Saturday, January 14, 2012

Any conflict on Iran is a direct threat to Russia’s security – Rogozin

The escalating conflict around Iran should be contained by common effort, otherwise the promising Arab Spring will grow into a “scorching Arab Summer,” says Dmitry Rogozin, Russia’s former envoy to NATO. Iran is our close neighbor, just south of the Caucasus. Should anything happen to Iran, should Iran get drawn into any political or military hardships, this will be a direct threat to our national security,” stressed Rogozin.
Dmitry Rogozin, who served as Russia’s special envoy to NATO in 2008-2011, was appointed deputy prime minister by Vladimir Putin in December. On Friday he was bidding farewell to his NATO colleagues in the alliance’s headquarters in Brussels.
As for Syria, if NATO persists in interfering in its affairs, a catastrophe will be hard to avoid, said Rogozin, talking to journalists on the premises of the Russian mission to the alliance.
The example of Libya should have cooled everybody down in matters dealing with foreign civil wars,” he said, stressing that this is his personal point of view.
Syria must be left alone and the sides to the conflict must be assisted in breaking the stand-off and starting negotiations. No one must interfere with Syria. This is dangerous,” added Rogozin. The West’s attempts to improve democracy in the Middle East and North Africa have resulted in Islamists coming to power. It is now up to the West to decide how comfortable they feel with neighbors who determine their politics with Sharia law, says Rogozin. If we add the escalating tensions around Iran to the situation in Syria and the consequences of the Libyan war, then the upcoming 'scorching' Arab Summer, which is following the Arab Spring, will hardly be to anyone’s taste.”

Russia’s response will make AMD ‘a waste of money’

Despite his recent promotion, Rogozin is still in charge of Russia-NATO discussions on anti-missile defense (AMD) issues. A legal binding that the European and American missile defense systems will not target Russia has not been taken off the table, Rogozin pointed out. It seems strange that it is Russia who is required to show flexibility. This is not our project. If an architect is building a house, it is up to him to offer a design which would not violate property rights, area design and neighbors’ interests. So it is our US colleagues who should demonstrate miraculous flexibility to ensure that their AMD system does not violate the interests of other countries if it is to be located in Europe.” Rogozin also called on European leaders to stop being “political puppets” in the AMD game, adding that everyone should stand for their own interests, not for some “Atlantic solidarity.” If Moscow’s position is ignored and the range of the US anti-missile defense system covers the European part of Russia, this will be considered a situation requiring defensive action. I will certainly ensure Russia will give a corresponding technical response if the AMD system endangers our national interests. This will result in the American AMD being considered a waste of money,” said Rogozin. Russia has everything needed to annihilate any attempt “to strip” its strategic potential, he added. This also means the era of imported weapons is coming to an end. In a farewell gesture, Rogozin said he was considering planting a tree in the alliance’s headquarters. Symbolically enough, this would be a poplar, or “topol” in Russian, which brings up associations with Russia’s modern intercontinental ballistic missiles Topol-M. But NATO replied that planting a tree within the headquarters perimeter “is not possible,” so the tree will have to be planted nearby. Source

The US Government Is Bankrupt


By Doug Casey, Casey Research
Everyone knows that the US government is bankrupt and has been for many years. But I thought it might be instructive to see what its current cash-flow situation actually is. At least insofar as it's possible to get a clear picture.
As you know, the so-called Super Committee recently tried to come up with a plan to cut the deficit by $1.5 trillion and failed completely. To anyone who understands the nature of the political process, the failure was, of course, as predictable as it was shameful. What's even more shameful, though, is that the sought-after $1.5 trillion cut wasn't meant to apply to the annual budget but to the total budget of the next 10 years – a fact that is rarely mentioned.
Now whenever the chattering classes talk about cuts, it's always about cuts over the course of 10 years. Which is a dodge, partly because most of the supposed cuts will be scheduled for the end of the period, but also because new programs, new emergencies and hidden contingencies will creep in to offset any announced cuts. So the numbers below aren't a worst case; they're the rosiest possible scenario. People have thought I was joking when, asked how bad the Greater Depression was going to be, I answered that it would be worse than even I thought it would be. But I haven't been joking.
To sum up the situation, given its financial condition and the political forces working to worsen it, the US government is facing a completely impossible and irremediable situation. I'm going to try to illustrate that here. But because I'm a perpetual optimist, not a gloom-and-doomer, I'm also going to give you solutions to the purely financial problems – albeit with some good news and some bad news. The good news is, there actually are solutions. The bad news is that there is zero chance that any of them will be put into effect.
The problems are one hundred percent caused by the US government, not by bankers, brokers or the real estate industry – although they have been complicit. Recall what government is: an organization with a monopoly of force within a certain geographical area. Its purpose is, ostensibly, to protect the inhabitants of its bailiwick from the initiation of force. That implies three functions: an army to protect against aggressors coming from outside of its borders; police to protect citizens from aggressors inside its borders; and a court system to allow citizens to adjudicate disputes without resorting to force. Assuming you're going to have a government, it's important to limit it strictly, lest it get completely out of control – it's got a monopoly of force, after all – and overwhelm the society it's supposed to protect.
Here I want you to distinguish government from society. They are not only two totally different things, but are potentially antithetical to each other. This is because the essence of government is force, not voluntary cooperation. Everything that people think the government provides (beyond some forms of protection) is really provided by society or with resources the government has taken from society. It's critical to understand this, or you won't see the slippery slope the US is now sliding on.
Is there any chance that the US government can reform and go back to a sustainable basis at this point? I'd say no. Its descent started in earnest with the Spanish-American War in 1898, when it acquired its first foreign possessions (Cuba, the Philippines, Puerto Rico, etc). It accelerated with the advent of the income tax and the Federal Reserve in 1913. It accelerated further with World War I, when the government took over the economy for 18 months. The New Deal and World War II made the state into a permanent major feature in the average American's life. The Great Society made free food, housing and medical care a feature. The final elimination of any link of the dollar to gold in 1971 ensured ever-increasing levels of currency inflation. The Cold War and a series of undeclared wars (Korea, Viet Nam, Afghanistan and Iraq) cemented the military in place as a permanent focus of the government. And since 9/11, the curve has gone hyperbolic with the War on Terror. It's been said that war is the health of the state. We have lots more war on the way, and that will expand the state's spending. But the Greater Depression will be an even bigger drain, and it will likely destroy the middle class as an unwelcome bonus.
In all that time, from 1898 to today, there have been no substantial retrenchments of the US government, and the situation is getting worse, on a hyperbolic curve. Trends in motion tend to stay in motion until a genuine crisis changes them, and this trend has been gaining momentum for over a century.
Let's divide people into three classes – rich, poor and middle class. Rich people are going to be okay. They can bribe the politicians to change the laws, hire the lawyers to interpret the laws, the accountants to limit their liabilities, advisors to help them profit from distortions and travel agents to get them out of Dodge. They may get eaten later, but for the moment, don't worry about them.
The poor don't have much to lose, and the government is going to keep throwing benefits at them to keep them happy. That's a shame because it cements them to the bottom as poor people – but that's a topic for another day.
The real danger is to the middle class, and it's a serious matter because the US is a middle-class society. These are people who try to produce more than they consume and save the difference in order to grow wealthier. That formula has worked well up to now – but almost everybody saves dollars. What happens, however, if the dollars are destroyed? It means that most of what they saved disappears, and most of the middle class will disappear with it, at least for that generation. They'll be very unhappy, and they'll be up for some serious changes. I'll come back to those later.
The Budget
Take a look at the following pie chart of US government spending. It's cut into 10 slices, by function. The government used to break down and report its spending according to agencies – Defense Department, so much; Department of Agriculture, this much; FTC, that much. They've de-emphasized that and now seem to prefer reporting by function, because most of the agencies do many things. Actually, with thousands of agencies, departments, divisions, bureaus, units and contractors, it's impossible to figure out exactly who does what in the government. It's so large, so irresponsible and so unmanageable that the only solution is to abolish things wholesale. Bureaucracy naturally grows unless it's pulled out by the roots; reform, or pruning it back, is doomed to failure.
Click here for source, full story and more on Justice, Defence, Social, Security, Income security, Medicare, Health, Education, training and social services, Transportation, General government and Interest.


