Moody's, that venerable credit rating agency, just acknowledged what the entire financial universe has known for months: Greece is not an investment grade credit! Really? Even Standard & Poors figured that out nearly two months ago.
In making the 4-step downgrade to Ba1 from A3, Moody’s cited risks to economic growth from the austerity measures tied to a €110 billion ($134.5 billion) aid package from the European Union (EU) and the International Monetary Fund (IMF). Obviously, the Moody's analysts must be regular readers of Marko's Take.
Greece has cut spending, raised taxes and trimmed public-sector wages and benefits to reduce the deficit, which ballooned to 13.6% of Gross Domestic Product (GDP) last year, more than four times the EU maximum. The government pledged to trim the shortfall to 8.1% of GDP this year and bring it back under the 3% EU limit by 2014.
Spain's problems, which are far less severe than those of Greece, is struggling to raise financing for debt maturities of €16.2 billion by July.
Spain disclosed yesterday that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some, while Germany said the EU stands ready to help if Madrid needs a Greek-style rescue.
With the 4th largest economy in the EU, Spain is coping with 20% unemployment and an 11.2% budget deficit. Spain has among the lowest sovereign debt ratios in the Euro-Zone, at less than 60% of GDP.
Despite growing investor concerns amid a tougher credit environment, Madrid was able to place €5.2 billion at its 12- and 18-month bill auctions, but investors demanded a big yield premium.
Spanish 10-year bond yields rose nearly a quarter of a point yesterday, to 4.67%, while financial sector shares also came under pressure, down nearly 1% as they underperformed the broader market.
The demands on Germany and France, the EU's most healthy countries, continued to exert political problems.
German chancellor Angela Merkel's center-right coalition government may be close to collapse, stung by a string of disagreements and intense infighting over austerity cuts, policy reform and the departure of senior conservatives. With elections coming up in the next few weeks, German voters appear inclined to make wholesale changes.
The bail-out package has also raised the ire of Merkel's French counterpart, Nicolas Sarkozy, who has accused the Germans of creating an atmosphere that will thwart growth in Europe at a time when it should be stimulated. Relations between the two politicians are at an all-time low.
Ireland was also able to sell €1.5 billion of new debt, but at much higher yields than in previous auctions. The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April. The 2018 bond had a yield of 5.088%, up from 4.55% last August.
The credit window is still open for European sovereign debtors but could slam shut at any time. If, and when it does, the toll on the world financial system will be particulary acute as governments will be forced to make substantially greater cuts to bolster investor confidence. Marko's Take? Avoid these issuers and focus on the only winner in this entire financial crisis: Gold.
Marko's Take
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