As we speak, Fitch is nuking ratings across Europe. Not that it matters for much directly, but when all the ratings agencies reach agreement, there could be some fireworks from funds obligated to sell.
Unless Europe is smart, quick on its feat, and able to undo their own financial regulations…
(laughter)…
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A similar argument was made when the US was downgraded, that funds who require AAA ratings will be obligated to sell. I have no experience with this, so maybe someone could shed some light on this.
Facing mass forced liquidations, how quick would a fund be to just re-write it’s prospectus? I would assume most funds would have the ability to do so buried somewhere in the fine print and I would think they would opt to do that rather than just fire sell their assets. But, I don’t know if such things happen in practice. And of course this situation is quite a bit different than the US downgrade.
I’m not sure it’s as simple as “redefining oneself” finances are pretty heavily regulated.
Generally speaking, there are some regulations that mandate minimum credit ratings for certain types of funds. In theory, if all credit rating agencies downgrade one type of debt, there will be no where else to stick their heads in the sand and these funds will be forced to divest, or at least stop buying.
That would make selling bonds even harder for these governments, or even depress the market.
I have no idea, and I generally don’t think these governments would really be stupid enough to allow their own regulations to hamstring themselves. They passed these laws in the beginning to make sure they always had lots of buyers for their bonds; to monopolize the debt markets; but really I would guess it’s a one way street.
Heads I win, Tails you lose, sort of thing.
US Govt issues in the US weren’t ever referred to as being rated at all – normally, US based bond funds and other US mandates which had to invest in investment grade paper could buy, “investment grade issues as rated by S&P, Moody, or Fitch, and US government obligations”, so, if the same is true of overseas desks, which I’m guessing that it would be then they’d end up with a mandate where they could always buy the government paper of their own government – no matter its rating. Likely, cross border investing will take a hit – if they copied the US forms, then foreign government issues would be subject to being rated.
“Feat” spelled that way… that’s a pun, right? 😉
I would say there’s a difference between the U.S. getting downgraded and the shittly little Euro countries getting downgraded. There’s only one country that is considered “the deep pockets” due to its sovereign currency status.
I would argue that the ratings agencies downgrading the Euros is a lot worse for those markets than it is (was) for the U.S.
That said, Deep Pockets Ben will continue to print to support the Euro, so you will not get the dollar surge that you have been expecting.
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Lol, I wish I could say it was a pun. I’m just leaving it…
Jake, haven’t I already been getting that surge? Certainly the dollar has moved significantly down of late, but if they announce another LTRO, well then why wouldn’t it break out again?
The Fed’s latest announcement didn’t differ at all from the others.
Agreed announcements mean nothing. It’s the action, which is printing to facilitate liquidity in the Euro markets.
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