Denouement
My point is to make it very apparent that there really is no conventional solution to the US government's financial crisis. It's reached a stage where the government will have to start defaulting on some of its obligations. You decide which. The only questions are political; the economics are quite clear. Nothing will be done, as the Super Committee showed. I believe they would have done something if they thought it possible and knew how.

Actually, the situation is much more serious than what I've briefly illustrated. We've only discussed one aspect of the income statement, which itself is enough to bring down the whole structure, and soon. We haven't discussed the government's balance sheet. Estimates vary, but the US government has direct and contingent obligations that go far beyond its $15 trillion in accumulated borrowing. The present value of its Medicaid, Medicare, Social Security, veterans, financial insurance and numerous unfunded liabilities might be another $200 trillion. Nobody knows, and it's probably impossible to calculate.
So, the US government will go bankrupt. That's not the end of the world. Lots of governments have gone bankrupt, some of them numerous times – like almost all of them here in South America, where I am at the moment.
In fact, there's a temptation to look forward to it eagerly. After all, the state is the enemy of any decent human. One might hope that when they bankrupt themselves, maybe we will get to live in a libertarian paradise. But that's not likely the way things will come down; rather, just the opposite. Not all state bankruptcies are just temporary upsets. Most of the great revolutions in history have financial roots. Great revolutions are more than just unpleasant and inconvenient; they're extremely dangerous.
The French Revolution of 1789 was brought on by the financial collapse of the French government. It was a good thing to depose Louis XVI, but things didn't get better – they got much, much worse with Robespierre and then Napoleon. In Germany, the destruction of the German mark in 1923 set the stage for the Nazis – and then the Depression ushered them in. The collapse of the Czar's regime in Russia in 1917 seemed to be good news at first – but then things got worse, and they stayed worse for a long time.
The fact is that when a government collapses, especially when the government is providing all the things the US government does today, people want somebody to fix it; they want their goodies back. It's well known that over 50% of the US population are net recipients of state largess. And the degree of state support and involvement in the US is far, far greater than it was in France, Russia or Germany. After a period of chaos, it's always the people who are most political, who have the most rabid statist ideas who get the public's attention and rise to the top.
It seems highly likely that the US will get a savior, someone full of bravado, who assures the booboisie that he can straighten things out – if he is given sufficient power. Perhaps it will be an arrogant windbag like Gingrich, perhaps some general. The government won't wither away; it will reassert itself. I don't see any way around it, actually. We are already moving into a police state (evidenced most recently by the Senate's Nov. 2 vote allowing the military to indefinitely incarcerate anyone they accuse of terrorism). But at least it's a police state with a fairly high standard of living, one with Walmarts, McDonalds, and SUVs – at least for the time being.
But rest assured that if the situation evolves the way I expect, the standard of living will drop steeply, financial markets are going to become chaotic and the US will become a quite repressive place for some time – at least as long as the War on Terror lasts. I will bet you money on this. In fact, I am betting money on it.
So what can you do about it? Well, actually, there is nothing you can do about it. At least as far as changing the course of history is concerned. The best you can do is to speculate intelligently on further, new distortions that will be cranked into the system, as well as others that are inevitably going to be liquidated.
It seems to me that this is a trend that can no longer be turned around. The US government's budget is, in fact, the biggest thing in the world; it won't be turned around, because it is like a gigantic snowball rolling down a hill. It will only stop when it smashes into the village at the bottom of the valley. The best thing you can do is capitalize on it as well as you can and get out of its way while you do.
[If Doug is right and this trend cannot be reversed, the time to start preparing for what's ahead is right now. This free investor briefing will help you get started.]


