut but, soon after, offered a mea culpa chalking it up to a “technical error” and a reaffirmation of the nation’s top status. Still, how a full statement on a downgrade to one of the best-rated nations on the planet was readied and released could have been a mere tech glitch became fodder for intense speculation in the weeks that followed.

Still, the warnings and the premature downgrade classification, all are leading to an increasingly likely conclusion that the French will have to deal with a ratings cut in the coming days, weeks or months. And, given its importance in helping steer the stabilization of the stumbling euro situation, it could have a much more dramatic impact in real terms than did S&P’s bold downgrade of the United States this summer.

Brian Shappell, NACM staff writer

EU heads of state worked through marathon session Wednesday, and into early Thursday, in Europe to come up with plans to address problems revolving around crushing debts among several member nations. The first point agreed upon, as ratified by its 27 member state setup, was to force banks to set up higher capital ratios with the purpose of absorbing what are seen as unavoidable losses, notably from Greece, as nations’ debt problems continue to grow. Banks, which had been required to hold a capital ratio of 5%, must raise the ratios to 9% by June 2012. This is seen as a way to create a cushion, in excess of 100 billion euro, for upcoming losses.

Also, in the interest largely of protecting from still somewhat unlikely worst case scenarios in key economies Italy and Spain, the 17-member block of nations operating on the euro ratified plans to bolster the European Financial Stability Fund and pledged that it would be used for insurance and partial guarantees against losses going forward. The 17 members of the EU on the Euro also came to an agreement, likely through considerable strong-arming, with financial institutions to accept up to 50% losses on Greek bonds. The EU also plans to up the Greek bailout to upwards of 100 billion euro through 2014.

Though the plan may not be finalized until December and could yet face bumps along the way, surges and rallies in bond markets in several of the “PIIGS” nations, the U.S. stock market and oil prices were all experienced through the first few hours of business (EST) Thursday.

Brian Shappell, NACM staff writer

Though Moody’s Investment Services has been the most maligned of the three top, U.S.-based credit ratings agencies by the European Union in recent months, the latest moves made by Standard & Poor’s are likely to draw ire from the so-called “PIIGS Nations” and those supporting bailout efforts alike.

In downgrading the credit rating of the city of Barcelona Monday, S&P again clarified the reasons behind its deepening concerns over the key European economy of Spain, which itself received a sovereign credit rating downgrade on Oct. 14. S&P noted that despite “signs of resilience” in the Spanish economy, there are deep problems to worry about, primarily including the state of trade partners in other “PIIGS” members struggling with debt (Portugal, Ireland, Italy, Greece). The following were listed as the top reasons for the downgrade of Spain, from AA- to A-1+, as well as the “negative” outlook going forward.

• “Spain's uncertain growth prospects in light of the private sector's need to access fresh external financing to roll over high levels of external debt amid rising funding costs and a challenging external environment.
• The likelihood of a continuing deterioration in financial system asset quality as reflected in the recent revision of our Banking Industry Credit Risk Assessment score for Spain to Group 4 from Group 3.
• The incomplete state of labor market reform, which we believe contributes to structurally high unemployment and which will likely remain a drag on economic recovery.”

It’s neither the first nor, likely, the last downgrade of an EU member amid the ongoing global economic malaise and debt conundrum. However, it’s among the most notable because its economy is much larger and more critical that some of its neighbors that have struggled in such mighty fashion.

Brian Shappell, NACM staff writer

In what will surely draw the ire of member nations in the European Union, Moody’s Investment Services has moved to cut Italy’s credit rating on concern stemming partly from contagion related to other high-debt PIIGS Nations (Portugal, Ireland, Italy, Greece, Spain). Italy’s government bond ratings to A2 with a negative outlook from Aa2.

Moody’s explained the reasons beyond the downgrade as follows:
"(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.

