Posts Tagged ‘Credit downgrade’

S&P Computer Error Briefly Downgrades France’s Credit Rating

Tuesday, November 22nd, 2011

Whoops!  Someone has a red face.  France’s credit ratings have not been downgraded by Standard & Poor’s (S&P) and apparently resulted from an accidental transmission of a message that it had downgraded the nation’s credit. S&P’s error roiled global equity, bond, currency and commodity markets when it sent and then corrected the erroneous message.

“As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed,” S&P said.  “This is not the case: the ratings on Republic of France remain ‘AAA/A-1+’ with a stable outlook, and this incident is not related to any ratings surveillance activity.  We are investigating the cause of the error.”

Downgrading France’s credit rating would negatively impact the rating of the European Financial Stability Facility (EFSF), the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal.  If the EFSF ends up paying higher interest on its bonds, it may not be able to provide as much funding for indebted nations.  “It was a mess,” said Lane Newman, the New York-based director of foreign exchange at ING Groep NV. “It calls into question the credibility of people who can have that sort of impact not really being careful.”

“It clearly raises issues about internal systems and controls,” said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, CA-based bank- rating firm.  “The onus is on them to be careful and it’s troubling.  Whether you’re a broker dealer or a rating agency, everything you say has to be very carefully considered because of the weight that they carry.”

The incident is currently under investigation.  “This is a very serious incident,” said European Union (EU) Internal Market Commissioner Michel Barnier.  “This shows that we are in an extremely volatile situation, that markets are extremely tense, and therefore that players on these markets must be extremely rigorous and exercise a duty of responsibility.”  Barnier continues, “It is all the more important since these are not minor players on these markets, but actually one of the three major rating agencies and therefore an agency that has a particular responsibility. I do not wish to make a statement on the failure itself, which immediately was recognized by Standard & Poor’s.  The European authority for credit rating agencies, together with AMF, the French market authority, will have to look into this and draw conclusions from this incident.”

S&P’s error spooked investors already apprehensive over Europe’s debt crisis, feeding concerns that the continent’s debt problems had engulfed the region’s second-largest economy.  It contributed to the worst day for French government bonds since before the euro debuted in 1999.

The Globe and Mail’s David Berman wonders If the error was practice for the real thing. “Standard & Poor’s downgrade of France’s credit rating was apparently accidental – so consider the reaction to the panicky downgrade as a kind of dress rehearsal:  It lets you know how markets will react if and when an actual downgrade goes through.  The way things are going for Europe’s sovereign-debt crisis, an actual downgrade looks more than likely.  Just as Italy supplanted Greece as the eurozone’s biggest trouble spot, highlighted by the country’s surging bond yields, France has the makings of a troubled spot in-the-making.”

As MarketWatch’s Laura Mandaro sums it up, the computer did it.

S&P Downgrade Costs Investors $1 Trillion

Wednesday, September 14th, 2011

Shareholders in American companies can blame Standard & Poor’s  for taking $1 trillion of their money after the rating firm downgraded Treasury securities for the first time in American history to AA+ from AAA.  Now, some of the most experienced investors say the stock market losses make no sense.  While the benchmark index for U.S. equities fell as much as 6.7 percent — or $1.03 trillion — since the downgrade, 10-year Treasuries rallied the most in more than two years and the government financed its quarterly debt obligations at the lowest interest rates ever.  Treasuries have returned two percent since the downgrade. 

“One of the most perverse things I’ve seen in 25 years of doing this is that S&P downgrades the United States government, and investors’ reaction is to run towards the securities that they downgrade, selling businesses without asking at what price,” said Kevin Rendino, a money manager at BlackRock Inc., which oversees $3.65 trillion.  “Equity prices have swung too far.” 

The downgrade, which diverged from Moody’s Investors Service and Fitch Ratings, turned investors’ focus from the 10th consecutive quarter in which S&P 500 companies topped analyst earnings forecasts.  Per-share profits had climbed 18 percent among companies in the index, with 76 percent topping the average analyst projection, according to data compiled by Bloomberg.  Sales grew by 13 percent. 

“It did a lot of damage to confidence, which had been shaky anyway,” Liz Ann Sonders, New York-based chief investment strategist at Charles Schwab, said.  “We had started to get a sense of a little bit of a lift for the economy in the second half of the year, and you just kind of wiped it out because of the lack of confidence in our political leaders. S&P reflected that with the downgrade, but what it ended up causing was a real confidence crisis, more than an economic crisis.” 

Additionally, the Chicago Board Options Exchange volatility index jumped 50 per cent to 48, the highest level in 29 months and the biggest jump in more than four years, the first trading day after the downgrade was announced. 

“We’re starting to see real disorderly selling, far more than what we’ve been seeing,” said Matthew Peron, head of active equities at the Chicago-based Northern Trust, which manages approximately $650 billion in assets.  At Jersey City-based Knight Capital, senior equity trader Joseph Mazzella said that “It’s scary.  It really is.  I hate it when the market closes below its low, as it sets the stocks up for a follow-through tomorrow.” 

President Barack Obama said that he blames political gridlock in Washington, D.C., for the downgrade.  He announced plans to offer recommendations on ways to cut the federal deficit.  Agreeing with the president is William Suplee, a financial manager with Structured Asset Management in Paoli, PA.  “Almost universally my clients are blaming this on ‘The Government’, this lack of confidence – and that is what it is.  This sell-off is uniformly blamed by my clients on the government’s inability to act rationally. 

According to Genna R. Miller, Ph.D., Visiting Instructor, Economics Department, Duke University, “In terms of the CPA profession, there may have been some fear that the negative outlook on U.S. sovereign debt, as well as possible increases in interest rates, may have caused a further downturn in the economy.  Such a downturn in the economy may have been expected to reduce the demand for accounting services, as clients’ incomes declined.  However, as there have only, at this point in time, been minimal impacts on the economy and the accounting profession, this does not appear to be the case.  It may be the case that the income elasticity of demand for accounting services may actually be quite inelastic.  The income elasticity of demand tells us the percentage change in quantity demanded for accounting services divided by the percentage change in clients’ incomes.  Thus, if there is a relatively inelastic income elasticity of demand, then clients who have had accounting services in the past may continue to do so, despite any declines in their own income.  On the flip side, some financial planners may have experienced an increase in business as some clients may have needed to re-assess portfolio values from a tax perspective or may have needed to comply with disclosure policies with respect to increased risk.”

Mark Vitner, Managing Director & Senior Economist, Wells Fargo Securities, LLC, offers this perspective.  “I think most firms understand that the downgrade does not affect many private businesses.  The downgrade and the problems with the federal budget deficit that precipitated it are primarily a problem for state and local governments and government contractors.  Businesses and governments that receive a large part of their funding from the federal government will be most impacted by the downgrade and renewed emphasis on deficit reduction.”

Rick Mattoon of the Fed believes the downgrade will affect mostly the secondary markets like municipals funds.  Listen to his podcast here.

Rick Mattoon on the Economy: On the Brink or On the Mend?

Tuesday, August 30th, 2011

Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession.  This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago,  Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.

According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes.  Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors.  The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.

From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around.  At present, he says the issue isn’t so much one of supply but demand.  A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards.  The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.

The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs.  Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy.  A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions.  Another was the unanticipated spike in oil prices that dampened consumer spending.

The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy.  The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.

One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.

In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions.  The market’s comeback depends on job growth.  According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York.  Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt.  The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.

To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.

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