Angelo: oops. I have added the link above.

Syria: The Iraqi stereotype?

The Arab League has declared it has given its observers in Syria more time for their mission. Head of the mission, General Mohammed Ahmed Mustafa al-Dabi, is to give a report on the League on January 19 on Syria's compliance of the plan, as the ministers in Cairo said. Is this mission merely a pretext for foreign intervention? Will Syria witness more instability and haphazard bombings in the coming days, and transform into a new Iraq? Source

Q4 Spanish Unemployment Soars By Most Since Lehman, Hits "Astronomical" 23.3%


Tyler Durden's picture
For anyone convinced that yesterday's S&P two notch downgrade of Spain to A is the last one for a while, we have some bad news: in Q4 Spanish unemployment soared by the most since the Lehman collapse, hitting what new PM Mariano Rajoy called an "astronomical" 5.4 million. This compares to 4.978 million people unemployed at the end of Q3 2011. Since the official number is not yet public and will be released on January 27 we will take his word for it. In which case it becomes clear that in Q4 the Spanish economy experienced a Lehman-like collapse, losing more than 400K people, or the most since the bankruptcy of Lehman brothers. In percentage terms this means that Spanish unemployment rose by a ridiculous 2%, or from 21.5% to 23.3%, in one quarter! And since Spain is a country of the Keynesian persuasion, we can only assume the number includes a whole bunch of meaningless birth/death and seasonal adjustments, but we'll leave it at that. Incidentally, it means that by the time the mean reversion exercise, with cost-cutting and what not is complete, Spanish unemployment will be well north of 30%, and 2 out of 3 people aged between 16 and 25 will be out of a job, if ot more. It also begs the question just what the real unemployment picture in the US, which lately has put the Chinese Department of Truth to shame, would be if reported on a realistic, unadjusted, and not "workforce contracted" basis. The chart below shows you everything you need to know.
This is what quarterly Spanish unemployment looks like pre-BLS "intervention"
"This year (2011) is going to close with 5.4 million people... who want to work but cannot," Rajoy said, anticipating official unemployment data due to be published on January 27.

"It is an astronomical figure," he said in a speech to supporters of his conservative Popular Party in Malaga, southern Spain, in which he reaffirmed fighting unemployment as his top priority.

"This is our challenge and all our efforts and all our policies are going to be dedicated to this," he said, without giving a new percentage rate.

Economists have warned that Spain may be back in recession with the economy likely to contract in the first quarter of 2012. The Bank of Spain said the economy shrank in the last quarter of 2011.
As a reminder, S&P said there is a substantial chance it would lower Spain even further:
"We could lower the ratings again if additional labour market and other growth-enhancing reforms are delayed or we consider them to be insufficient to reduce the high unemployment rate."
Time to start pricing in the transition from spAin to sBain? Source

Israeli agents posed as CIA to recruit terrorists

The buddy-buddy relationship between American and Israel could falter as it is revealed that Mossad intelligence officers posed as CIA agents in order to recruit and train Iranian terrorists, all unbeknown to US authorities. American intelligence officials have come clean with details surrounding Israel’s attempt to infiltrate the network of the Iranian terrorist group Jundallah. According to internal memos just released, Washington was initially unaware that agents working for Mossad, the Israeli intelligence agency, were recruiting Iranian terrorists under the guise that they would be hired and trained by the CIA.
The memos that reveal the CIA’s then discovery of the program come from the last year of the George W Bush administration, and it is unsure if such campaigns still exist overseas today. What is known, however, is that Mossad — who is largely funded by the CIA and typically works hand-in-hand with their American counterpart — did not approach American officials for authorization in fronting as US agents in their attempt to infiltrate Jundallah.
"It's amazing what the Israelis thought they could get away with," an intelligence officer speaking on condition of anonymity tells Foreign Policy’s Mark Perry. "Their recruitment activities were nearly in the open. They apparently didn't give a damn what we thought."
The account has been confirmed to Foreign Policy by four retired intelligence officers who have either worked with the CIA or in conjunction with Mossad.
The attempt to enter the ranks of Jundallah is arguably warranted for the Israelis, but doing so by training terrorists under the supposed name of America — and then sending them off to kill in the name of America — could largely worsen what relationship, if any, exists between Tehran and Washington. Since its inception in 2003, the Jundallah army has been linked to the massacre of at least 150 Iranians and injuring many more. While American officials have distanced themselves to a degree from hostilities in Iran, specifically shrugging off any allegations that the US has ties to the recent assassination of an Iranian scientist, the reality of this discovery is that Mossad might very well be training Iranian terrorists and then sending them back out into the world with the impression that they are new CIA recruits. If captured during a botched intelligence mission for Mossad, those phony CIA agents could be forced into revealing their “true” identity — with only Israel really aware of the operation.
US Defense Secretary Leon Panetta denied claims that America was linked to the execution of Mostafa Ahmadi Roshan, the 32-year-old nuclear scientist, saying, “We have some ideas as to who might be involved…. but I can tell you one thing: The United States was not involved in that kind of effort. That's not what the United States does."Speaking for the Israeli Army, Brig. Gen. Yoav Mordechai wrote on Facebook, "I have no idea who targeted the Iranian scientist but I certainly don't shed a tear."
Iran's Ayatollah Ali Khamenei has pinned the blame on both Israel and America, however, and told the state’s IRNA news agency, "We will continue our path with strong willand certainly we will not neglect punishing those responsible for this act.” Source

