Currency Wars: Moody's Warns on US AAA Rating But Europe Is the Target

I continue to suspect strongly that the debt ceiling theatricals will come to nothing, the can will be kicked down the road past the 2012 elections, and the markets will rally, with Risk On again, when the crisis dissipates.

I am not so optimistic about Europe, with the hedge funds and their Ratings Agencies dogging them. The saber rattling by Moody's at the US is merely to provide cover for the next assault on Ireland and Italy.

The solution is obvious, but difficult to achieve. A single currency for a range of economies is simply not feasible without transfer payments and a single financial authority as exist among the States in the US. Some states give more and others receive more as the necessary resolution of regional currency inflexibility.

A two-tiered system would work, as would spinning off a few of the PIIGs into a system which would allow them to devalue currencies as required. It would hamper the strong economies' regional exports, but that is the price they would pay.

The stumbling block is the CDS market and the debts owed to the French and German banks, and to a lesser extent the English and the Americans. This is why the Wall Street banks can ruthlessly press a default scenario as just another Goldman opportunity.

And in the meanwhile, Asia bides its time. The next eighteen months should be interesting.

MarketWatch
Stock index futures fall after Moody's warning
By Carla Mozee
July 13, 2011, 6:13 p.m. EDT

U.S. stock index futures fell Wednesday evening after Moody's Investors Service warned that it may cut its triple-A rating on U.S. government debt. Dow Jones Industrial Average futures recently fell 79 points, to 12,346 from its settlement Wednesday afternoon.

S&P 500 Index futures /quotes/zigman/1277190 SP1U -0.38% fell 9 points to 1,303, and Nasdaq 100 Index futures /quotes/zigman/876546 ND1U -0.48% shed 15 points to 2,330.

The U.S. dollar index /quotes/zigman/1652083 DXY 0.00% , which measures the U.S. unit’s performance against a basket of six other major currencies, fell to 75.01 and reached as low as 74.93. The benchmark was above 75 before the news. The euro /quotes/zigman/4867933/sampled EURUSD +0.44% and the Japanese yen each strengthened.

Moody’s said the review was prompted by the possibility that the U.S. debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.

“As such, there is a small but rising risk of a short-lived default,” Moody’s said, adding that it considers the probability of a default to be low but no longer minimal.

“An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate,” it said. If lowered, the rating would most likely be somewhere in the Aa range, said Moody’s.

Jeffrey Goldstein, the U.S. Treasury’s under secretary for domestic finance, said in a statement that Moody’s assessment “is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country’s obligations and agree upon a substantial deficit-reduction package.”

Earlier Wednesday, a stalemate between lawmakers appeared to be breaking after Senate Democratic Leader Harry Reid lauded a proposal from his Republican counterpart to let President Barack Obama raise the debt ceiling on his own. Reid praises Republican debt-ceiling proposal.

Currency Wars: Moody's Cuts Portugal Four Notches to 'Junk'

The ratings agencies have been and are still the creatures of the Anglo-American banking cartel.

Until there is reform, there will be no security, no growth, and no peace.

Reuters
Moody's cuts Portugal ratings by 4 notches to junk
Tue Jul 5, 2011 2:11pm EDT

NEW YORK, July 5 (Reuters) - Moody's Investors Service on Tuesday cut Portugal's credit rating by four levels to Ba2, two notches into junk territory, saying there is great risk the country will need a second round of official financing before it can return to capital markets.


Reuters
FOREX-Euro snaps six-day advance as Moody's cuts Portugal
Jul 5, 2011 7:36pm BST

NEW YORK, July 5 (Reuters) - The euro slid against the dollar and the Swiss franc on Tuesday, snapping six straight days of gains, after Moody's cut Portugal's credit rating to junk.

Weak euro zone data and concerns on China had already weighed on risk sentiment and boosted safe-haven currencies. Concerns about Greece have not faded despite the approval of 12 billion-euro loan by euro zone finance ministers, and the Moody's downgrade of Portugal only added to risk aversion.

Moody's Investors Service cut Portugal's credit rating by four levels to Ba2, two notches into junk territory, saying there is great risk the country will need a second round of official financing before it can return to capital markets.

"This renews the question of whether or not just Greece but the other peripherals are likely to need more bailouts," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "These issues were not extinguished last week. There was a nice dose of water poured on them, but they are still smoldering, and this is like adding gasoline to those smoldering ashes."

