New Avid Trader Home

All articles have been moved to www.avidtrader.com. We have a whole new look!  We hope you enjoy all the new infomation on Avid Trader!

Bank Downgrades

by Larry Levin 

A would-be stunner hit the tape today...AFTER THE CLOSE, of course.  Fitch released a report saying it put many banks on "watch negative" while others were outright downgraded.  The reason for the action: "the ongoing Eurozone crisis continues to feed intense market speculation regarding the potential or bank recapitalization schemes. Therefore for the near term the agency is maintaining a 'single A' range support rating floors for banks in its highest rated Eurozone countries."
 
LONDON/MILAN, October 13 (Fitch) Fitch Ratings has downgraded UBS AG's (UBS) Long-term Issuer Default Rating (IDR) and revised its Support Rating Floor (SRF) to 'A' from 'A+'. The Outlook on the Long-term IDR is Stable.

At the same time, the agency has downgraded UBS's Short-term IDR to 'F1' from 'F1+' and affirmed UBS's Support Rating at '1'. UBS's Viability Rating (VR) of 'a-' remains on Rating Watch Negative (RWN). This rating action has no impact on the 'AAA' rating of the outstanding covered bonds issued by UBS. A full list of rating actions is at the end of this comment. The rating action on UBS and its subsidiaries is part of Fitch's broader review of changing sovereign support in developed countries announced in separate comments titled 'Rating Banks in a Changing World' and 'Fitch Comments on Support for Euro Banks; Takes Various Support-Driven Rating Actions' both published on 13 October 2011 and available on www.fitchratings.com.
 
Since the intervention of the Swiss authorities in late 2008, UBS's IDRs have been based on Fitch's view of the availability of sovereign support. As a result, the Long-term IDR has been at the SRF. Reflecting the particularly close ties between UBS and the Swiss government following the transfer of a USD38.7bn portfolio of assets to the Swiss National Bank (SNB) StabFund in late 2008 and early 2009, UBS's SRF has since early 2009 been rated one notch above the SRF for Credit Suisse AG (CS), the other large, systemically important Swiss bank.
 
Fitch's rating action on UBS's SRF reflects Fitch's view that the one notch uplift for close affiliation with the Swiss state is no longer warranted and the agency has therefore lowered UBS's SRF to 'A' in line with its SRF for CS. Consequently, Fitch has downgraded UBS's Long- and Short-term IDRs to 'A' and 'F1' respectively. UBS's Viability Rating (VR), on Rating Watch Negative (RWN) since 16 September 2011 (see "Fitch Places UBS's Viability Rating on Rating Watch Negative; Affirms IDRs" dated 16 September 2011 at www.fitchratings.com), remains unaffected by today's rating action. UBS's SRF and IDRs continue to be based on Fitch's view that there is an extremely high probability of support for UBS from the Swiss authorities at least until the global financial sector has stabilized and resolution regimes in Switzerland and abroad are in place. In Switzerland, legislation attempting to avoid taxpayers having to bail out one of its systemically important banks again ("too big to fail", TBTF, legislation) is currently being finalized. The legislation centres around strengthening banks' capital positions, imposing more stringent liquidity requirements, improving risk diversification and adjusting banks' organizational set-up to allow for the protection of systemically important utility functions in the event of a bank insolvency or threatened insolvency.
 
And the market's reaction since this was released?  "Survey SAYS?!  UP +1.75!" Yes, even bank downgrades are BULLISH.  (The full report can be read at www.fitchratings.com)

 

Trade Date: 10/13/11

E-Mini S&P Trades*

(before fees and commissions):

1. Pivot sell @ 2:09pm at 1202.00 = +.75 & +0.50 (2 lots)

2. Algorithm positions (4)

3. "Reading the Tape" positions (2) ...combined Secret's, Algo, & "Reading the Tape" total...-0.75 

Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!