Wall Street Gangsta! Don Obama: US mafia's spaghetti-monster-in-chief? Max Keiser


Corruption with a clean face and Jamie "Spaghetti Face" Dimon. In the second half of the show, Max talks to investment adviser and blogger Michael Krieger about Ron Paul, the Fed and political futures. Source

The Shadowy World of Private Equity

A transcript has been released of the Federal Reserve's meeting in January of 2006 and it's filled with lots of laughs, and praise for Alan Greenspan, as well as a complete lack of knowledge of the economic crisis to come. We're also taking a look at Mitt Romney's past with Bain Capital and ask what is it that Private Equity firms do? William Black, author of "The Best Way to Rob a Bank" and Josh Kosman author of "The Buyout of America" join the show. Source

Jim Rickards is Working for the Elite 0.01%: Proof



Jim Rickrds statement "Iran has said they will burn Israel to the ground.  So this is not just a strategic rebalancing this is life or death for the Israelis." marks him out as working for the axis of the 1%. There he goes supporting the bogus " Saddam has WMD bullshit ahead of more death and destruction to keep the US war machine and the Palestinian concentration camp ticking over. Shame, nevertheless this does not discredit Rickards, it simply furnishes him with the correct credits.


From around 10minutes in in to the interview, the nuclear issue is confronted head on.


Ahmadinejad's closing statement (21 minutes) poignant and another major contradiction to Rickards' statement.

Mohamed El-Erian tells us that he believes QE3 is coming and that the Age of Credit is at Risk

Eurozone nations face another round of credit downgrades as Standard and Poor's is expected to cut the rating of several nations in Europe. France will lose its triple-A (AAA) according to it's finance minister, perhaps the most important of the downgrades. Meanwhile, although the european central bank is pumping out cheap cash to try and prop up the countries that need it, it's ending up right back at the central bank, as deposits there hit a record high. What does this mean for the Global Economy's future? We speak to PIMCO's CEO Mohamed El-Erian to see what the biggest bond fund in the world is thinking. And speaking of central banks, does a rotation of voting members at the Federal Reserve mean we may be headed for more quantitative easing? Fed officials meet later this month and are reportedly expected to talk about making such a move. But would this really matter and has the Fed become ineffective at this point? Mohamed El-Erian thinks so; he think QE3 is coming, but that the Fed will only act for the sake of acting, worried more about appearances than its ability to actually influence the economy at this point. And speaking of all this, it is Friday the 13th, which means paranormal activity abounds. We are not talking about the movie, but rather the world that Mohamed El-Erian and Bill Gross of PIMCO believe we now inhabit: a
world of bimodal, fat tail distributions. Of competing tail risks that and sandwiching our investment options and our economy between a rock and a hard place. At the very least, if you are living in the eurozone, you can feel this pressure coming to bear. The ECB's solutions certainly are not going as planned, and the downgrade of France and Austria are the least among its problems. Money from the central bank's most recent LTRO is coming right back to the ECB's deposit facility, as banks hoard the cash. Again,
we ask, what are they really afraid of? Is the risk a reflation of the global economy? Maybe, but to get that inflation, you need that money to enter the system's pipes, flooding liquidity throughout the economy. If banks are hoarding the cash, then deflation risk becomes a factor. Which tail will be activated? Will we see higher prices, or renewed asset price delevering. Mohamed El-Erian will be with us for a full 20 minutes to give us his take. Source

CNN Reporter is Criticized for Paul Hit Piece



CNN's Dana Bash is repeatedly criticized for her unfair coverage of Ron Paul. On January 2, the corporate media correspondent said she was worried about the possibility of Paul doing well in the New Hampshire primary. Paul came in second behind Mitt Romney on January 10. Near the end of the video, Bash says she has received a lot of negative email about her biased interview on January 9 that was cut short by Jesse Benton, Paul's campaign spokesman. Oddly, she compares the criticism of her coverage to the Arab-Israeli conflict and says there is nobody in the media as fair as she is. Bash apologists at TVNewser insist the comment made to her husband and CNN anchor John King was merely a "misplaced phrase." Source

Sibel Edmonds on why the Military Industrial complex supports oppressive regimes

In November of last year, The Washington Times published an opinion piece entitled, "Bahrain, a vital US ally. Backing protesters would betray a friend and harm American security." The article was written by Vice-Admiral Charles Moore, who is now a regional president for Lockheed Martin. Lockheed Martin has done millions of dollars of business with Bahrain. Bahrain has been criticized for abusing its own citizens and Sibel Edmonds with the National Security Whistleblowers Coalition, joins us to discuss why Bahrain is interested in lobbying in America. Source

The Real Dark Horse - S&P's Mass Downgrade FAQ May Have Just Hobbled The European Sovereign Debt Market