The downgrade reflects the weight of these growing risks relative to some positive credit attributes. These include a lack of significant imbalances in the economy or severe pressure on private financial and non-financial sector balance sheets, as well as the actions undertaken by the government over the summer. Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens. A country's susceptibility to shocks is a key factor under Moody's sovereign methodology.

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. If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels.”

Will talk of the debt struggles and spreading contagion in four of the five so-called European “PIIGS Nations” resemble a distant memory within one to two years? One of the foremost international macroeconomic minds said just that when speaking at last weekend FCIB New York International Roundtable. Still, the five and most debt-saddled of the PIIGS, Greece, isn’t likely going anywhere soon, either in its debt standing or its affiliation with the rest of the European Zone.

Matthew Higgins, vice president of the Federal Reserve Bank or New York, stated he believes there was reason to be hopeful for significant improvements in four of the five PIIGS economies, which could take some of the hot spotlight in the mainstream media away from them. To wit, Italy and Spain are demonstrating they’re each on a “credible track” as far as austerity goes, and even Ireland and Portugal have hit most of their targets post-bailout. The only “real” concern, Higgins speculated, was Greece.

“Europe easily has the capacity to roll off Greece from the others – There’s a reasonable chance we won’t be talking about this two years from now or, with luck, maybe one year,” he told FCIB attendees. “But clearly, Greece itself is a real challenge. They’re going through a very large fiscal austerity process that dwarfs that of the U.S.”

Still, the euro zone nations carrying the Greeks financially, as well as others more in the middle economically may have little punitive recourse, going forward. Higgins suggests that cutting Greece out of the European Union entirely would amount to an “enormously disruptive mess.”

“The legal infrastructure to do so doesn’t even exist,” said Higgins. “And all the contracts would have to be rewritten.”

Higgins believes it would go a long way to stabilizing or improving all-important market confidence if the EU were to take steps such as firmly establishing a bailout mechanism that is more flexible and providing clarity to what the banking exposure/the related backstop system was for it. Clearly, simply cutting the Greeks out of the equation in no way resembles a cure-all or even feasible option in the short- and mid-term.

Brian Shappell, NACM staff writer

Italy is the latest to feel the wrath of the credit ratings agencies, as Standard & Poor's moved to downgrade Italian bonds. Once again, the market barely noticed, and many have started to assert that the ratings agencies have become next to irrelevant when it comes to these big country bonds.

It comes as no shock to investors that Italy has issues, and the downgrade didn’t add any relevant information to the mix. The Italians are right there with the other struggling PIIGS nations (Portugal, Ireland, Greece, Spain) in Europe as they watch the yields on their bonds rise. Italy is now looking at yields close to 6%, but at least they are still a far cry from the nearly 30% yield the Greek bonds are carrying. The major market collapse yesterday in Europe seems to have been overblown, and there already has been some recovery today as many investors filter back into the positions they abandoned yesterday. The issues are the same, but there is variability from day-to-day when it comes to investor faith.

The latest mood is slightly more upbeat on the subject of the Greek bailout. The sense is that something will happen to reduce the fallout from a Greek default and that has some feeling a little better about the potential for further collapse in other nations. The talk now is of a “managed default” that will reduce some of the impact on European banks and others exposed to the Greek debt. The aim seems to be to quarantine Greece and let the issues be their own as opposed to the concerns of the entire euro zone.

Analysis: The Europeans are simply confused. Everybody knows that Greece is in serious trouble, but they also know that there is capacity to bail them out. The Germans could have a change of heart and back the issuance of eurobonds or the IMF could ride to the rescue with another big loan. The Chinese might even step in. The point is that nobody has a good feel for what happens next. Even if Greece slips into default, there are few who have a sense of what that would look like. It is clear that it would be some kind of managed default, but that is murky at best. The scenarios range from an extreme position resulting in the explusion of Greece from the euro zone to something as limited as negotiated settlements with Greek debtors.

