What Do You Expect After Greece Is Declared Junk?

What do you expect after S&P downgraded Greece's credit ratings were slashed to junk? (What took them so long to make this downgrade?)

Here is snippet from S&P:

------------------

Overview

• We have updated our assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to place Greece's public debt burden onto a sustained downward trajectory.
• We are lowering our ratings on Greece to 'BB+/B' from 'BBB+/A-2' and assigning a negative outlook.
• The negative outlook reflects the possibility of a further downgrade if the Greek government's ability to implement its fiscal and structural reform program materially weakens in our view, undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume.

....

Rationale

The downgrade results from Standard & Poor's updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory. We believe that the government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising. Moreover, in our view, medium-term financing risks related to the government's high debt burden are growing, despite the government's already sizable fiscal consolidation plans. Our updated assumptions about Greece's economic and fiscal prospects lead us to conclude that the sovereign's creditworthiness is no longer compatible with an investment-grade rating.

As a result of Greece's rising commercial borrowing costs, the authorities have requested extraordinary support from the Eurozone and the International Monetary Fund (IMF). We anticipate further information in the coming weeks from EU members regarding the terms and duration of support for Greece. We believe that a multiyear European Economic & Monetary Union (EMU)/IMF support program is likely, which should, in our opinion, significantly ease Greece's near-term liquidity challenges. Nevertheless, in our view, pressures for more aggressive and wide-ranging fiscal retrenchment are growing, in part because of recent increases in market interest rates. In our revised projections, we forecast Greece's net general government debt-to-GDP ratio reaching 124% of GDP in 2010 and 131% of GDP in 2011.

We continue to believe that the size and scope of the Greek government's fiscal consolidation program, and the government's political will to implement it, are the main drivers of our sovereign ratings on Greece. Sustained success in this regard could, in time, be reflected in lower market interest rates on Greece's debt. Early indications show that the government is likely to meet its 2010 deficit target. The authorities are also moving ahead with their
structural reform agenda, adopting tax reform in April, while proposals on pension reform are expected in May.

Nevertheless, we believe that the dynamics of this confidence crisis have raised uncertainties about both the government's administrative capacity to implement reforms quickly and its political resolve to embrace a fiscal austerity program of many years' duration. Based on our updated assessment, we estimate that the adjustment needed in Greece's primary fiscal balance relative to that of 2008 in order to stabilize the government debt burden amounts to at least 13% of GDP--a very high level compared with that which other sovereigns have been able to achieve. The government's resolve is likely, in our opinion, to be tested repeatedly by trade unions and other powerful domestic constituencies that will be adversely affected by the government's policies. At the same time, we expect official lender support to be highly conditional and revocable, and as such, we do not believe that it provides a floor under Greece's sovereign ratings.

As previously noted, the government's multiyear fiscal consolidation program is likely to be tightened further under the new EMU/IMF agreement. This, in our view, is likely to further depress Greece's medium-term economic growth prospects. Under our revised assumptions (see below), we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not regain the 2008 level until 2017. Moreover, we find that Greece's fiscal challenges are increasing pressures on the banking and corporate sectors. In particular, we see continuing fiscal risks from contingent liabilities in the banking sector, which could in our view total at least 5%-6% of GDP in 2010-2011.

....

Outlook

The negative outlook reflects the possibility of a further downgrade if, in our view, the Greek government's ability to implement its fiscal and structural reform program is undermined by domestic political opposition or materially weakens for other reasons, including even weaker economic conditions than we currently assume.

We could revise the outlook to stable if we perceive that political support for government economic policies remains robust and Greece's economic growth prospects prove to be more benign than we currently anticipate.

---------------

On Bloomberg Businessweek: RBS Says Medium-Term Outlook for Euro Is ‘Extremely Challenging’

• April 27 (Bloomberg) -- The medium-term outlook for the euro remains “extremely challenging” because of risks the Greek debt crisis persists and extends to other countries in the region, according to Royal Bank of Scotland Group Plc.
  
  Regardless of how Greece “is resolved in the short term, investors will remain underweight euro for the foreseeable future and a short-covering rally on a short-term resolution would be limited,” Greg Gibbs, a currency strategist in Sydney, wrote today in a report. The euro is “defying gravity,” which is “at odds with European sovereign debt markets,” he said.