Tyler Durden's picture
All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.
Here are the key take home messages from the FAQ (source):
  • We believe that as long as uncertainty about the bond buyers at primary auctions remains, the risk of a deepening of the crisis remains a real one. These risks could be exacerbated should renewed policy disagreements among European policymakers emerge or the Greek debt restructuring lead to an outcome that further discourages financial investors to add to their positions in peripheral sovereign securities.
  • The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. According to our assessment, the political agreement reached at the summit did not contain significant new initiatives to address the near-term funding challenges that have engulfed the eurozone.
  • Instead, it focuses on what we consider to be a one-sided approach by emphasizing fiscal austerity without a strong and consistent program to raise the growth potential of the economies in the eurozone.
  • Financial solidarity among member states appears to us to be insufficient to prevent prolonged funding uncertainties. Specifically, we believe that the current crisis management tools may not be adequate to restore lasting confidence in the creditworthiness of large eurozone members such as Italy and Spain. Nor do we think they are likely to instill sufficient confidence in these sovereigns' ability to address potential financial system stresses in their jurisdiction. In such a setting, the prospects of effectively intervening in the feedback loop between sovereign and financial sector risk are in our opinion weak.
  • Despite these encouraging developments on domestic policy, we downgraded both sovereigns by two notches. This is due to our opinion that Italy and Spain are particularly prone to the risk of a sudden deterioration in market conditions.
  • While we see a lack of fiscal prudence as having been a major contributing factor to high public debt levels in some countries, such as Greece, we believe that the key underlying issue for the eurozone as a whole is one of a growing divergence in competitiveness between the core and the so-called "periphery."
  • We believe that the risk of a credit crunch remains real in a number of countries as economic conditions weaken and banks continue to consolidate their balance sheets in light of tighter capital requirements and poor market conditions in which to raise additional equity
  • We estimate a 40% probability that a deeper and more prolonged recession could hit the eurozone, with a likely reduction of economic activity of 1.5% in 2012.
  • We believe an even deeper and more prolonged slump cannot be entirely excluded. We expect this weak macroeconomic outlook if realized would complicate the implementation of budget plans, with slippages to be expected, which would likely further dampen confidence and potentially deepen the recession, as funding and credit is curtailed and the private sector increases precautionary savings.
  • Reports indicate that many investors had hoped that a breakthrough at the December summit would have enticed the ECB to step up its direct government bond purchases in the secondary market through its Security Market Program (SMP). However, these hopes were quickly deflated as it became clearer that the ECB would prefer to provide banks with unlimited funding, partly with the expectation that those liquid funds in banks' balance sheets would find their way into primary sovereign bond auctions. This indirect way of supporting the sovereign bond market may yet be successful, but we believe that banks may remain cautious when being faced with primary sovereign offerings, as most financial institutions have aimed at shrinking their balance sheets by running down security portfolios in order to comply with higher capital requirements, which become effective in 2012.
Shockingly, S&P dares to challenge not only the status quo, but "powerful national interest groups" - easily the first time we have seen something like this out of a "status quo" organization, let alone a rating agency.
  • Governments are also aiming to put greater focus on growth-enhancing structural measuresWhile these may contribute positively to a lasting solution of the current crisis, we believe they could also run counter to powerful national interest groups, whose resistance could potentially jeopardize the reform momentum and impede the recovery of market confidence.
Why it is all a Catch 22 and why the LTRO "carry trade" has failed:
  • Recent Italian and other primary auctions suggest to us, however, that banks and other investors may still only be willing to lend longer term to governments facing market pressure if they are offered interest rates that, all other things being equal, will make fiscal consolidation harder to achieve.
Let's not forget the EFSF:
  • We are currently assessing the credit implications of today's eurozone sovereign downgrades on those institutions and will publish our updated credit view in the coming days.
And probably the most important observation of the night:
  • As we noted previously, we expect eurozone policymakers will accord ESM de-facto preferred creditor status in the event of a eurozone sovereign default. We believe that the prospect of subordination to a large creditor, which would have a key role in any future debt rescheduling, would make a lasting contribution to the rise in long-term government bond yields of lower-rated eurozone sovereigns and may reduce their future market access.
The S&P itself warns that the entire basis of the European bailout will create a split market in sovereign bonds, in which pari passu treatment will be a thing of the past, and in which buyers will have no clue what treatment awaits them in a worst case scenario. If anyone thought that ISDA's idiotic attempt to kill the CDS market caused a collapse in demand for sovereign paper, just wait until potential buyers comprehend they could be primed every step of the way and the market is effectively two tier.
S&P may have just killed the European sovereign market by saying out loud what only "fringe bloggers" dared suggest in the past.
From S&P
FRANKFURT (Standard & Poor's) Jan. 13, 2012--Standard & Poor's Ratings Services today completed its review of its ratings on 16 eurozone sovereigns, resulting in downgrades for nine eurozone sovereigns and affirmations of the ratings on seven others.
We have lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, the Slovak Republic, and Slovenia, by one notch; and affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands. All ratings on the 16 sovereigns have been removed from CreditWatch where they were placed with negative implications on Dec. 5, 2011 (except for Cyprus, which was first placed on CreditWatch on Aug. 12, 2011).
The outlooks on our long-term ratings on all but two of the 16 eurozone sovereigns are negative; the outlooks on the long-term ratings on Germany and Slovakia are stable. See "Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments," published today for full details.
This report addresses questions that we anticipate market participants might ask in connection with our rating actions today.
WHAT HAS PROMPTED THE DOWNGRADES?
Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone. In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges.
The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.
We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.