The real issue has and continues to be the Italians and the Spanish. The Italians are locked into the same bitter political battle with which the United States has been struggling. There is no consensus on what to do in Italy as even the ruling coalition is deeply split. The Spanish are in somewhat better shape politically as the Socialists are preparing to yield power to the Popular Party earlier than planned. The new prime minister will have far more latitude than the predecessor has had, but the issue in Spain is that a housing boom was followed by a massive bust and unemployment levels are still above 20%.

The market reaction to all this has been volatile as investors grab at every indication they see. Obviously, the US and Europe are not ready to resume their former positions of influence, and that leaves investors feeling a bit confused—again.

Source: NACM Economist Chris Kuehl

Following a deal struck between stable European Union powers Germany and France, Greece is going to get their second bailout so that they have a little more time to see if the European recovery will become robust enough to save them. The foot-dragging by the Germans and the European Central Bank (ECP) finally ended for a while, and a compromise was worked that is better than inertia though it really doesn’t satisfy anymore.

Still, the deal is a significant one in a lot of respects. The “selective (temporary) default” is the first time there has been a default of any kind on Eurobonds, and that is somewhat likely to weaken this market, as well as the sovereign credit rating of neighboring nations, for a long time. The Europeans have also now committed to an open-ended rescue of Greece, meaning taxpayers in the other EU nations could be fronting the Greeks for years. These latest loans will not be the last. The real work starts now for Greece, the worst off of the debt-hobbled "PIIGS nations," as these loans only stave off the inevitable unless something changes to make Greece competitive.

The global markets were expecting that a deal would be reached, as they could not conceive of the Germans presiding over the destruction of the euro zone. But in the current political climate, nothing is certain and the markets have been wavering for weeks. Yesterday, there was a sigh of some relief, and the response was robust. Now global markets are waiting for the other shoe to drop. Will U.S. lawmakers pull the fat out of the fire at the last minute and make a deal on the critical debt ceiling issue? Most think one is imminent, but there are still some very substantial obstacles in the form of political leaders that are ready to fall on the sword over the issue of the debt and deficit.

Source: Armada Corporate Intelligence.

A bailout agreement between debt-riddled Portugal and the European Union/International Monetary Fund appears to be complete with just one more hurdle to clear. And it appears to have come just in time to prevent a default.

Reports out of Europe Wednesday indicate the Portugal bailout will be valued at 78 billion euro/$116 billion (USD). All parties actively were pressing opposition leaders, primarily from the Social Democrats party, for an agreement ahead of the official announcement. The bailout would require a host of Portuguese austerity measures highlighted by the following: an increase taxes in areas including those in the property category, a freeze on the levels of many existing benefits and public sector wages/pensions, barring of spending on new construction projects like the Lisbon airport and Liston-Porto high-speed rail link and tighter cuts, perhaps even potentially significant cuts to, education, health and housing.

The bailout marks the third of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) to accept financial assistance in less than one year amid crushing debt loads. Additionally, Portugal saw its sovereign credit rating plummet just five week ago as Standard & Poor’s noted that the bailouts pre-conditions almost surely would require a restructuring of debts and that all senior unsecured government debt would be subordinated to the EU’s European Stability Mechanism.

Freddy van den Spiegel, chief economist and director of public affairs for BNP Paribas Fortis, told NACM that Portugal’s bailout is a short-run positive in the sense that it restores some confidence in the EU and the euro currency. However, the economist noted that deep, existing problems are far from resolved and will remain a steep challenge for the Iberian nation in the coming years.

Brian Shappell, NACM staff writer

Portugal's acceptance of a financial bailout from the European Union (EU) is nearing finalization as the Iberian nation's officials are hard at work negotiating the final terms with the EU and the International Monetary Fund (IMF).

Freddy van den Spiegel, chief economist and director of public affairs for BNP Paribas Fortis, told NACM Portugal’s action was a necessary step but far from a Panacea for deep problems in the Iberian nation or the rest of the EU.

