Fitch Ratings has affirmed Japan’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘A+’ with a Negative Outlook. The Short-term IDR has been affirmed at ‘F1+’. The Country Ceiling has been affirmed at ‘AA+’.

The affirmation of Japan’s sovereign ratings in part reflects the greater commitment of the Bank of Japan and government to bring to an end two decades of economic stagnation and deflation. If successful and underpinned by structural reform to raise potential growth along with a credible medium-term deficit reduction plan, Japan’s adverse public debt dynamics could be corrected. The Negative Outlook reflects the uncertainty over the success of these efforts to shift the economy onto a more positive real and nominal growth path as well as the absence of more detailed reform and fiscal consolidation programme.

KEY RATING DRIVERS

The affirmation of the ratings with Negative Outlooks reflects the following key factors: >> Read More

Italy and France need to work harder and faster to resolve their structural problems, a senior ally of German Chancellor Angela Merkel said in a newspaper interview published on Thursday.

Michael Meister, deputy parliamentary floor leader in Merkel’s Christian Democrats, told the Neue Osnabruecker Zeitung newspaper that the European Central Bank should stop buying Italian government debt if Italyfailed to meet its debt reduction requirements.

“Italy and France have structural problems to resolve and not economic problems,” said Meister, deputy to parliamentary floor leader Volker Kauder. “They can’t wait any longer. More time won’t relieve the problem. It’ll only make it worse.” >> Read More

Reminder – Italian auctions up shortly, should garner some attention given the light calendar this morning…Target: EUR 5-8bln BTPs & CCTeu

— RANsquawk (@RANsquawk) May 13, 2013

Most global portfolio managers, pension plans and other such real money investors have the choice of a whole slew of assets to invest in. Their potential investment options can be thought of as sitting on a risk-return curve, moving upwards in both dimensions. At one end of the curve, you can have cash in the bank (the lowest risk and lowest return). The curve moves up to government bonds, investment-grade companies and high-yield debt; then equities and private equity; and finally culminates in venture capital (the highest risk and highest return). This risk-return curve, of course, only applies to financial assets – real asset investments such as real estate, timber and gold find their own place. Also, depending on valuations, the stage of the economic and business cycle, risk aversion, investor positioning and so on, these financial assets can move up or down the curve and change their relative positions. >> Read More

The Eurozone’s government debt pile has risen to 90% of GDP,according to new data from Eurostat this morning which showed the region’s annual deficit had fallen.

Eurostat has calculated that eurozone members’ collective debt reached €8.6 trilion in 2012, when its combined economic output was nearly €9.5 trillion.

The total eurozone deficit fell to 3.7%, from 4.2% a year ago. Brussels will see that as proof that tough fiscal consolidation programmes are finally bearing fruit.

But the data shows stark difference across the region, and the wider EU. Five eurozone countries have deficit levels above 6% of GDP, a position shared with the UK.

And seventeen memebrs of the European Union missed the target of a deficit below 3% of output (with Spain the worst, at 10.6%)

As Eurostat put it:

In all, thirteen Member States recorded an improvement in their government balance relative to GDP in 2012 compared with 2011, twelve a worsening and two remained stable.

Fitch Ratings has downgraded the United Kingdom’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘AA+’ from ‘AAA’. The Outlook is Stable. At the same time, the agency has affirmed the UK’s Short-term foreign currency rating at ‘F1+’ and the Country Ceiling at ‘AAA’.

The rating actions follow the conclusion of the review of the UK’s sovereign ratings initiated on 22 March and resolve the Rating Watch Negative. The previous Negative Outlook on the UK’s sovereign ratings had been in place since 14 March 2012.

KEY RATING DRIVERS
The downgrade of the UK’s sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch’s medium-term projections for UK budget deficits and government debt. Despite the loss of its ‘AAA’ status, the UK’s extremely strong credit profile is reflected in its ‘AA+’ rating and the Stable Outlook.

- Fitch now forecasts that general government gross debt (GGGD) will peak at 101% of GDP in 2015-16 (equivalent to 86% of GDP for public sector net debt, PSND) and will only gradually decline from 2017-18. This compares with Fitch’s previous projection for GGGD peaking at 97% and declining from 2016-17 and the ‘AAA’ median of around 50%. >> Read More

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns.

 “We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”

The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning.

“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.” >> Read More

The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring.

Although CDS that reference sovereign credits are only a small part of the sovereign debt market ($3 trillion notional SCDS outstanding at end-June 2012, compared with $50 trillion of total government debt outstanding at end-2011), their importance has been growing rapidly. With the growing influence of SCDS, questions have arisen about whether speculative use of SCDS contracts could be destabilizing - and this caused regulators to ban non-hedge-related protection buying.

The prohibition is based on the view that, in extreme market conditions, such short selling could push sovereign bond prices into a downward spiral, which would lead to disorderly markets and systemic risks, and hence sharply raise the issuance costs of the underlying sovereigns. The IMF’s empirical results do not support many of the negative perceptions about SCDS. In particular, spreads of both SCDS and sovereign bonds reflect economic fundamentals, and other relevant market factors, in a similar fashion. Relative to bond spreads, SCDS spreads tend to reveal new information more rapidly during periods of stress, admittedly with overshoots one way or the other. Given the current apparent ‘stability’ in many nations’ bond market spreads, the chart below suggests an alternative way of judging what the credit market thinks – the volume of protection bid – and in this case some interesting names emerge. >> Read More

This Great Graphic comes the the IMF’s latest World Economic Outlook. For a selected group of countries, it shows the bank holdings of government debt in Q1 2006 (pre-crisis) and Q3 2012 as a percentage of overall bank assets. 

There are several countries included where sovereign holdings in Q3 12 are a smaller part of bank assets than in Q1 2006.  Greece stands out, but that is a consequence of the restructuring of the government’s debt (that was in private hands, though ABN AMRO, in the Netherlands is a notable exception).

We suspect that in several core euro zone members, like Germany, France and Belgium, the reduction is a function of reducing peripheral exposures faster than domestic sovereign debt was accumulated.  Similarly, the increase in Portugal, Spain Italy’s ratios are function of the use of the LTROs to purchase domestic sovereign debt.  >> Read More

Curious how Abenomics is progressing six months after its announcement? These charts courtesy of Diapason should provide a convenient status update.

>> Read More