Accordingly, in line with our published sovereign criteria, we have adjusted downward our political scores (one of the five key factors in our criteria) for those eurozone sovereigns we had previously scored in our two highest categories. This reflects our view that the effectiveness, stability, and predictability of European policymaking and political institutions have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the eurozone.
In addition to our assessment of the policy response to the crisis, downgrades in some countries have also been triggered by external risks. In our view, it is increasingly likely that refinancing costs for certain countries may remain elevated, that credit availability and economic growth may further decelerate, and that pressure on financing conditions may persist. Accordingly, for those sovereigns we consider most at risk of an economic downturn and deteriorating funding conditions, for example due to their large cross-border financing needs, we have adjusted our external score downward.
WHY WERE SOME EUROZONE SOVEREIGNS DOWNGRADED BY TWO NOTCHES AND OTHERS BY ONE NOTCH?
We believe that not all sovereigns are equally vulnerable to the possible extension and intensification of the financial crisis. Those we consider most at risk of an economic downturn and deteriorating funding conditions, for example due to the large cross-border financing needs of its governments or financial sectors, have been downgraded by two notches, as we lowered the political score and/or the external score reflecting our view of the risk of a marked deterioration in the country's external financing.
On the other hand, we affirmed the ratings of sovereigns which we believe are likely to be more resilient at their current rating level in light of their relatively strong external positions and less leveraged public and private sectors. These credit strengths remain robust enough, in our opinion, to neutralize the potential ratings impact from the lowering of our political score.
In this context, we would note that the ratings on the eurozone sovereigns remain at comparatively high levels, with only three below investment grade (Portugal, Cyprus, and Greece). Historically, investment-grade rated sovereigns have experienced very low default rates. From 1975 to 2010, the 15-year cumulative default rate for sovereigns rated in investment grades was 1.02%, and 0.00% for sovereigns rated in the 'A' category or higher.
WHY DO THE RATINGS ON MOST OF THESE SOVEREIGNS HAVE NEGATIVE OUTLOOKS?
For those sovereigns with negative outlooks, we believe that downside risks persist and that a more adverse economic and financial environment could erode their relative strengths within the next year or two to a degree that in our view could warrant a further downward revision of their long-term ratings. We believe that the main downside risks that could affect eurozone sovereigns to various degrees are related to the possibility of further significant fiscal deterioration as a consequence of a more recessionary macroeconomic environment and/or vulnerabilities to further intensification and broadening of risk aversion among investors, jeopardizing funding access at sustainable rates. A more severe financial and economic downturn than we currently envisage (see "Sovereign Risk Indicators," published Dec. 28, 2011) could also lead to rising stress levels in the European banking system, potentially leading to additional fiscal costs for the sovereigns through various bank workout or recapitalization programs. Furthermore, we believe that there is a risk that reform fatigue could be mounting, especially in those countries that have experienced deep recessions and where growth prospects remain bleak, which could eventually lead to lower levels of predictability of policy orientation, potentially leading to another downward adjustment of the political score, which might lead to lower ratings.
We believe that important risks related to potential near-term deterioration of credit conditions remain for a number of sovereigns. This belief is based on what we see as the sovereigns' very substantial financing needs in early 2012, the risk of further downward revisions of economic growth expectations, and the challenge to maintain political support for unpopular and possibly more severe austerity measures, as fiscal targets are endangered by macroeconomic headwinds.Governments are also aiming to put greater focus on growth-enhancing structural measuresWhile these may contribute positively to a lasting solution of the current crisis, we believe they could also run counter to powerful national interest groups, whose resistance could potentially jeopardize the reform momentum and impede the recovery of market confidence. In our view, it also remains to be seen whether European banks will indeed use the ample term funding provided by the ECB (see below) to purchase newly issued sovereign bonds of governments under financial stress. We believe that as long as uncertainty about the bond buyers at primary auctions remains, the risk of a deepening of the crisis remains a real one. These risks could be exacerbated should renewed policy disagreements among European policymakers emerge or the Greek debt restructuring lead to an outcome that further discourages financial investors to add to their positions in peripheral sovereign securities.
For two sovereigns, Germany and Slovakia, we concluded that downside scenarios that could lead to a lowering of the relevant credit scores and the sovereign ratings carry a likelihood of less than one-in-three during 2012 or 2013. Accordingly we have assigned a stable outlook.
HOW DO WE INTERPRET THE CONCLUSIONS OF THE DECEMBER EUROPEAN SUMMIT?
We have previously stated our belief that an effective strategy that would buoy confidence and lower the currently elevated borrowing costs for European sovereigns could include, for example, a greater pooling of fiscal resources and obligations as well as enhanced mutual budgetary oversight. We have also stated that we believe that a reform process based on a pillar of fiscal austerity alone would risk becoming self-defeating, as domestic demand falls in line with consumer's rising concerns about job security and disposable incomes, eroding national tax revenues.
The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures. Instead, it focuses on what we consider to be a one-sided approach by emphasizing fiscal austerity without a strong and consistent program to raise the growth potential of the economies in the eurozone. While some member states have implemented measures on the national level to deregulate internal labor markets, and improve the flexibility of domestic services sectors, these reforms do not appear to us to be coordinated at the supra-national level; as evidence, we would note large and widening discrepancies in activity and unemployment levels among the 17 eurozone member states.
Regarding additional resources, the main enhancement we see has been to bring forward to mid-2012 the start date of the European Stability Mechanism (ESM), the successor vehicle to the European Financial Stability Fund (EFSF). This will marginally increase these official sources' lending capacity from currently €440bn to €500bn. As we noted previously, we expect eurozone policymakers will accord ESM de-facto preferred creditor status in the event of a eurozone sovereign default.We believe that the prospect of subordination to a large creditor, which would have a key role in any future debt rescheduling, would make a lasting contribution to the rise in long-term government bond yields of lower-rated eurozone sovereigns and may reduce their future market access.
