While the US may be rejoicing its daily stock market all time highs day after day, it may come as a surprise to many that global equity capitalization has hardly performed as impressively compared to its previous records set in mid-2007. In fact, between the last bubble peak, and mid-2013, there has been a $3.86 trillion decline in the value of equities to $53.8 trillion over this six year time period, according to data compiled by Bloomberg. Alas, in a world in which there is no longer even hope for growth without massive debt expansion, there is a cost to keeping global equities stable (and US stocks at record highs): that cost is $30 trillion, or nearly double the GDP of the United States, which is by how much global debt has risen over the same period. Specifically, total global debt has exploded by 40% in just 6 short years from 2007 to 2013, from “only” $70 trillion to over $100 trillion as of mid-2013, according to the BIS’ just-released quarterly review.
It should come as no surprise to anyone by now, but the only reason why global stocks haven’t plummeted since the Lehman collapse is simple: governments have become the final backstop for onboarding risk, with a Central Bank stamp of approval – in other words, the very framework of the fiat system is at stake should global equity levels collapse. The BIS admits as much: “Given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers,” according to Branimir Gruic, an analyst, and Andreas Schrimpf, an economist at the BIS. >> Read More
The crisis in the Ukraine has increased the risks to Russia’s already weakening economy presented by currency depreciation and capital flight, Fitch Ratings says. The situation is still highly unpredictable but Russia’s sovereign credit profile is robust and events so far do not have implications for the country’s ‘BBB’ rating.
Market reaction to Russia’s intervention in Crimea saw the rouble fall 2.2% to an all-time low against the US dollar on Monday, while the MICEX index of Russian shares fell 10.8% and yields on rouble sovereign debt rose sharply. The Central Bank of Russia (CBR) raised its key interest rate by 150bp to 7%, and intervened to support the rouble, selling USD11bn. Losses were partly recovered on Tuesday as tensions appeared to ease.
The rouble has now fallen around 9% against the dollar this year, partly driven by fears across emerging markets about the impact of US tapering, but also on Russia-specific concerns about low growth and the weakening current account surplus, and in anticipation of further liberalisation of the exchange rate regime. >> Read More
Moody’s Investors Service, (“Moody’s”) has today changed the outlook on Germany’s Aaa government bond rating to stable from negative. Concurrently, Moody’s has affirmed Germany’s Aaa ratings.
The key drivers for today’s outlook change are:
(1) Diminished risks that Germany’s government balance sheet will be affected by further collective support to other euro area countries, in particular to Italy (Baa2 stable) or Spain (Baa2 positive), along with reduced contagion risks within the wider euro area.
(2) Progress with respect to fiscal consolidation as reflected in nearly balanced budgets in 2012 and 2013 and a declining debt-to-GDP ratio.
(3) Diminished risks that Germany’s government balance sheet will be affected by a further crystallization of contingent liabilities from the German banking system.
Moody’s has affirmed Germany’s Aaa rating due to the country’s advanced and diversified economy, very high debt affordability and a history of stability-oriented macroeconomic policies.
In a related rating action, Moody’s has today changed the outlook to stable from negative on the Aaa rating from of FMS-Wertmanagement (FMS-WM) and affirmed FMS-WM’s Aaa and Prime-1 ratings.
FMS-WM is a resolution agency or “bad bank” scheme for 100% state-owned Hypo Real Estate Group created under the Financial Market Stabilisation legislation in Germany. FMS-WM is rated on par with the German sovereign. This is due to a loss compensation obligation from the Financial Market Stabilisation Fund vis-à-vis FMS-WM, which is ultimately an obligation of the German sovereign.
RATIONALE FOR OUTLOOK CHANGE
–FIRST DRIVER: DECLINING RISKS FROM EURO AREA DEBT CRISIS– >> Read More
19 February 2014 - 10:30 am
Probably every kid in the world has at some point dreamed of having a time machine and being able to travel back to the past… usually to see dinosaurs or something like that.
Time travel is an almost universal fantasy. And if I could snap my fingers and turn the pages of time, I’d be seriously curious to check out the thousand-year period between the decline of the Western Roman Empire and the rise of the Renaissance.
They used to refer to this period as ‘the Dark Ages’ (though historians have since given up that moniker), a time when the entire European continent was practically at an intellectual standstill.
The Church became THE authority on everything– Science. Technology. Medicine. Education. And they kept the most vital information out of the hands of the people… instead simply telling everyone what to believe. >> Read More
07 February 2014 - 23:40 pm
Fitch Ratings-London-07 February 2014: Fitch Ratings has downgraded Ukraine’s Long-term foreign currency Issuer Default Rating (IDR) to ‘CCC’ from ‘B-’, and affirmed the Long-term local currency IDR at ‘B-’. The Outlook on the local currency IDR is Negative.
The issue ratings on Ukraine’s senior unsecured foreign and local currency bonds are also downgraded to ‘CCC’ from ‘B-’ and affirmed at ‘B-’ respectively. The Country Ceiling is downgraded to ‘CCC’ from ‘B-’ and the Short-term foreign currency IDR is downgraded to ‘C’ from ‘B’.
Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch’s sovereign rating on Ukraine was 28 February 2014, but Fitch believes that developments in Ukraine warrant such a deviation from the calendar and our rationale for this is laid out below.
KEY RATING DRIVERS >> Read More
05 February 2014 - 17:44 pm
New dates and deadlines for agreeing a revised US federal government debt limit are back in focus and will be a key driver for resolving the Rating Watch Negative (RWN) Fitch assigned to the ‘AAA’ US sovereign rating on 15 October 2013.