On the UK Telegraph, Ambrose Evans-Pritchard reports: ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

• “We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.
  
  “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”
  
  Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.
  
  This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.
  
  Mr Cailloux added: “This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”
  
  Yields on 10-year Portuguese bonds spiked 48 basis points to 5.67pc, replicating the pattern seen as the Greek crisis started.
  
  Portugal’s public debt will be just 84pc of GDP by the end of this year, far lower than that of Greece, at 124pc. However, its private debt is much higher and data from the IMF shows that its external debt position is worse.
  
  Interest payments on foreign debt will be 8pc of GDP this year. Portugal’s net international investment position is minus 100pc of GDP, the worst in the eurozone.
  
  The interest rate on a €9.5bn (£8.2bn) issue of Italian notes jumped to 0.814pc, up from 0.568pc in March. The bid-to-cover ratio was wafer-thin, falling to 1.02. Italy has the world’s third biggest debt in absolute terms.
  
  The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.
  
  But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.
  
  The markets are already looking beyond the €40bn to €45bn joint rescue for Greece by the IMF and the EU, questioning whether some form of debt restructuring or managed default can be avoided over the next year or two, or even whether the rescue plan can work at all in a country trapped in debt deflation with no way out through devaluation.
  
  Professor Willem Buiter, a former member of Britain’s Monetary Policy Committee and now global economist for Citigroup, said there may need to be a “voluntary restructuring” of debt.
  
  “It is quite likely that a haircut of, say, 20pc to 25pc will be imposed on creditors as parts of the deal,” he said.
  
  The bond markets are already “pricing in” a default of some kind in Greece, where rates on 2-year debt spiked close to 15pc in panic trading yesterday. The European Commission and the International Monetary Fund both insist that restructuring is out of the question but investors have become cynical after months of EU rhetoric and foot-dragging by Berlin.
  
  The ECB cannot lightly risk a second sovereign crisis erupting, with dangers of a spillover into Spain.
  
  The exposure of Spanish-based banks to Portuguese debt exceeds $80bn, according to the Bank for International Settlements. There were early signs of strain in the Spanish banking system yesterday.
  
  Banks were forced to pay a premium in the domestic “repo” market on fears of counterparty risk, although the Bank of Spain has so far won plaudits for ensuring that banks have large safety buffers.
  
  It is unclear why the markets are becoming skittish over Italian bonds. Public debt is 115pc of GDP but this is offset by very low household debt.
  
  Italian citizens are among the most frugal savers in the OECD club of rich states. Moreover, the government has weathered the financial crisis with a budget deficit in remarkable good health.

Portugal ratings were cut too.

• Portugal’s Rating
  
  Portugal’s long-term local and foreign currency sovereign issuer credit ratings were cut yesterday to A- from A+ at S&P, which cited “fiscal and economic structural” weakness and also gave the nation’s debt a negative outlook.
  
  “The downgrade was more aggressive than expected,” said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, referring to the reduction in Portugal’s debt rating. “If Portugal comes under attack, you get to Spain pretty quickly. ( source: here )

And of course with Greece debts no considered junk, I would ass-u-me that banks holding these Greek debts would soon need to replace those debt with capital.

And the markets tumbled. FTSE 100 suffers worst fall since November

How?

Have you check at the implications of last night events? Did you see what the charts are showing? Are you looking at the relevant charts?

Arrrghhhh... terrible way to start the morning eh?

Some light humour based on Goldman Sachs. (in case you need to ask, remember the movie 'A Few Good Men' starring Tom Cruise and Jack Nicholson?)

• "You want the truth? You can't handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who's gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman's death, while tragic, probably saved the financial system. And that Goldman's existence, while grotesque and incomprehensible to you, saves pension funds. You don't want the truth. Because deep down, in places you don't talk about at parties, you want us to fill that investment gap. You need us to fill that gap. "We use words like credit default swaps, collateralized debt obligation, and securitization? We use these words as the backbone of a life spent investing in something. You use 'em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We'd rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don't give a damn what you think you're entitled to!" ( Source: here )