Sovereign debt bubble thread

[citizen k]

http://www.bloomberg.com/news/2011-08-10/societe-generale-leads-fall-in-french-banks-as-credit-default-swaps-climb.html

SocGen Denies Rumors About Credit as Shares Tumble
By Jacqueline Simmons -  Aug 10, 2011

Societe Generale (GLE) SA, France's second-largest bank, denied "all market rumors" and asked the nation's market watchdog for an investigation after speculation France's creditworthiness was in doubt sent the shares tumbling.

The lender's performance in July and early August shows it will be able to post "solid" results in the future, Paris- based Societe Generale said in a statement after the market closed yesterday. The bank asked France's Autorite des Marches Financiers to open a probe into the origin of speculation that is "extremely harmful to the interests of its shareholders."

Societe Generale led European bank stocks to the lowest since the aftermath of the credit crisis yesterday, tumbling 15 percent to 22.18 euros in Paris, the biggest drop since Oct. 27, 2008. France's top credit rating was affirmed by all three major rating companies as speculation that Europe's debt crisis would spread to the region's second-biggest economy pushed the cost of insuring its government debt against default to a record.

"There is no indication whatsoever that France would waver in its determination to honor its obligations," Dirk Hoffmann- Becking, an analyst at Sanford C. Bernstein Ltd. in London, said in a report to clients. "The resilience of the French banks against a freeze in the short-term funding market is very high," he said, predicting that the sell-off in French banking shares "should be short-lived."

European banks tumbled to the lowest since March 2009, when stocks fell to the weakest since the collapse of Lehman Brothers Holdings Inc. six months earlier. The Euro Stoxx Banks Index fell 8.9 percent to 109.87. BNP Paribas (BNP) SA, France's largest bank, slid 9.5 percent to 35.61 euros and Credit Agricole SA (ACA) slumped 12 percent to 6.07 euros.

Watchdog 'Vigilant'

France's AMF said it's watching to ensure "good functioning" of markets with an eye toward financial shares in particular.

"Like in each period of turbulence, the AMF is vigilant," the regulator said in a statement read in a telephone interview.

Societe Generale said it has low exposure to peripheral European sovereign debt and has fulfilled "almost all" of its financing plan for 2011.

The company said Aug. 3 that it may miss its 2012 earnings target after second-quarter profit fell 31 percent because of a writedown on Greek government debt.

Societe Generale SA Chief Executive Officer Frederic Oudea defended the lender and said speculation that France's creditworthiness is in doubt is "absolute rubbish."

"I think the situation is really under control in France and in good hands," Oudea said in an interview yesterday with CNBC. "In such a market, you know, which is nervous, it's really easy to circulate absolutely unfounded information."

ECB Intervention

The London interbank offered rate, or Libor, for borrowing in euros for three months was 1.5 percent yesterday, according to the British Bankers' Association. Societe Generale reported a rate of 1.46 percent for the same period.

The European Central Bank was forced to buy Spanish and Italian bonds yesterday, according to four people with knowledge of the transactions. The amount of securities acquired by the central bank was smaller than in the previous two days, said one of the people, who asked not to be identified because the trades are confidential.

The extra yield investors demand to buy 10-year French debt rather than German bunds jumped to 90 basis points, even though both carry AAA grades from the major rating companies. That spread is almost triple the 2010 average of 33, and compares with 17 in the second half of the previous decade.

Francesco Meucci, a spokesman for Moody's Investors Service, said in a telephone interview that the country's Aaa grade is "stable," echoing his counterparts at Standard & Poor's and Fitch Ratings.

'Fear Effect'

French bonds are the most costly AAA government securities to insure as investors raise bets that top-rated euro-region nations may be next in the firing line after the U.S. was downgraded one notch to AA+ by S&P on Aug. 5. Credit-default swaps on France trade at more than double the rate to protect German securities, CMA data show.

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

BNP options prices rose to the highest level since at least 2005 and Societe Generale's reached a two-year high.

The slide in French banking shares "seems to be prompted by concerns about the U.S. downgrade and the idea that France could be next, but that's something Standard & Poor's has denied," said John Raymond, a banking analyst at CreditSights Inc. in London. "I don't see any reason for what happened," he said. "It seems to be a fear effect."

To contact the reporter on this story: Jacqueline Simmons in Paris at  [email protected]

To contact the editor responsible for this story: Frank Connelly at  [email protected]

[Zanza]

The labour market had little to do with the current crisis. It stems from the housing bubble. There was a whole host of other factors leading to it, such as regulation penalizing owners and thus preventing competition in rental market, fiscal incentives toward buying property, arrival of millions of immigrants in need of a place to live, a fucked up municipal funding system that depended on housing transactions... and guess what: chronically low ECB interest rates. Which is why I can't help but roll my eyes every time I read a German patronizing us.

Then there are are long-term structural problems such as rigid labour market, education imbalances and the like. Those were not really involved in the bubble, although obviously should have been addressed then and we'd be in slightly less deep shit.

The reason the markets see Spain so critical definitely has to do with its labour market. After all, Spain's debt isn't that bad compared to most other countries and neither is its deficit. It's the long-term structural problems it faces. And those are mostly related to its labour market. But feel free to roll your eyes at me.

[Caliga]

I no longer hold sovereign debt (sold it on Monday via a standing stop loss order)... made a very modest profit on it, not including some dividend payouts.