We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU's core and the so-called "periphery." In our opinion, the eurozone periphery has only been able to bear its underperformance on competitiveness (manifest in sizeable external deficits) because of funding by the banking systems of the more competitive northern eurozone economies. According to our assessment, the political agreement reached at the summit did not contain significant new initiatives to address the near-term funding challenges that have engulfed the eurozone.
The summit focused primarily on a long-term plan to reverse fiscal imbalances. It proposed to enshrine into national legislation requirements for structurally balanced budgets. Certain institutional enhancements have been introduced to strengthen the enforceability of the fiscal rules compared to the Stability and Growth Pact, such as reverse qualified majority voting required to overturn sanctions proposed by the European Commission in case of violations of the broadly balanced budget rules. Notwithstanding this progress, we believe that the enforcement of these measures is far from certain, even if all member states eventually passed respective legislation by parliaments (and by referendum, where this is required). Our assessment is based on several factors, including:
  • The difficulty of forecasting reliably and precisely structural deficits, which we expect will likely be at the center of any decision on whether to impose sanctions;
  • The ability of individual member states' elected governments to extricate themselves from the external control of the European Commission by withdrawing from the intergovernmental agreement, which will not be part of an EU-wide Treaty; and
  • The possibility that the appropriateness of these fiscal rules may come under scrutiny when a recession may, in the eyes of policymakers, call for fiscal stimulus in order to stabilize demand, which could be precluded by the need to adhere to the requirement to balance budgets.
Details on the exact content and operational procedures of the rules are still to emerge and -- depending on the stringency of the rules -- the process of passing national legislation may run into opposition in some signatory states, which in turn could lower the confidence of investors and the credibility of the agreed policies.
More fundamentally, we believe that the proposed measures do not directly address the core underlying factors that have contributed to the market stress. It is our view that the currently experienced financial stress does not in the first instance result from fiscal mismanagement. This to us is supported by the examples of Spain and Ireland, which ran an average fiscal deficit of 0.4% of GDP and a surplus of 1.6% of GDP, respectively, during the period 1999-2007 (versus a deficit of 2.3% of GDP in the case of Germany), while reducing significantly their public debt ratio during that period. The policies and rules agreed at the summit would not have indicated that the boom-time developments in those countries contained the seeds of the current market turmoil.
While we see a lack of fiscal prudence as having been a major contributing factor to high public debt levels in some countries, such as Greece, we believe that the key underlying issue for the eurozone as a whole is one of a growing divergence in competitiveness between the core and the so-called "periphery." Exacerbated by the rapid expansion of European banks' balance sheets, this has led to large and growing external imbalances, evident in the size of financial sector claims of net capital-exporting banking systems on net importing countries. When the financial markets deteriorated and risk aversion increased, the financing needs of both the public and financial sectors in the "periphery" had to be covered to varying degrees by official funding, including European Central Bank (ECB) liquidity as well as intergovernmental, EFSF, and IMF loans.
HOW HAS THE EUROPEAN POLICY RESPONSE AFFECTED THE RATINGS?
We have generally adjusted downward our political scores (one of the five key factors in our published sovereign ratings criteria) for those eurozone sovereigns we had previously scored in our two highest categories. This score change has been a contributing factor to the rating actions on the relevant sovereigns cited above. Under the political score, we assess how a government's institutions and policymaking affect a sovereign's credit fundamentals by delivering sustainable public finances, promoting balanced growth, and responding to economic or political shocks. Our political score also captures the potential effect of external organizations on policy settings.
It is our view that the limitations on monetary flexibility imposed by membership in the eurozone are not adequately counterbalanced by other eurozone economic policies to avoid the negative impact on creditworthiness that the eurozone members are in opinion view currently facing. Financial solidarity among member states appears to us to be insufficient to prevent prolonged funding uncertainties. Specifically, we believe that the current crisis management tools may not be adequate to restore lasting confidence in the creditworthiness of large eurozone members such as Italy and Spain. Nor do we think they are likely to instill sufficient confidence in these sovereigns' ability to address potential financial system stresses in their jurisdiction. In such a setting, the prospects of effectively intervening in the feedback loop between sovereign and financial sector risk are in our opinion weak.
HOW DO YOU EXPECT MACROECONOMIC DEVELOPMENTS WILL AFFECT THE REFORM AGENDA?
We believe that the elusiveness of an effective policy response is likely to add to caution among households and investors alike, weighing on the growth outlook for all eurozone members. Our base case still assumes that the eurozone will record moderate growth in 2012 and 2013, i.e. 0.2% and 1%, respectively -- down from 0.4% and 1.2% according to our early December forecast, with a relatively mild recession in the first half of 2012. Nevertheless, we estimate a 40% probability that a deeper and more prolonged recession could hit the eurozone, with a likely reduction of economic activity of 1.5% in 2012. Furthermore, we believe an even deeper and more prolonged slump cannot be entirely excluded. We expect this weak macroeconomic outlook if realized would complicate the implementation of budget plans, with slippages to be expected, which would likely further dampen confidence and potentially deepen the recession, as funding and credit is curtailed and the private sector increases precautionary savings.
WHAT IS YOUR VIEW OF THE LATEST DEVELOPMENTS IN GREECE AND WHAT IMPACT DO THEY HAVE YOUR ANALYSIS?
We did not change the rating on Greece, which had been downgraded to 'CC' in July 2011, indicating our view of the risk of imminent default. Negotiations with bondholders have taken longer than originally anticipated and we believe may now run close to a large redemption of €14.5 billion on March 20, 2012, raising the specter of a disorderly default. Such an event would in our view further complicate the restoration of affordable market access for other sovereigns experiencing market stress. We understand that the main unresolved issues are related to the treatment of holdouts, the participation of official creditors, and the coupon of the new bonds that will be offered (which partly determine the effective recovery, which we continue to expect to lie between 30% and 50%). We do not believe that private-sector involvement will necessarily be a one-off event in the case of the Greek restructuring and would not be sought in possible future bail-out packages in a future case of sovereign insolvency or prolonged loss of market access. All the more so as official lenders are less likely to bear any future losses as their lending will be channeled through the ESM, a privileged creditor that is expected to be senior to bondholders in any future restructuring.
