Bloomberg:
- Greece Cut to Junk at S&P as Contagion Spreads. Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time a euro member has lost its investment grade since the currency’s 1999 debut, as contagion from the nation’s debt crisis spread through the bloc. Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+. The euro weakened, stocks plunged and the extra yield that investors demand to hold Greek, Spanish and Portuguese bonds over German bunds surged. The turmoil comes as European Union policy makers struggle to agree on measures to ease the panic over swelling budget deficits. The spread on Greek 10-year bonds over German counterparts widened 23 basis points to 675 basis points, the highest since at least 1998, as investors increased bets that Greece will restructure its debt. The Portuguese spread jumped 59 basis points to 277 basis points and the Spanish spread rose 12 basis points to 113. “This is no longer a problem about Greece or Portugal, but about the euro system,” Eric Fine, who manages Van’s Eck’s G- 175 Strategies emerging-market hedge fund. “My concern is the risk of coordination failure. Policy makers need to get ahead of the curve.” The EU’s inability to contain the Greek crisis is sparking concern that other countries will have to fend for themselves and will struggle to win support from European parliaments. Portugal’s PSI-20 benchmark dropped 5.4 percent today, the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse. Spain’s IBEX 35 Index dropped 4.2 percent. “There is a clear risk that contagion pressures might intensify in the coming months, perhaps after a brief respite immediately after the Greek package is finalized and money starts being disbursed,” said Marco Annunziata, chief European economist at UniCredit Group in London.
- Portugal Suffering Greek Contagion Pressures EU Bonds. Portugal risks becoming the new Greece. With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala. “We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.” Standard & Poor’s today cut its long-term local and foreign currency sovereign rating for Portugal to A- from A+ and said the outlook was negative. Portuguese spreads, the extra yield that investors demand to hold its debt rather than German equivalents, rose to 260 basis points, the most since at least 1997. While Portugal’s public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based group’s data. “The reason we’re concerned about Portugal is not because its public sector debt ratios are excessively high, it’s more that the Portuguese economy doesn’t really grow,” said Kenneth Wattret, chief euro region economist at BNP Paribas SA in London. Credit default swaps on Portuguese debt, which insure against default, rose 24 basis points to 335 today according to CMA DataVision, near a record. “As spreads get higher the problems are getting bigger: it’s a self-fulfilling prophecy,” Penninga said in a telephone interview. “It will get more difficult now for Portugal to tap markets.”
- Greece Bond Losses to Be 'Significant,' Buiter Says. Greece is likely to default or inflict “significant” losses on bondholders unless it receives more generous terms on its planned aid package, according to Willem Buiter, chief economist at Citigroup Inc. Yields on Greek bonds soared close to 14 percent on the benchmark two-year security amid concern investors will lose out as the country grapples with the highest debt ratios in the European Union. The cost to protect Greek debt against default surged to a record along with credit-default swaps on Portugal and Spain. “With the financial terms currently on offer -- from the euro area member states and from the markets -- a significant haircut for creditors or even a formal default become more likely,” wrote Buiter, a former external member of the Bank of England’s policy making Monetary Policy Committee. Default by Greece would damage the euro-area banks, where regulators have “failed singularly to prevent a very high concentration of exposure to Greek risk, and to Greek sovereign risk,” Buiter wrote. “A sovereign default by a euro-area member state could undermine the viability of euro-area banks and cause further systemic distress.”
- Bernanke Says Budget Gap Might Raise Interest Rates. Federal Reserve Chairman Ben S. Bernanke said a failure to reduce the federal budget deficit may push up interest rates over time and impair economic growth, putting the recovery at risk. “Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk.” Budget deficits may eventually erode the confidence of bond investors in the management of U.S. fiscal policy, driving yields higher on Treasury borrowing, raising the cost of lending in the economy and slowing economic growth, Bernanke said. The Obama administration estimates budget deficits will total $5.1 trillion over five years and hit a record $1.6 trillion in the year ending Sept. 30. The $1.4 trillion deficit in 2009 was equal to 9.9 percent of gross domestic product, the largest share since the end of the World War II.
- Copper Plummets After S&P Cuts Ratings for Greece, Portugal. Copper futures for July delivery plummeted 15.5 cents, or 4.4 percent, to $3.393 a pound at 1:07 p.m. on the Comex in New York. Copper futures fell the most in 10 months as investors sold risky assets including commodities after Greece and Portugal had their credit ratings downgraded. The dollar “has strengthened further against the euro, on the uncertainty about Greece and the reluctant German attitude toward providing funds for Greece -- that is all weighing on markets,” said Peter Fertig, the owner of Hainburg, Germany- based Quantitative Commodity Research Ltd. “There are fears Greece could declare bankruptcy and that would have a devastating impact.” In China, the world’s top copper consumer, the benchmark equity index fell to a six-month low, on concern government measures to cool the property market will damp consumer spending and curb demand for raw materials.
