Sovereign debt watch

[oirg]

http://www.nytimes.com/aponline/2010...ngrade.html?hp

MANAMA, Bahrain (AP) -- Moody's Investor Service says it has downgraded Bahrain's sovereign rating, citing the country's increasingly high price of oil needed to balance its budget.

The ratings agency in a statement Monday also cited a negative outlook about the island nation's banking sector and added it had downgraded ratings for several Bahrain-based banks over the past two years.

http://wallstreet.blogs.fortune.cnn....rades-ireland/

Standard & Poor's cut Ireland's sovereign debt rating by a notch to double-A-minus, citing the massive cost of patching up the hemorrhaging Irish banking system.

The news comes at a time when worries about Ireland's finances have loomed larger in financial markets. The cost of insuring against a default on Irish government debt has risen 25% over the past month, approaching levels seen in early 2009, and Irish bonds are trading at a record premium to safer German bonds.

S&P said it now expects recapitalizing the financial system in Ireland to cost the government half again as much as it had earlier estimated. The tab could run to 45 billion to 50 billion euros ($57 billion-$63 billion), the ratings firm said.

The huge cost of bailing out the banks will push Irish government debt up well above the country's annual gross domestic product, S&P said – well above the levels seen in other stressed sovereign debt issuers such as Belgium and Spain.

"The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term," S&P said.

It estimated that the total costs of support for the financial sector will hit 58% of annual GDP. Moody's made some mind-bending cost estimates of its own last month in downgrading Ireland for the second time this year.

The Irish banks collapsed in 2008 when a massive property bubble popped. Taxpayers have been consigned to spending huge sums to prop up the banks, including Anglo Irish, which ran aground after making bad loans. Former CEO Sean Fitzpatrick took $114 million in personal loans over eight years at the bank, but recently declared bankruptcy. The government has been investigating.

But with the economy still faltering, support for Anglo Irish has become a thorn in the side of Ireland's finance minister Brian Lenihan. He recently said the government propped the bank up "to ensure that the resolution of debts does not damage Ireland's international credit-worthiness and end up costing us even more than we must now pay."

With investors showing a renewed aversion to risk, Ireland now faces the unhappy prospect that it will end up paying more anyway.

[campbell]

http://www.businessinsider.com/prepa...ession-2010-82

There’s a colorful report going around this week out of Morgan Stanley that describes the global magnitude of the sovereign debt crisis and essentially concludes that haircuts are coming for bondholders. In other words, sovereign defaults are inevitable.

As noted in the article, there's not a distinction made between those that can monetize their debt (i.e., the U.S.), and the rest (not sure about the UK... what are their bonds denominated in?)

[echo]

Originally Posted by campbell

http://www.businessinsider.com/prepa...ession-2010-82





As noted in the article, there's not a distinction made between those that can monetize their debt (i.e., the U.S.), and the rest (not sure about the UK... what are their bonds denominated in?)

The chart has inconsistencies. Looks like the Italy and Ireland numbers may have gotten mixed up. Assuming the first 2 columns are correct, the numbers in the third column for Italy and Ireland would need to be switched.

[campbell]

....did someone screw up their spreadsheet formulas, hmmm?

[Omikron]

This is like watching bubbles pop, except less enjoyable.

Wait, there can't be haircuts for sovereign bondholders - the European "stress tests" assumed there wouldn't be any!

[campbell]

http://www.businessweek.com/news/201...te-starts.html

France now pays about 2.6 percent to borrow for 10 years, compared with 3 percent for the U.K. and 2.7 percent for the U.S. Still, that’s more than the 2.3 percent paid by Germany, whose bunds set Europe’s benchmark borrowing costs. All have the highest ratings from companies including Moody’s Investor Corp. and Standard & Poor’s.

Bond Spread

The French-German spread widened to as much as 55.6 basis points, more than half a percentage point, on June 8 on concern that Sarkozy was falling behind Germany in curbing debt. The spread may widen again if the pension reform fails, say investors including Axel Botte.

“If there are huge demonstrations, if the reforms come into political difficulty, it could become a problem for the market,” said Botte, who helps oversee about 500 billion euros ($640 billion) at Axa Investment Managers. “It is a worry.”

[campbell]

Now is the time in Sprockets where we do the cross-posting! I'm doing this post in the various related threads.

For those not aware, there are a bunch of related threads sprinkled about the AO:

This forum:

First public pensions in trouble thread

Second public pensions in trouble thread

Retirement age changes

Current round of Social Security discussion

Pension accounting thread

In the Finance/Investments forum:

Sovereign debt watch

Muni watch

Illinois debt watch

[campbell]

http://www.theatlantic.com/business/...t-worse/63837/

It's hard to know what to say about Ireland's revelation that it expects the cost of cleaning up Anglo Irish Bank to come to a staggering 21% of GDP. Profanity is too weak, really. The total cost of the bank bailouts looks as if it will be well over a quarter of GDP.

Needless to say, as Tyler Cowen notes, this rather calls into question the notion that austerity is making Ireland's problems worse. The size of the bank rescue may well turn out to be too large for the government to handle. Yet the government has little choice. Ireland is massively dependent on foreign credit, and if it flees--well, the second letter in the country's name might as well be a "c". That means cutting the budget elsewhere to send a credible signal to the bond market--because without that credible signal, an even worse financial crisis seems like the most likely outcome.