Friday, February 19, 2010

Moody's decides AAA rating may be a bit high for Greek Asset Backed Securities (MCO)

Moody's announced back on Feb 4th that they were going to take a peek at various Greek Structured Finance products, for possible downgrade actions.

Question. Forget why anything with the word "structured" should be rated AAA. But why are any countries - our own included - rated AAA?

Below are the only remaining AAA-rated companies in the S&P500.

Apart from Johnson & Johnson, the other three have debt on their balance sheets just for fun. They cover interest payments about 160ish times over. Microsoft's debt is largely commercial paper, which is basically magic financing with an annual interest rate of .14%. No, I didn't screw up the decimal point there, MSFT's cost of short term debt is really 14 100ths of one percent. As for ADP, debt represents one half of one percent of revenue, compared to about 100% for the USA, another AAA credit.

Anyway. Today Moody's took "bold steps!" Haven't we been down this "credit enhancement" road before?
Paris, February 19, 2010 -- Moody's Investors Service today placed the Aaa ratings of all except one Greek ABS, RMBS, CLO and covered bond transactions under review for possible downgrade. A complete list of affected transactions is at the end of this press release. The affected transactions include nine ABS, eleven RMBS, two CLO and one covered bond programme which are all backed by pools of Greek assets. There is no Greek CMBS rated by Moody's.
Today's rating actions result from an initial assessment of these highly rated Greek structured finance and covered bond transactions within the context of the evolving sovereign situation as well as the current economic and financial environment. This included a consideration of the existing credit enhancement levels because, in the event of the local economy coming under further stress, the default probability of the assets in the underlying pools may potentially increase. In addition certain deals are also exposed to both refinancing risk and local banks.

More laughable has been the return of the phrase "BOND VIGILANTES" to describe lenders who demand a slightly higher interest rate from Greece than it has enjoyed over the past decade. Thanks to the suicide pact that is the European Union, Greece was able to borrow money at rates much closer to what Germany borrows, rather than the much higher rates that would be appropriate given their lax accounting, tax collection, and record on corruption. The very incorrect assumption that allowed this was that the EU was a debt union, rather than a currency-based union. The other EU states have no obligation to come to Greece's rescue, and they probably shouldn't. Maybe leave it to the International Monetary Fund.

Now that the disastrous fiscal situation in Greece is becoming more widely understood - including using swaps to push off debt payments and essentially "hide" its deficit - investors demand a LOT more yield to own Greek debt rather than German debt, to the tune of about 3%. DUH, right? Makes sense that to lend money to Greece for 10 years, you'd demand 6ish percent, over Germany's 3ish due to Greece's higher risk.

But no, the media shrieks that bond investors demanding a reasonable interest rate for risky lending makes them "vigilantes" out to hurt the poor Greeks.

From Business Week - "Greece - How the Bond Vigilantes Left it in Ruin"

"Today's Sirens are the investors and traders of the global bond market, who lure nations into tapping abundant credit at low rates when times are good. If a nation borrows too much, those open-handed investors abruptly turn into vigilantes who punish the country by making new loans scarce and expensive. "

Ready to right the ship in Greece? Hell no. Cluelessly walking off the job, protesting, and laughably saying that it's Germany's fault for not paying WW2 reparations....

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