The euro dropped 1.7 percent against the safe-haven Swiss franc EURCHF=EBS to a low of 1.21150, francs, pulling back from a five-week high touched on Monday on trading platform EBS.

The euro was down around 0.8 percent against the dollar at $1.44267 EUR=EBS on EBS, taking a breather from recent gains made after Greece approved tough austerity measures last week. The euro had gained more than 2 percent against the greenback last week in its best weekly performance since January.

On Monday the euro hit a one-month high versus the dollar at $1.45800.

Traders cited talk of stops through $1.44400-$1.44500 ahead of bids $1.44300/$1.44350.

The Portuguese credit ratings cut followed another setback for Greece on Monday when ratings agency Standard & Poor's warned it would treat a rollover of privately held Greek debt, now being discussed, as a selective default.

Greece also needs a second aid package worth some 110 billion euros, which euro zone finance ministers said would be made final by mid-September.

Falls in the euro accelerated after the Markit Eurozone Purchasing Managers' Index showed growth in the euro zone's dominant services sector slowed to its weakest pace since October.

Euro zone retail sales data was also lower than forecast.

One factor capping losses in the euro was Thursday's ECB policy meeting, An ECB rate increase has been well factored in by the market, analysts said.

Price moves post meeting will hinge on the language that ECB President Jean-Claude Trichet uses at his news conference after the formal announcement, with investors focused on what he says about inflation.

"Dropping the reference to 'strong vigilance' would signal a short pause at least in the tightening cycle and likely see the euro rally fade again," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Earlier, Chinese media reports about a possible rate rise in China this weekend and a report by rating agency Moody's saying the scale of problem loans to local governments in China may be much bigger than previously thought also hurt risk appetite, lifting the dollar as well.

China: The US Is "Insolvent and Faces Bankruptcy"

The common thought amongst even reasonably educated and economically literate Americans is that China is 'stuck with US Treasuries' and has no choice, so it must perform within the status quo and do as the US wishes, or face a ruinous decline in their reserve holdings of US Treasuries.

And with real short term US Treasury interest rates decidedly negative, meaning that it is costing you money to hold dollars, there is a case to be made that there are a lot of 'price takers' out there in this world. Wow, they are just that good, aren't they. Having their heyday in a genuine deflation. A subtle tax levied on all holders of US dollars, probably more significant because of the official understatement of inflation. Yo, come git some.

I think China is already diversifying their reserve portfolio, and more stealthily and effectively than one would imagine into 'real goods.'

Further, I suspect that through the use of hedging short positions and derivatives such as Credit Default Swaps, China would be able to cover a greater portion of its reserves than the common mind might allow, which is 'none' because of the obvious counter party risk in the event of a total collapse, a typical Western reaction, never seeing the gradations of outcomes.

And if this is in reality one theater in a global struggle for power, sacrificing a pawn or two, and even a bishop, would be a small price to pay to bring down the world's remaining superpower, as indirectly and gracefully as is possible. War is never cheaply waged.

It would most certainly be a nuclear option to outright dump Treasuries outright, and would raise the ire of what is still a formidable military power. But it is the Western mind that is so incapable of seeing the many shades of gray in every situation, the subtle gradations in a range of choices that I believe China not only sees but is already actively pursuing.

China is not the only country that resents the devastating frauds that the US has perpetrated on not only its own people but the rest of the world through its Wall Street banks and ratings agencies.

Most Americans overlook this developing estrangement that is beginning to isolate the US and UK from even their traditional allies in Europe and South America and Asia. This is a serious error, but so typical of the short term mentality dominated by greed, dishonesty, and self-delusion that captured the American psyche in the latter part of The New American Century. But what choice does Europe have except to take what the Anglo-Americans serve them. Take it or leave it. And ain't currency war hell?

It never pays to have a 'checkerboard mentality' when your opponent is playing Go."

Financial Times
China rating agency condemns rivals
By Jamil Anderlini in Beijing
July 21 2010 16:22

The head of China’s largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world’s largest creditor nation China should have a bigger say in how governments and their debt are rated.

“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards,” Guan Jianzhong, chairman of Dagong Global Credit Rating, told the Financial Times in an interview. “China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged.”

He specifically criticised the practice of “rating shopping” by companies who offer their business to the agency that provides the most favourable rating.

In the aftermath of the financial crisis “rating shopping” has been one of the key complaints from western regulators , who have heavily criticised the big three agencies for handing top ratings to mortgage-linked securities that turned toxic when the US housing market collapsed in 2007.