Haircut

 

 

 

by Larry Levin 

The Greek mess isn't over.  The ESFS mess hasn't been approved yet.  European banks need more capital.  Sovereign downgrades continue.  What else could possibly go wrong?  Oh yeah, there's Portugal, and Spain, and Italy, and Ireland. Hmm, we haven't heard much of Ireland lately but John Mauldin has a few good things to say about it.

 
...And the Irish willingly took on the debt of banks that went bankrupt. If Anglo Irish Bank were a US institution, the equivalent debt would have been about $3.5-4 trillion (depending on the exchange rate). Can you imagine trying to get a bailout for ONE bank for that much? And in Ireland there were three of them (!), though the other two were somewhat smaller. The Irish government guaranteed the bank debt for ECB loans, which money then went to European banks that had loaned the Irish banks the money in the first place.
 
I have written extensively in the past about how the Irish have figured out they are taking on debt for banks that no government should have touched. It was just too much. It's simple arithmetic: the Irish cannot repay that debt under the current terms (even after the ECB and Europe gave them lower interest rates in July) and ever hope to get out of debt in the next 30 years. They have consigned themselves and their children to decades of toil to pay back English and German and French banks (among others).

And that fact dawned upon them. They voted out the government that allowed the debt to be assumed. It was a clear message, but the government has not yet done anything to rid itself of the debt.

There are those like McWilliams who simply want to repudiate the debt. "It should never have been done, so we will not pay it." He is not alone; that view is becoming increasingly mainstream now.

...We are not Greece, they say; there is a need for "respectability." But when pressed, they would come around to admitting that, "Yes, Ireland will get a haircut." Everyone I met expected it to happen. The difference was the path to the haircut. But while the politics matter, the destination is the same.

Some favor doing it outright. Others truly believe they will be offered a haircut when Greece and Portugal get theirs. They fully expect it. In a meeting with an establishment-insider economist (off the record), who was at the table when the first deal was done, he said there was an implicit understanding with the IMF (and ECB) that whatever was offered to Greece, et al. would be available to Ireland. So Ireland went along with the bailout to keep from imploding the euro and averting a crisis that would have been biblical in proportions. The future of the euro is now not in their hands, because by taking on the debt they did not blow the euro up. Which could have happened, because European politicians were not ready for such a crisis.

So rather than having to kick the door open for a haircut, they expect the door to be opened for them by the IMF and the ECB. A far more respectable path for those who are very pro-Eurozone. But Irish leaders clearly get that voters expect that something will be done...But here is the issue for Europe. The amount of money needed for Ireland is going to be a lot more than they now think, or at least are willing to admit.

 

When Eurozone politicians worry about "contagion," or one country wanting the debt relief that another country gets, it is a very real worry. And rightfully so, as voters in Portugal or Spain or (gasp) Italy who are burdened by debt that is seemingly intractable will also want relief. It is not just an Irish condition, it is a human trait.

And the money that Europe needs will overwhelm the €440 billion ESFS fund. Stratfor and others think it will take at least €2 trillion. The Boston Consulting Group put out a report that suggest the total number, at the end of the day, will need to be (drum roll, wait for it) over €6 trillion. I don't like their proffered solutions, but their analysis of the debt and the need for relief is sobering.

France is at risk of losing its AAA rating. From my far-removed seat, I think it is almost a certainty they will, as the amount they will have to raise for French banks is enormous. Add another few hundred billion euros for bailout funds for Spain and Italy, and the idea of AAA euro debt goes right out of window. To keep the current AAA, a majority of guarantees needs to be from AAA countries. That is a very touchy issue right now.
 
But it will all be fine in just a short while say the politicians...as long as the Hopium holds out.

Yes sir, as I said above - the banksters get what the banksters want. 

 

Trade Date: 10/11/11

E-Mini S&P Trades*

(before fees and commissions):

1. Pivot sell @ 9:40am at 1208.75 = +.50 & +0.75 (2 lots)

2. Algorithm positions (6)

3. "Reading the Tape" positions (0) ...combined Secret's, Algo, & "Reading the Tape" total...+7.00

Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!