The debt limit – the maximum amount of debt the federal government can issue to the public and other federal agencies – was suspended on 17 October 2013 until 7 February 2014, as a short-term fix to the debt ceiling crisis in October. On 8 February 2014, the limit will be reset at the level of debt at that date. The latest figure for the amount of debt subject to the limit is USD17.3trn.
We expect the debt ceiling will be raised (or suspended) before the Treasury exhausts its borrowing capacity. Timely resolution of the debt limit is necessary to avoid immediate uncertainties about the Treasury’s ability to remain current on its obligations, including payments on Treasury securities. >> Read More
31 January 2014 - 13:19 pm
Fitch Ratings has affirmed Russia’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB’ with a Stable Outlook. The issue ratings on Russia’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB’. The Short-term rating has been affirmed at ‘F3′ and the Country Ceiling at ‘BBB+’.
KEY RATING DRIVERS
Low government debt (11% of GDP) and sovereign net foreign assets of 23% of GDP support the rating, although the sovereign balance sheet has largely stopped strengthening. The government will transfer a surplus USD6bn (0.3% of GDP) to the Reserve Fund, the main fiscal buffer, in early 2014, but this is smaller than it was before the 2008 crisis.
Russia is running a small fiscal deficit, which it aims to keep below 1% of GDP through 2016. The federal government recorded a deficit of 0.5% of GDP in 2013, 0.3pp below target. Fitch believes non-oil revenues are overestimated in 2014 and the deficit will exceed its target of 0.5% of GDP. However, rouble depreciation will have a countervailing effect, increasing the local currency value of oil revenues.
The authorities estimate real GDP grew just 1.4% in 2013, half the official forecast at the start of the year. A decline in investment and the inventory cycle contributed to the slowdown, but these effects are likely temporary. Fitch expects growth to reach 2% in 2014, driven by private consumption, but does not expect a dynamic recovery. A shrinking labour force and lack of structural reform constrain long-term growth. >> Read More
28 January 2014 - 9:58 am
Submitted by Doug Noland of The Prudent Bear blog,
Backdrops conductive to crises can drag on for so long – sometimes seemingly forever – as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where newfound momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared.
…Virtually the entire EM “complex” has been enveloped in protracted destabilizing financial and economic Bubbles. In particular, for five years now unprecedented “developed” world central bank-induced liquidity has spurred unsound economic and financial booms. The massive investment and “hot money” flows are illustrated by the multi-trillion growth of EM central bank international reserve holdings. There have of course been disparate resulting impacts on EM financial and economic systems. But I believe in all cases this tsunami of liquidity and speculation has had deleterious consequences, certainly including fomenting systemic dependencies to foreign-sourced flows. In seemingly all cases, protracted Bubbles have inflated societal expectations.
For a while, central bank willingness to use reserves to support individual currencies bolsters market confidence in a country’s currency, bonds and financial system more generally. But at some point a central bank begins losing the battle to accelerating outflows. A tough decision is made to back away from market intervention to safeguard increasingly precious reserve holdings. Immediately, the marketplace must then contend with a faltering currency, surging yields, unstable financial markets and rapidly waning liquidity generally. Things unravel quickly. >> Read More
28 January 2014 - 0:26 am
Eurozone governments facing the threat of bankruptcy should impose a one-off wealth tax on their citizens before seeking help from others, Germany’s Bundesbank proposed on Monday.
The German central bank raised the idea of an emergency capital levy in its monthly report, arguing that it corresponded with the principle of “national responsibility, according to which taxpayers are responsible for their government’s obligations, before the solidarity of other states is called upon”.
The Bundesbank said that the levy would have to be a one-off “imposed in conditions of extraordinary national crisis”, in order to limit negative consequences for investment, and potential capital outflows.
It acknowledged that a nation in crisis would have difficulty making a convincing case to depositors and investors that any such levy would be a one-time measure.
Although the report did not specify a eurozone country that should consider such a tax, its policy makers may have had Italy in mind. At the height of the eurozone crisis in 2011, Rome actively considered such an extraordinary wealth tax – known in Italy as a “patrimoniale” – as a way to pay down its sovereign debt load, the biggest in the single currency after Greece. It was never enacted. >> Read More
25 January 2014 - 9:51 am
Moody’s Investors Service has today affirmed France’s Aa1 government bond rating. The outlook remains negative.
Moody’s decision to maintain the negative outlook was driven by the following key interrelated factors: (1) the continued reduction in the competitiveness of the French economy, which risks lowering its long-term growth prospects, as well as (2) the risk of a further deterioration in France’s government financial strength. This is reflected in the significant increase in the general government debt-to-GDP ratio to 93.6% in 2013 from 90.2% in 2012, and Moody’s expects a further increase to above 95% by the end of 2014.
Although the French government has introduced or announced a number of measures intended to address these competitiveness and growth issues, the implementation and efficacy of these policy initiatives are complicated by the persistence of long-standing rigidities in labour, goods and services markets as well as the social and political tensions the government is facing. Moreover, in Moody’s view, France’s fiscal policy flexibility is limited, which, together with the policy challenges noted above, imply a continued risk of missing fiscal targets.
At the same time, Moody’s has affirmed France’s Aa1 government bond rating. Credit positive rating factors that support the affirmation include: (1) France’s large and diversified economy which underpins the country’s economic resiliency; and (2) the currently modest interest burden relative to total government revenues associated with the government’s debt (i.e. its very high debt affordability) as a consequence of its strong investor base, a large tax revenue base, and low funding costs. Moreover, the risks to the French government’s finances associated with the euro area debt crisis have — at least for now — abated and French banks’ direct exposures to peripheral Europe have diminished. >> Read More