“The financial crisis was caused because rating agencies didn’t properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests,” Mr Guan said.

Recently, the rating agencies have been criticised for being too slow to downgrade some of the heavily indebted peripheral eurozone economies, most notably Spain, which still holds triple A ratings from Moody’s.

There is also a view among many investors that the agencies would shy away from withdrawing triple A ratings to countries such as the US and UK because of the political pressure that would bear down on them in the event of such actions.

Last week, privately-owned Dagong published its own sovereign credit ranking in what it said was a first for a non-western credit rating agency.

The results were very different from those published by Moody’s, Standard & Poor’s and Fitch, with China ranking higher than the United States, Britain, Japan, France and most other major economies, reflecting Dagong’s belief that China is more politically and economically stable than all of these countries.

Mr Guan said his company’s methodology has been developed over the last five years and reflects a more objective assessment of a government’s fiscal position, ability to govern, economic power, foreign reserves, debt burden and ability to create future wealth.

“The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings ,” Mr Guan said. “Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”

A wildly enthusiastic editorial published by Xinhua , China’s official state newswire, lauded Dagong’s report as a significant step toward breaking the monopoly of western rating agencies of which it said China has long been a “victim”.

“Compared with the US’ conquest of the world by means of force, Moody’s has controlled the world through its dominance in credit ratings,” the editorial said...

China Ratings Agency Downgrades US Debt From Moody's, S&P's, and Fitch's AAA Rating

Currency wars. Well at least a Phony War for now. See, nothing has happened. All is well. Move along. Nothing to see here. Status quo intact.

The US sovereign debt gets a stiff downgrade, cut down from number one in the world, to a distant thirteenth place by China's Dagong Credit Rating Agency.

Governments like China do not take actions like this randomly, and their quasi-state organizations do not march to the beat of their own drummer. It will be interesting to watch this develop, and calculate the strategy, to figure out the next steps.

From a thematic perspective, coming up, competitive devaluations, and a shift in the reserve currency regime that will resemble a seismic shift, most likely pivoting around the SDR composition discussions later this year.

The US battered the euro and has been sitting on gold and silver ahead of the SDR discussions. And now China has slipped a shiv between the ribs of the almighty Dollar. This is just the overture, the prelude to the dance.

And further down the road, trade wars, well, at least trade wars more overt than the ones which have been ongoing since 1980, in which the US based multinationals thought they were pulling the strings, breaking the back of American labor.

And guess who the arms dealers are in this paper chase, selling to all sides? Who are the untouchables, the TBTF, a strategic asset in the financial arsenal of democracy? When these boys roll into town it's time to hide the women, children, livestock and provender.

The US media will downplay this, dismiss it, say it does not matter because China will not/ dare not/ can not/ do anything to change the status quo. And expect the spin to be laced with plenty of condescension. Oh those sly Chinese, just talking up their book, just like us. But who can take those little rapscallions seriously.

They are wrong, and they know it.

Well maybe not the news readers and the spokesmodels, who only know what they are told. But the strategists, the thought leaders, and the smart money most certainly know it. They just do not wish to share that information with you yet, because real knowledge is power. And show enjoy the show.

Watch how people react to this, and how they spin it to you. This will be an indication of either what they know, or the kind of character they have. Then you will know something about them and the kind of player they are. Remember it.

They think that you do not have a need to know anything about this yet, because you are intended to be cannon fodder, grist for the mill. Along with Europe, which is busy scourging its citizens into submission to more willingly serve the Anglo-American banking cartel.

And of course there is the new dictum, 'Extend and pretend. If it bleeds, bury it...'

And so the fog of war rolls in.

Associated Press
Chinese credit firm says US worse risk than China
By Joe Mcdonald
July 11, 2010

BEIJING (AP) --
A Chinese firm that aims to compete with Western rating agencies declared Washington a worse credit risk than Beijing in its first report on government debt Sunday amid efforts by China to boost its influence in global markets.

Dagong International Credit Rating Co.'s verdict was a break with Moody's, Standard & Poors and Fitch, which say U.S. government debt is the world's safest. Dagong said it rated Washington below China and 11 other countries such as Switzerland and Australia due to high debt and slow growth. It warned the U.S. is among countries that might face rising borrowing costs and risks of default.

The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs -- a criticism echoed by some foreign analysts. At June's G-20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.

Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially. But in a sign of official support, its announcement Sunday took place at the headquarters of the Xinhua News Agency, the ruling Communist Party's main propaganda outlet.

Dagong's chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe's debt woes. He said it "provides the wrong credit-rating information" and fails to reflect changing conditions.

"Dagong wants to make realistic and fair ratings," he said.

Beijing has more than $900 billion invested in U.S. Treasury debt and has appealed to Washington to avoid hurting the value of the dollar or China's holdings as it spends heavily on its stimulus.

Dagong's report covered 50 governments and gave emerging economies such as Indonesia and Brazil better marks than those given by Western agencies, citing high growth. Along with the United States, some other developed nations such as Britain and France also received lower ratings than those of other agencies.

Dagong rated U.S. government debt AA with a negative outlook, below the firm's top AAA rating. It warned that Washington, along with Britain, France and some other countries, might have trouble raising more money if they allow fiscal risks to get out of control.

"The interest rate on debt instruments will run up rapidly and the default risk of these countries will grow even larger," its report said.

Dagong said it hopes to "break the monopoly" of Moody's Investors Service, Standard & Poors and Fitch Ratings. Their reputation suffered after they gave high ratings to mortgage-linked investments that soured when the U.S. housing market collapsed in 2007.

Manoj Kulkarni, head of credit research for SJS Markets in Hong Kong, said that despite the possibility China's government might try to influence Dagong's decisions, there is room in the market for a Chinese agency because Western firms' credibility is badly tarnished.

"As long as there is another opinion and it is backed up, I don't really think a China-based company will have an incentive to rate, say, Indonesia any better than a U.S.-based rating agency," Kulkarni said.

"If it comes to Chinese government-related companies, maybe there might be a conflict of interest, and investors would have to be aware of that fact," he said.

Chinese leaders have appealed repeatedly to Washington to safeguard their country's U.S. holdings and avoid taking steps in response to the global crisis that might weaken the dollar or the value of American assets.

Dagong rated China AA-plus with a stable outlook -- higher than Moody's A1 and S&P's A-plus -- due to rapid growth and relatively low debt.

Ahead of it were seven countries including Switzerland, Australia and Singapore that received the top rating of AAA, the same as those from Western agencies. Canada and the Netherlands also ranked above China...

Bloomberg
China Wins Higher Rating Than U.S. in First Ranking
July 12, 2010

July 12 (Bloomberg) -- A Chinese company gave its own government a higher debt rating than the U.S., U.K. and Japan in the nation’s first sovereign ranking because of widening deficits in the developed world.

Dagong Global Credit Rating Co. rated U.S. government debt AA with a negative outlook, and China AA+ with a stable outlook, the company said in a report covering 50 nations published on its website. The yuan-denominated rating is higher than Japan’s AA- and the same as Germany’s, Beijing-based Dagong said...

Dagong’s rating report gave “markedly” different valuations to 27 countries compared with those of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, the statement said. The euro has slumped 12 percent this year on concern that Europe’s fiscal crisis may expand beyond Greece and Spain to Germany and France.

“This marks a new beginning for reforming the irrational international rating system,” Chairman Guan Jianzhong said in a statement. “The essential reason for the global financial crisis and the Greek crisis is that the current international rating system cannot truly reflect repayment ability.”...

China Ratings Agency Press Release

Typical snide reaction from the Financial Times I Heart China Says China Rating Agency

Moody's Cuts Greece to 'Junk'

It certainly is nice to own the world's major ratings agencies.

Oh no, not the US government -- the Anglo-American hedge funds and a few multinational banks.

Bloomberg
Greece Cut to Junk by Moody’s on ‘Substantial’ Economic Risks
By Ben Martin and Maria Petrakis

June 15 (Bloomberg) -- Greece’s credit rating was cut to non-investment grade, or junk, by Moody’s Investors Service, threatening to further undermine demand for the debt-strapped nation’s assets as it struggles to rein in its budget deficit.

In making the four-step downgrade to Ba1 from A3, Moody’s cited “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said in a statement yesterday in London. The outlook is stable, it said.

Greece has cut spending, raised taxes and trimmed wages to tackle the deficit, which swelled to 13.6 percent of gross domestic product last year, more than four times the EU limit. To secure the EU-IMF aid, the government pledged to trim the shortfall to 8.1 percent of GDP this year and bring it back under the 3 percent EU ceiling in 2014. The crisis has prompted investors to sell the bonds of Greece and other high-deficit nations and pushed the euro down 15 percent this year.