HOW DOES STANDARD & POOR'S VIEW THE ECB's RESPONSE TO DATE?
In our view, the actions of the ECB have been instrumental in averting a collapse of market confidence. We see that the ECB has eased its eligibility criteria, allowing an ever-expanding pool of assets to be used as collateral for its funding operations, and has lowered the fixed rate on its main refinancing operation to 1%, an all-time low. Most importantly in our view, it has engaged in unprecedented repurchase operations for financial institutions. In December 2011, it lent financial institutions almost €500 billion over three years and announced further unlimited long-term funding auctions for early 2012. This has greatly relieved the funding pressure for banks, which will have to redeem over €200 billion of bonded debt (excluding in some jurisdictions sizeable private placements) in the first quarter alone. By lowering the ECB deposit rate to 0.25%, we believe that the central bank has implicitly tried to encourage financial institutions to engage in a carry trade of borrowing up to three-year funds cheaply from the central bank and purchasing high-yielding government bonds. Recent Italian and other primary auctions suggest to us, however, that banks and other investors may still only be willing to lend longer term to governments facing market pressure if they are offered interest rates that, all other things being equal, will make fiscal consolidation harder to achieve.
Reports indicate that many investors had hoped that a breakthrough at the December summit would have enticed the ECB to step up its direct government bond purchases in the secondary market through its Security Market Program (SMP).However, these hopes were quickly deflated as it became clearer that the ECB would prefer to provide banks with unlimited funding, partly with the expectation that those liquid funds in banks' balance sheets would find their way into primary sovereign bond auctions. This indirect way of supporting the sovereign bond market may yet be successful, but we believe that banks may remain cautious when being faced with primary sovereign offerings, as most financial institutions have aimed at shrinking their balance sheets by running down security portfolios in order to comply with higher capital requirements, which become effective in 2012. We believe that the ECB has not entirely closed the door to expanding its involvement in the sovereign bond market but remains reluctant to do so except in more dramatic circumstances. In our view, this reluctance is likely prompted by concerns about moral hazard, the ECB's own credibility (particularly should losses mount), and potential inflation pressures in the longer term. We think it may also be the case that the ECB (as well as some eurozone governments) is concerned that governments' reform efforts would falter prematurely if market pressure subsides.
We believe that the risk of a credit crunch remains real in a number of countries as economic conditions weaken and banks continue to consolidate their balance sheets in light of tighter capital requirements and poor market conditions in which to raise additional equity. However, the monetary policy actions described above may mitigate the risk of a more extreme tightening of credit conditions, which, if it were to come to pass, could put further pressure on economic activity and employment.
In summary, while the monetary policy reaction has not been as accommodating as many investors may have anticipated or hoped for, we believe that it has nevertheless provided significant breathing space during which progress on policy reform can be made. Furthermore, the ECB may yet engage in additional supporting steps should the sovereign and bank funding crises intensify further. Therefore, we have not changed our monetary score on eurozone sovereigns.
HOW DOES STANDARD & POOR'S ASSESS THE REFORM EFFORTS OF THE NEW GOVERNMENTS IN ITALY AND SPAIN?
In our view, the governments of Mario Monti and Mariano Rajoy have stepped up initiatives to modernize their economies and secure the sustainability of public finances over the long term. We consider that the domestic political management of the crisis has improved markedly in Italy. Therefore, we have not changed our political risk score for Italy because we are of the opinion that the weakening policy environment at the European level is to a sufficient degree offset by Italy's stronger domestic capacity to formulate and implement crisis-mitigating economic policies.
Despite these encouraging developments on domestic policy, we downgraded both sovereigns by two notches. This is due to our opinion that Italy and Spain are particularly prone to the risk of a sudden deterioration in market conditions.Thus, we believe that, as far as sovereign creditworthiness is concerned, the deepening of the crisis and the risks of further market dislocation that could accompany an inconclusive European crisis management strategy more than offset our view of the enhanced national policy orientation.
WHY WAS IRELAND THE ONLY SOVEREIGN AMONG THE SO-CALLED "PERIPHERY" NOT
DOWNGRADED?
We have not adjusted our political score backing the rating on Ireland. This reflects our view that the Irish government's response to the significant deterioration in its public finances and the recent crisis in the Irish financial sector has been proactive and substantive. This offsets our view that the effectiveness, stability, and predictability of European policymaking as a whole remains insufficient in addressing the deepening financial crisis in the eurozone. Excluding government-funded banking sector recapitalization payments, the authorities have adjusted Ireland's budget by almost 13% of estimated 2012 GDP since 2008 and plan additional fiscal savings of close to 8% of GDP for 2012-2015. All other things being equal, we view the government's fiscal consolidation plan as sufficient to achieve a general government deficit of about 3% of GDP in 2015. In our view, there is currently a strong political consensus behind the fiscal consolidation program and policy implementation so far has been extremely strong.
In our view, Ireland has the most flexible and open economy among the "periphery" sovereigns. We believe that Ireland's economic adjustment process is further advanced than in the other sovereigns currently experiencing market pressures. This is illustrated by the 25% depreciation in the trade-weighted exchange rate since May 2008 and Irish exports growth contributed positively to the muted Irish economic recovery in 2011. However, in our view this also leaves the Irish economy and, ultimately, the Irish government's fiscal consolidation program susceptible to worsening external economic conditions, which is reflected in our negative outlook on the rating.
WHAT ARE THE IMPLICATIONS FOR THE EFSF AND OTHER EUROPEAN MULTILATERAL LENDING INSTITUTIONS?
Following our placement of the ratings on the eurozone sovereigns on CreditWatch in December, we also placed a number of supranational entities on CreditWatch with negative implications. These included, among others, the European Financial Stability Fund (EFSF), the European Investment Bank (EIB), and the European Union's own funding program. We are currently assessing the credit implications of today's eurozone sovereign downgrades on those institutions and will publish our updated credit view in the coming days. Source