Brace Yourself , Europe Central Bank Goes Italian and Just How Bad Will the S&P Downgrade Be?

Just when you think you've had enough, here comes Italy. The European Central Bank is buying Italian and Spanish government bonds on a massive scale. From the ECB press statement:

The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.

The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.

The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.

The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

Greece Downgraded Again, Credit Default Swaps Soar

Greece has been downgraded to CCC, a drop of three credit rating grades, by the almighty S&P credit ratings agency.

Greece had its credit rating cut three levels by Standard & Poor’s, which branded the nation with the world’s lowest debt grade and said a restructuring looks “increasingly likely.”

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement today. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

The problem now is soaring credit default swaps:

Credit-default swaps on Greece, Ireland and Portugal surged to records on concern European governments’ struggles to resolve the deficit crisis will threaten their ability to pay their debts.

Swaps on Greece jumped 47 basis points to an all-time high of 1,610 as of 5:30 p.m. in London after Standard & Poor’s downgraded the nation, according to CMA. Contracts on Ireland soared 27 basis points to 740, Portugal climbed 22 to 764 and the Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 7 basis points to 218, approaching the record 221.75 set Jan. 10.

Remember those from the financial crisis? Credit default swaps are insurance policies, anyone can buy, which pay out when a nation defaults.

Greece loses, they win. The problem is those who issue CDSes will have to pay out. Remember AIG?

It Would Hurt the Banks....

The latest request to restructure Greece's debt has been denied. with a quote from the ECB that should be classic:

A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi.

Look at this quote on their demand to privatize:

“Privatization makes a real difference,” said Poul Thomsen, head of the IMF’s Greek mission, which is in the process of reviewing the country’s progress on the bailout conditions. “If targets can be met, it will make a change to debt sustainability.”

Oh really? And that is why the US deficit is so small today, or other nations who privatized?

Seems The Greece Prime Minster, George Papandreou, is all for denying Greece any debt restructuring as well.

Greece must avoid debt restructuring and push on with budget cuts and privatisations to overcome its debt crisis, the country's Prime Minister George Papandreou and senior ECB officials said on Saturday.

Papandreou also said:

Henceforth, the European Union will escort Greece's privatisation programme as if we were conducting it ourselves

Dear Portugal, You Get a Bail Out and a Recession

Portugal is getting an IMF, EU, ECB crafted bail out of €78 billion where the austerity terms will throw them into recession.

Portugal's main opposition party met European and IMF officials on Wednesday and said they would consider whether to back a 78-billion-euro bailout after a source said the terms would propel the economy into two years of recession.

Why would the opposing party say that? The IMF is requiring Portugal to enact draconian cuts to the deficit, 9.1% to 5.9% of GDP in 2011 and less than a 3% GDP to debt ratio by 2013. The Guardian:

Health and education spending will be cut by €745m, civil service pay and pensions will be frozen, and people on state pensions above €1,500 a month will have them reduced.

Civil service staffing is to be squeezed by 1% a year in central government, while regional administrations and town halls will be told to shed 2% of their employees annually.

Banks will get €12 billion of the bail out. Earlier Banco Português de Negócios was nationalized, so the bail out requires Portugal to sell it at a greatly reduced price. In fact there is no minimum price specified.

Portugal is expected to reduce public spending by 3.4% of its GDP this year and raise an extra 1.7% of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes.

Thar Blows Portugal Straight into the IMF Austerity Plan

Portugal is asking for a bail out.

Portugal's prime minister said Wednesday his country has asked for financing assistance from the European Union due to its high debts and difficulty raising money on international markets.

The amount is €80 billion, with the Wall Street Journal reporting €90 billion.

Germany is already backing the bail out.

Of course the help will have a catch, that infamous, vague term, austerity. So far this has been an attack on workers, wages and social safety nets.

The U.K., which has cuts social safety nets, workers will contribute £4bn to the Portugal bail out....in order to cut social safety nets, workers and wages.

The Treasury said the UK was not planning to offer bilateral assistance to Portugal in the way that it did to Ireland.

But it confirmed that Britain could be required to provide a loan of up to about £4.4bn – 13.6% of the €37.5bn remaining in the EU "disasters fund" after it was drawn upon by Ireland – as well as 4.5% of any IMF loan.

Earlier in March, Portugal voted against austerity measures and the Portugal prime minister resigned.

Seems the ECB, EU and the infamous IMF are putting together an austerity plan for Portugal which will take 2 to 3 weeks.

Greece Calls Out IMF

Greece is growing a spine. Seems the EU and the IMF are demanding Greece sell off their public assets, and in response to these demands, Greece said:

"The behavior of the representatives of the EU, IMF and ECB during yesterday’s press conference was unacceptable,” government spokesman George Petalotis said in a statement today, referring to the European Central Bank. “The only agent responsible for these decisions is the Greek government. We take orders only from the Greek people.”

Associated Press:

It was the first time the government has publicly struck back at the IMF and the European Union, which rescued Greece from bankruptcy but at a price that many Greeks consider too harsh.

The IMF, the European Central Bank and the European Commission delegation said Greece must privatize euro50 billion ($68 billion) in state assets and speed up structural reforms in the next few months to keep the country's troubled finances afloat. The IMF representative also said some of the frequent demonstrations against the Greek government's reforms were being carried out by groups angry at losing their "unfair advantages and privileges."

Just incredible and good for Greece. The IMF is pushing their austerity program, which is privatization and reductions in pensions, social safety nets for workers, who I guess are those of unfair advantage and priviledge.

The Luck of the Irish

4leaf It seems Ireland is basically insolvent. All hail the banks.

The Ireland "Dr. Doom":

WHEN I wrote in The Irish Times last May showing how the bank guarantee would lead to national insolvency, I did not expect the financial collapse to be anywhere near as swift or as deep as has now occurred. During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.

Morgan Kelly is an Irish Economist who is predicting an 80% drop in Ireland home prices. He estimates their own bank bail out is sinking their nation:

This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?

What is driving our bond yields to record levels is not the Government deficit, but the bank bailout. Without the banks, our national debt could be stabilised in four years at a level not much worse than where France, with its triple A rating in the bond markets, is now.

European Central Bank - Hazardous Contagion & Adverse Feedback Loops

The ECB has issued a report which warns on contagion, the interdependencies when bailing out the financial institutions with public funds one doesn't have. The full report is here (large pdf).

Outside the ﬁnancial system, the progressive intensiﬁcation of market concerns about sovereign credit risk among the industrialised economies in the early months of 2010 opened up a number of hazardous contagion channels and adverse feedback loops between ﬁnancial systems and public ﬁnances, in particular in the euro area. By early May, adverse market dynamics had taken hold across a range of asset markets in an environment of diminishing market liquidity. As a result, the prices of some securities tended to become detached from underlying fundamentals, and banks’ long-term funding costs were pushed to levels not seen since the time of the failure of Lehman Brothers. Apart from the pass-through of higher sovereign funding costs, this appeared to reﬂect growing concerns about the possibility of mark-to-market losses on banks’ government bond portfolios. Towards the end of the ﬁrst week of May, the situation deteriorated very abruptly and extensively. On 7 May, the cost of insuring against credit losses on European banks soared to record levels, surpassing the heights reached after the collapse of Lehman Brothers in 2008.

They also warn on more write-offs, peaking in 2010, but also 2011 for €195 billion.

ECB