“We’ve got a lot of uncertainty around the growth outlook for Greece,” Sarah Carlson, vice president-senior analyst in Moody’s sovereign-risk group, said in a telephone interview yesterday. “It’s rare for a country to implement so much structural reform in a very short time...”

Why Its Good to Own the Ratings Agencies (Or At Least to Have the Same Owner)

Dean Baker speaks to the issue of the US and its AAA rating.

I had considered that the Ratings Agencies might become instruments of national policy, implicated as they are in numerous scandals and misbehaviour. If you don't do the time, then you must have turned cooperative and informant in at least a soft and accommodating way.

But I had never considered this particular angle. Now there is room for doubt that they might serve the will of the US government, but there should be no doubt, given their recent history, that they are all too often willing to say and do whatever pleases Wall Street.

"....This means that if Moody’s were to downgrade the government’s debt, to be consistent it must also downgrade the debt of Citigroup, Goldman Sachs and the other big banks. If Moody’s downgrades the government’s debt, without downgrading the debt of the big banks – or even threatens to downgrade the government’s debt without also threatening to downgrade the debt of the big banks – then it is more likely acting in pursuit of Wall Street’s political agenda than presenting its best assessment of the creditworthiness of the U.S. government.

It is unfortunate that we have to suspect a major credit-rating agency of such dishonesty, but given its track record, serious people have no choice. To paraphrase an old Winston Churchill joke, we already know about the character of the bond-rating agencies, we are only asking if they are prostituting themselves now."

Dean Bakes, Will the US Lose Its AAA Rating?

The quotation that Dean Baker references from Churchill brings to mind this famous anecdote from another British wit:

George Bernard Shaw once found himself at a dinner party, seated beside an attractive woman. "Madam," he asked, "would you go to bed with me for fifty thousand pounds?"

The colossal sum gave the woman pause, and after reflection, she coyly replied: "Perhaps."

"And if I were to offer you five pounds?" Shaw asked.

"Mr. Shaw!" the woman exclaimed indignantly. "What do you take me for!"

"We have already established what you are," Shaw calmly replied. "Now we are merely haggling over price."

US and UK Move Closer to Ratings Downgrades - Or Not

There is a spread of glass 'half-empty' and 'half-full' versions of this story in the news today. The Financial Times stresses that the ratings are 'safe' for now and 'well-positioned' while others such as Business Week choose to emphasize the deterioration and potential risk.

Who are Moody's and SP to judge this? Their shocking performance in the subprime and credit markets shows them repeatedly to be little more than carnival barkers and shills, willing to say almost anything for pay. Are they as malleable to political and commercial influence in this as they have shown themselves to be in the recent financial scandals?

And yet, the position of the fiat currencies and the financial engineers does seem to deteriorate to anyone who can look at debt to GDP ratios, debt servicability, and the quality of government statistics. And some currencies are more equal than others, being sustained by holdings in foreign reserves because of the current structure of international finance.

It is unlikely, however, that we will hear about any collapse before it happens from these US-based ratings agencies. Their ratings are triggers for traders however, and could be self-fulfilling, a tool for the currency bears, who use leverage to bring down nations.

The US will seek to stand the Dollar on the heads of Sterling and then the Euro to sustain its head about the rising waters.

Make no mistake about this. Keep an eye on Sterling as the currency wars intensify.

NY Times
Credit Agency Warns U.S. and Others of Risk to Top Rating
By DAVID JOLLY
March 15, 2010

PARIS — The United States, Germany and other major economies have moved “substantially” closer to losing their top-notch credit ratings and can not depend solely on economic growth to save them, a report warned on Monday.

The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently “stable,” Moody’s Investor Service wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Greece, Portugal and other countries that are already in far worse shape have been rocked by strikes and other protests in recent weeks as they try to adopt tough austerity measures.

Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.

Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. Last May, Moody’s cut Japan’s Aaa rating to Aa2, an acknowledgement of the market’s growing unease with the debt burden of the Asian country...

In the United States, the Obama administration estimates that the deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.

For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10.0 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

In Britain, Moody’s said, the risk is that tax receipts fail to keep pace with forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver. In that situation, the debt — which the government already predicts will stabilize at around 90 percent of G.D.P. — could balloon, undermining the credit rating.

In comparison to both Britain and the United States, the report noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not rise substantially...

As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.