- Obama Pressed to Lead on Climate Bill by Environmentalists, Business Leaders. President Barack Obama vowed to make legislation on climate change one of his top goals. Now, with a compromise bill in danger of falling apart, business leaders and environmentalists are pressing him to deliver. Royal Dutch Shell Plc and Exelon Corp. executives were set to appear alongside three senators in Washington yesterday to rally support for their version of climate legislation. Instead, administration officials and lawmakers worked to salvage Obama’s signature environmental initiative. “Strong White House engagement is really critical on a major piece of legislation like this,” Peter Molinaro, head of government affairs for Dow Chemical Co. said in an interview. Midland, Michigan-based Dow is among companies calling for climate-change legislation.
- AIG is 'Grossly Overvalued,' Cut by KBW's Gallant. American International Group Inc., the insurer rescued by the U.S., was cut to “underperform” by KBW Inc. on the prospect that meeting government obligations will wipe out most of common shareholders’ value. The stock fell the most in five months. “The publicly traded shares are grossly overvalued,” said Cliff Gallant, a KBW analyst, in a note to investors today. “Under the current ownership and capital structure, we see little long-term value in the common shares.” Gallant said he expects AIG to fall to $6 in 12 months, compared with yesterday’s closing price of $44.51. AIG turned over a stake of almost 80 percent to the U.S. in the 2008 bailout that swelled to $182.3 billion. The New York- based insurer has missed four rounds of dividend payments on a Treasury Department investment of more than $40 billion in preferred shares. Gallant said the Treasury is entitled to a 10 percent annual dividend from AIG, which posted a fourth-quarter loss of about $8.9 billion. “Even if AIG does report earnings, the income will not be accruing to the common shareholder,” Gallant wrote. “After liquidity needs are met, AIG has a legal obligation to the preferred owners to pay this dividend, effectively eliminating any real earnings per share.” Gallant previously rated AIG “market perform.” AIG dropped 10 percent to $39.92 at 1:56 p.m. in New York Stock Exchange composite trading, the biggest decline since November. The company has advanced about 33 percent this year after falling 97 percent in 2008 and 4.5 percent in 2009.
Wall Street Journal:
Business Insider:
- Goldman(GS) Stock Up As Market Realizes Senators Are Just Full of Hot Air. Goldman Sachs (GS) stock is up $2+ as the rest of the market crashes. But wait. How can this be happening? It's Public Humiliation Day! Goldman's executives are getting chewed into ground beef on live TV! (And they really are). How can the stock be going up?
- Another Looming Market Risk: Talk of Tax Hikes About to Come Fast and Furious.
- Here's Who's Getting Pounded When Greek Debt Holders Take Their Haircut.
- OTC Derivatives and the "Buffett Amendment". There is a lot of news this week on financials coming from Washington and the noise level is drowning out some of the detail. So when I heard that Berkshire Hathaway (BRK) CEO Warren Buffett was trying to slip an exception into the substitute legislation offered by Senator Blanche Lincoln (D-AK) to give his OTC derivatives book special treatment, I put aside my book project and picked up the short sword. And in case you find this opinion a little harsh, just remember that Mr. Buffett and his colleagues at BRK are the same folks who have been sanctioned by the SEC on several occasions for aiding and abetting the manipulation of corporate earnings using side letters and other canards taken from the insurance markets. The use of side letters in the case of American International Group (AIG) to falsify corporate financial statements is the functional equivalent of using OTC derivatives sans collateral or initial margin to goose BRK earnings. Do we see a pattern forming perhaps?
- February Case-Shiller Home Price Unadjusted Index Tumbles As Home Price Deterioration Accelerates.
Reuters:
- CME(CME) Slams CFTC's Speculator Plan, Wants it Shelved. CME Group Inc, the world's largest derivatives exchange, has slammed a U.S. futures regulator's plan to curb speculation in energy markets as being without factual basis and urged that the proposal be shelved. The proposal, which calls for stricter position limits on energy futures traders, does not meet the "factual and statutory basis" required to impose them, CME said in a letter to the regulator, the Commodity Futures Trading Commission. The exchange operator asked the regulator to drop the plan.
- Unemployment in Spain reached 20% in the first quarter for the first time since 1997, citing the National Statistics Institute's Web site. The jobless rate was 19% in the fourth quarter.
- Greek Market in 'Chaos' as Europe's Debt Crisis Deepens. Fear and loathing is spreading through Europe’s credit markets today as the debt crisis refuses to die and analysts predict it will only deepen. Not only did the yields on Greece’s 10-year bonds surge to more than 9.5 per cent, well beyond what the government can afford, but credit default swaps related to Greece, Portugal and Spain all reached new highs, pointing to greater troubles for Europe’s weak economies. “The situation in the Greek financial market has descended into chaos,” Charles Stanley analyst Jeremy Batstone-Carr told The Wall Street Journal.
“The European decision-making process has only exacerbated an already disastrous situation.”
- Brazilian central bank President Henrique Meirelles told President Luiz Inacio Lula da Silva that the country's benchmark interest rate needs a "hit," citing a presidential aide. Meirelles explained to the president that raising the Selic rate at a faster pace would result in lower political stress for the country and have a quicker effect on the economy. Lula previously expected a gradual rate increase.