[The Minsky Moment]

An alternative view is that they did not have sound finances: that whether you can balance a budget in a boom economy is not enough to be considered sound if you also a relatively small economy vulnerable to shocks in certain economic sectors (and even more so if you have a currency that won't depreciate with those shocks).

yeah but what that view really comes down to is that small countries either can never have sound finances by virtue of their size or that they cannot be market economies.

I think the more logical way to see it is that those countries had sound government finances, but that small market countries either need to impose capital controls or need to be able to draw upon backup from a much larger pool of credit and liquidity.

[MadImmortalMan]

Or have a savings pool from earlier years.

[The Minsky Moment]

Or have a savings pool from earlier years.

But Ireland actually did that.  They ran large surpluses for years.

[MadImmortalMan]

Italy's reforms:

SPENDING CUTS

    * Cuts to the budgets of central government ministries, worth a total of 6 billion euros in 2012 and 2.5 bln in 2013.
    * Funding to town councils, regions and provinces reduced by 6 bln euros in 2012 and 3.5 bln euros in 2013.
    * Unspecified changes to the pension system to save 1 billion euros in 2012.
    * A progressive increase in the retirement age of women in the private sector to 65 from 60 to begin in 2016, instead of 2020 as previously planned.
    * The retirement funds of public sector employees will be withheld for two years after they leave their jobs.
    * A reduction the "cost of politics" resulting in a halving of elected officials and around 55,000 fewer positions in the apparatus of central and local government. However, Berlusconi did not give a timescale for these cuts.
    * Abolition of 34 of Italy's 110 provincial governments and the merging of town councils with less than 1,000 inhabitants. However, this measure will be "for the future" and not become effective during the government's current term of office, Berlusconi said.

HIGHER REVENUES

    * A "solidarity tax" on high earners, to be levied for two years, as an additional 5 percent on income above 90,000 euros per year and 10 percent on income above 150,000 euros.
    * Increase in taxation of income from financial investments to 20 percent from 12.5 percent, excluding income from government bonds.
    * Purchases worth more than 2,500 euros will no longer be allowed to be made in cash, as a means of curbing tax evasion. There will also be tougher penalties, such as suspension from professional bodies, for failure to issue receipts and invoices.
    * All non-religious public holidays, such as the June 2 anniversary of the founding of the Italian Republic, will be celebrated on a Sunday in a bid to increase the number of working days in a year.

REFORMS

    * A liberalisation of national labour contracts giving greater scope to strike accords at the company or local level.

So, which one or two of these will actually happen, and when do the riots begin?

[Ed Anger]

Purchases worth more than 2,500 euros will no longer be allowed to be made in cash, as a means of curbing tax evasion.

LOL.

[Tamas]

Will the Italians also hold government-level meetings pondering about the use of water cannons when private residents in their capital will be set on fire?

Which reminds me, when I was leaving Cortina, Italian Alps several years ago, I had a Carabineri police car shadowing me for quite a while until they took a turn at a village. It was: unnerving.

[Zanza]

Italy's reforms:

SPENDING CUTS

    * Cuts to the budgets of central government ministries, worth a total of 6 billion euros in 2012 and 2.5 bln in 2013.
    * Funding to town councils, regions and provinces reduced by 6 bln euros in 2012 and 3.5 bln euros in 2013.
    * Unspecified changes to the pension system to save 1 billion euros in 2012.
    * A progressive increase in the retirement age of women in the private sector to 65 from 60 to begin in 2016, instead of 2020 as previously planned.
    * The retirement funds of public sector employees will be withheld for two years after they leave their jobs.
    * A reduction the "cost of politics" resulting in a halving of elected officials and around 55,000 fewer positions in the apparatus of central and local government. However, Berlusconi did not give a timescale for these cuts.
    * Abolition of 34 of Italy's 110 provincial governments and the merging of town councils with less than 1,000 inhabitants. However, this measure will be "for the future" and not become effective during the government's current term of office, Berlusconi said.

HIGHER REVENUES

    * A "solidarity tax" on high earners, to be levied for two years, as an additional 5 percent on income above 90,000 euros per year and 10 percent on income above 150,000 euros.
    * Increase in taxation of income from financial investments to 20 percent from 12.5 percent, excluding income from government bonds.
    * Purchases worth more than 2,500 euros will no longer be allowed to be made in cash, as a means of curbing tax evasion. There will also be tougher penalties, such as suspension from professional bodies, for failure to issue receipts and invoices.
    * All non-religious public holidays, such as the June 2 anniversary of the founding of the Italian Republic, will be celebrated on a Sunday in a bid to increase the number of working days in a year.

REFORMS

    * A liberalisation of national labour contracts giving greater scope to strike accords at the company or local level.

So, which one or two of these will actually happen, and when do the riots begin?

That's more than the US Congress could agree on, no?

[MadImmortalMan]

Moody's downgrades Japan to aa3. World yawns.



Edit: I'll have to find that chart of ratings projections from a couple years ago showing that more than half the world would be rated junk by 2050. We are right on schedule.

[Neil]

Everybody knows that Japan is fundamentally unsound, so I don't see how anyone could panic.

[MadImmortalMan]

Everybody knows that Japan is fundamentally unsound, so I don't see how anyone could panic.

Nikkei's reaction: UP

[Josquius]

Japan has been screwed for the past 20 years, the world going to hell is nothing new for them.
The world does increasingly seem screwed btw.
Unless you`re Chinese.

[Habsburg]

Everybody knows that Japan is fundamentally unsound, so I don't see how anyone could panic.

Japan has a craptastic debt situation.

Still we remain hopeful for everyone!