Monday, January 12, 2009

S&P Pretending Like Its Opinion Still Matters

One can say many things about the ratings agencies, one could be bribed and even say one good thing, but recently S&P has decided to get really proactive to have some ammo ahead of the inevitable congressional hearings (Moody's has Buffet in its back pocket so smooth sailing over there). On Jan.12 S&P put not Rotorooter, not even Sham-Wow, but the entire Country of Spain's AAA rating on CreditWatch with negative implications. For the un-nuanced, this means S&P doesn't have the guts to actually downgrade Spain but if things there get so bad that not even unemployed Wall Street analysts care to participate in the annual Tomatilla festival, they will throw the hammer down, and in the meantime can say they had the foresight to see what a fiasco that country has become...

Speaketh S&P: "A CreditWatch listing signals a potential but not inevitable change in a rating over the short term[. The] CreditWatch placement reflects our view of the significant challenges facing the Spanish economy as it traverses a period of very weak growth, and a sustained period of deleveraging, which we expect to lead to are balancing toward traded sectors requiring real exchange rate depreciation,"Standard & Poor's credit analyst Trevor Cullinan said. "The likely result of such factors will be a much weaker potential growth rate over the medium term than that experienced over the past decade. At the same time, we project a substantial worsening in the Kingdom's public finances."

This seems to have spooked sovereign CDS traders with all of Europe going batshit (i.e.wider) and Spain's CDS specifically hitting 104, after closing at 95 yesterday.

Spain immediately dismissed the news, with the Finance Ministry quoted saying that "Spain is doing everything necessary to restore growth". rrrrright - even illegal immigrants are scratching their heads and deciding the trek through the Pyrenees isnt worth it in order to do pro bono garbage pick up.

This leads to the broader question of Sovereign risk. According to Bloomberg the top 5 riskiest countries right now are Argentina, Venezuela, Iceland, Kazakhstan and Russia. Spain now climbs to be on par with the U.K. in terms of credit risk, while the bankruptcy-free subsidiary that the US is perceived to be is at 53 bps, just slightly more risky than France, Germany and Norway. Of course the question of how you collect money on a short risk bet in the US is more philosophical than practical... ISDA would need a few more phone lines in order to handle the physical settlement of US Treasuries if the unthinkable somehow came true...
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