“The bailout is not really a surprise; it demonstrates the political agreement to rescue the Euro,” said van den Spiegel, at speaker at this weekend’s FCIB I.C.E. Conference in Chicago. “In the short run, this is positive as it restores some confidence in the EU. However, the existing problems are not resolved, and this remains a challenging problem for the future.”

It will mark the third of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) to accept a bailout in less than one year amid crushing debt loads. It has been speculated that such a bailout could reach upwards of $120 billion (USD) and almost certainly will come with forced austerity measures.

(Note: Registration for the 2011 I.C.E. Conference will remain open through the weekend and onsite at Chicago’s lush/historic Drake Hotel. For more information or to register, visit http://www.fcibglobal.com/ICE2011).

Brian Shappell, staff writer

After months of speculation, denials, finger-pointing and debate, it has been confirmed that Portugal is ready to accept a financial bailout from the European Union. It now is the third of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) to accept a bailout in less than one year amid crushing debt loads. Greece was the first, followed by Ireland.

The European Union issued the following brief comment on the matter Thursday: 

“The Portuguese Prime-Minister, José Sócrates, today informed the President of the European Commission, José Manuel Durão Barroso, of the intention of Portugal to ask for the activation of the financial support mechanisms. The president of the European Commission assured that this request will be processed in the swiftest possible manner, according to the rules applicable. The president of the European Commission reaffirms on this occasion his confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners.”

It has been speculated that such a bailout could reach upwards of $120 billion (USD) and almost certainly will come with forced austerity measures. Again, European economic stalwarts Germany and France are expected to do most of the heavy-lifting, so to speak, in footing the bill for the bailout.

Brian Shappell, NACM staff writer

Following Monday's triple-downgrade of Greece's credit rating and perhaps more significantly, fellow-high-debt Spain also felt the sting of a downgrade by Thursday as part of the ratings agencies' ongoing skepticism of the so-called "PIIGS" nations (Portugal, Ireland, Italy, Greece, Spain).

Moody's Investment Services issued another downgrade, this one by just one notch, to Spain's rating, and followed it up with a warning that more would come if the nation reeling from banking and real estate collapses missed more financial targets. Spain's rating with Moody's now sits at "Aa2," with a negative outlook.

The Spain downgrade was explained as follows:

1.) Moody's expectation that the eventual cost of bank restructuring will exceed the government's current assumptions, leading to a further increase in the public debt ratio.
2.) Moody's continued concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances, given the limits of central government control over the regional governments' finances as well as the background of only moderate economic growth in the short to medium term.

"Throughout the evolution of the economic crisis in Europe, the nation that has loomed as the linchpin to all of this has been Spain; The crisis in Greece and in Ireland can be managed to some degree although even these states have placed an immense strain on the euro zone," said Chris Kuehl, NACM's economic advisor and director of Armada Corporate Intelligence. "The Spanish situation has always been far more serious due to the size and influence of the nation in Europe as a whole...and the crisis in Spain has added to the overall nervousness in the market as a whole. It has been a rough few weeks for bond investors, and that does not bode all that well for the efforts in Europe as a whole.

Greek and Spanish officials, who have regularly bashed the ratings agencies for their own poor track record of ratings in the run-up to the global economic downturn as well as what it perceives as obvious conflicts of interests in their decision-making, again responded to Moody's with vitriol. They've characterized the latest downgrade with words such as "incomprehensible" and "hasty," respectively, much like they did following downgrades that preceded talk of bailout packages, one of which going to Greece, rife with unpopular austerity demands in 2010.

"The ratings agencies are not too popular these days," said Kuehl, who will be speaking during two education sessions at NACM's 2011 Credit Congress in Nashville. "During the boom years they seemed to lose their ability to remain objective and consistently rated companies, banks and countries higher than now seems justified. These days, there seems to be a new attitude that reinforces strict interpretation. The ratings now are deemed too harsh by some."

For more information Kuehl's appearances and others at NACM's 2011 Credit Congress, visit http://creditcongress.nacm.org/.

Brian Shappell, NACM staff writer