So, S&P has started the process of downgrades - what does this mean /

Happy friday the 13th ! After weeks of speculation , S&P has started the roll out of downgrades for Europe. what should one take from this ? well , what has S&P actually done so far ? Here is what we know so far .

The Real Dark Horse - S&P's Mass Downgrade FAQ May Have Just Hobbled The European Sovereign Debt Market

Submitted by Tyler Durden on 01/13/2012 18:55 -0500

• Belgium
 
• Bond
 
• Borrowing Costs
 
• Carry Trade
• CDS
 
• Credit Conditions
 
• Creditors
 
• default
• Default Rate
 
• Estonia
 
• European Central Bank
• Eurozone
 
• Finland
 
• fixed
 
• France
 
• Germany
• Greece
 
• Gross Domestic Product
 
• International Monetary Fund
 
• Investment Grade
 
• Ireland
 
• Italy
• keynesianism
 
• Market Conditions
 
• Monetary Policy
 
• Moral Hazard
 
• Netherlands
 
• Portugal
• Rating Agency
 
• ratings
 
• Recession
 
• recovery
• Slovakia
 
• Sovereign Debt
 
• Sovereign Default
• Sovereign Risk
 
• Sovereign Risk
 
• Sovereigns
• Unemployment

All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt kleptocrats, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Mariner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

Here are the key take home messages from the FAQ (source):

• We believe that as long as uncertainty about the bond buyers at primary auctions remains, the risk of a deepening of the crisis remains a real one. These risks could be exacerbated should renewed policy disagreements among European policymakers emerge or the Greek debt restructuring lead to an outcome that further discourages financial investors to add to their positions in peripheral sovereign securities.
• The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. According to our assessment, the political agreement reached at the summit did not contain significant new initiatives to address the near-term funding challenges that have engulfed the eurozone.
• • Instead, it focuses on what we consider to be a one-sided approach by emphasizing fiscal austerity without a strong and consistent program to raise the growth potential of the economies in the eurozone.
  • Financial solidarity among member states appears to us to be insufficient to prevent prolonged funding uncertainties. Specifically, we believe that the current crisis management tools may not be adequate to restore lasting confidence in the creditworthiness of large eurozone members such as Italy and Spain. Nor do we think they are likely to instill sufficient confidence in these sovereigns' ability to address potential financial system stresses in their jurisdiction. In such a setting, the prospects of effectively intervening in the feedback loop between sovereign and financial sector risk are in our opinion weak.
  • • Despite these encouraging developments on domestic policy, we downgraded both sovereigns by two notches. This is due to our opinion that Italy and Spain are particularly prone to the risk of a sudden deterioration in market conditions.
    • While we see a lack of fiscal prudence as having been a major contributing factor to high public debt levels in some countries, such as Greece, we believe that the key underlying issue for the eurozone as a whole is one of a growing divergence in competitiveness between the core and the so-called "periphery."
    • We believe that the risk of a credit crunch remains real in a number of countries as economic conditions weaken and banks continue to consolidate their balance sheets in light of tighter capital requirements and poor market conditions in which to raise additional equity
    • • We estimate a 40% probability that a deeper and more prolonged recession could hit the eurozone, with a likely reduction of economic activity of 1.5% in 2012.
      • We believe an even deeper and more prolonged slump cannot be entirely excluded. We expect this weak macroeconomic outlook if realized would complicate the implementation of budget plans, with slippages to be expected, which would likely further dampen confidence and potentially deepen the recession, as funding and credit is curtailed and the private sector increases precautionary savings.
      • Reports indicate that many investors had hoped that a breakthrough at the December summit would have enticed the ECB to step up its direct government bond purchases in the secondary market through its Security Market Program (SMP). However, these hopes were quickly deflated as it became clearer that the ECB would prefer to provide banks with unlimited funding, partly with the expectation that those liquid funds in banks' balance sheets would find their way into primary sovereign bond auctions. This indirect way of supporting the sovereign bond market may yet be successful, but we believe that banks may remain cautious when being faced with primary sovereign offerings, as most financial institutions have aimed at shrinking their balance sheets by running down security portfolios in order to comply with higher capital requirements, which become effective in 2012.
      • Shockingly, S&P dares to challenge not only the status quo, but "powerful national interest groups" - easily the first time we have seen something like this out of a "status quo" organization, let alone a rating agency.
        • Governments are also aiming to put greater focus on growth-enhancing structural measures.While these may contribute positively to a lasting solution of the current crisis, we believe they could also run counter to powerful national interest groups, whose resistance could potentially jeopardize the reform momentum and impede the recovery of market confidence.
        Why it is all a Catch 22 and why the LTRO "carry trade" has failed:
        • Recent Italian and other primary auctions suggest to us, however,that banks and other investors may still only be willing to lend longer term to governments facing market pressure if they are offered interest rates that, all other things being equal, will make fiscal consolidation harder to achieve.
        • Let's not forget the EFSF:
          • We are currently assessing the credit implications of today's eurozone sovereign downgrades on those institutions and will publish our updated credit view in the coming days.
          And probably the most important observation of the night:
          • As we noted previously, we expect eurozone policymakers will accord ESM de-facto preferred creditor status in the event of a eurozone sovereign default. We believe that the prospect of subordination to a large creditor, which would have a key role in any future debt rescheduling, would make a lasting contribution to the rise in long-term government bond yields of lower-rated eurozone sovereigns and may reduce their future market access.
          • The S&P itself warns that the entire basis of the European bailout will create a split market in sovereign bonds, in which pari passu treatment will be a thing of the past, and in which buyers will have no clue what treatment awaits them in a worst case scenario. If anyone thought that ISDA's idiotic attempt to kill the CDS market caused a collapse in demand for sovereign paper, just wait until potential buyers comprehend they could be primed every step of the way and the market is effectively two tier.
            S&P may have just killed the European sovereign market by saying out loud what only "fringe bloggers" dared suggest in the past.