Just what does a debt-laden, dysfunctional US economy have to do to get a ratings downgrade?

What exactly does a debt-laden, politically dysfunctional major economy have to do to get a ratings downgrade around here?

In 2011, the U.S. earned the ignominious distinction of being the first of several post-financial crisis era economies to be stripped of a triple-A credit rating. Yet since then, Washington has lurched from one budget crisis to the next, with no plan for arresting the growing federal debt burden.

In spite of those factors, the ratings agency triumvirate of Moody's, Fitch and Standard & Poor's — the only firm to actually mete out a U.S. downgrade thus far — have been strangely reluctant to pull the trigger on another ratings cut.

Even still, America's problems — including political paralysis, oceans of red ink and stunted growth — are mounting.

The refusal to cut the U.S. again is curious, given that the Sword of Damocles has already fallen on both Britain and France — the euro zone's second-largest economy, which has been downgraded on two separate occasions by two different ratings firms. Read more >>

Shiller: Housing Recovery Could Take 50 Years

From housing starts to home prices, renowned economist Robert Shiller acknowledged "there are a lot of positive signs" for the U.S. housing market right now, but told CNBC Wednesday it's still unclear if a recovery is actually in place.

After all, Shiller noted the housing futures market for single-family homes was only "mildly optimistic" before superstorm Sandy struck the U.S.'s East Coast with expectations for just 3 percent growth per year over the next four years.

"If it goes up 3 percent a year that means that, in real terms, housing is just about flat," Shiller said. "It's not a recovery to write home about."

Shiller is probably best known for helping create the Standard & Poor's/Case Shiller index, a widely-followed measure of housing prices, which recently revealed that U.S. home prices rose 2 percent in August compared to one year ago. Meanwhile, the NAHB/Wells Fargo Housing Market Index - a survey of homebuilders - recently climbed sharply higher. Read more >>

Spain Downgraded to One Level Above Junk

Spain’s debt rating was cut to one level above junk by Standard & Poor’s, which cited mounting economic and political risks as the government considers a second bailout. The country was lowered two levels to BBB- from BBB+, New York-based S&P said in a statement yesterday. S&P assigned a negative outlook to the nation’s long-term rating and lowered the short-term sovereign level to A-3 from A-2.

“The negative outlook on the long-term rating reflects our view of the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in euro-zone policy,” S&P said. “The deepening economic recession is limiting the Spanish government’s policy options.”

The downgrade comes after Spain announced a fifth austerity package in less than a year and published details of stress tests of its banks. Creditworthiness concerns have grown since the government requested as much as 100 billion euros ($128 billion) in European Union aid to shore up its lenders and amid signals that the deficit target is in jeopardy. Read more >>

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Greece’s Rating Outlook Lowered By S&P

Greece’s credit rating may be cut again by Standard & Poor’s on concern the debt-burdened nation will need more support from European Union lenders.

The outlook on Greece’s CCC rating, already eight levels below investment grade, was revised to negative from stable, S&P said in a statement yesterday. The change reflects the risk of a downgrade if Greece is unable to obtain its next disbursement of bailout loans from the EU and International Monetary Fund rescue package, the rating company said.

Representatives from the so-called troika of the European Commission, European Central Bank and IMF return to Athens early next month to review Greece’s economic program, which will determine whether the nation will receive further funds from rescue packages, amounting to 240 billion euros ($297 billion), needed to remain in the 17-nation euro area.

Prime Minister Antonis Samaras has held meetings with the leaders of the two parties supporting his coalition government since it was formed following elections on June 17 to hash out a 11.5 billion-euro package of budget cuts demanded by the creditors for the next two years. Finance Minister Yannis Stournaras said yesterday the government is still working on identifying almost a third of the cuts. Read more >>

Companies Defaulting on Debt Skyrockets

The stock market has stalled. Each report on the economy raises questions. And now the number of companies defaulting on their debt obligations is rising fast. This year, 47 global companies have been unable to keep paying the interest on their debt, which is more than double the levels a year ago, says Standard & Poor's. A majority of those defaults, 25, are by U.S. companies. "The economy is still fragile," says Diane Vazza of S&P.

This is happening despite record low interest rates that should allow companies to refinance and reduce their interest costs. While most companies continue to be in good health, investors are paying close attention to the:

•Increasing default rate. The past 12 months, 2.6% of companies with the lowest credit ratings have defaulted. That's up from 2.5% in March yet still well below the long-term average of 4.5%.

But given the rash of defaults, S&P predicts the default rate will rise to 3.6% by March. If problems persist in Europe and China, S&P says, defaults could jump to 5.5%.

•Danger of more downgrades. During the second quarter, 87 U.S. companies saw their credit ratings lowered, while 78 were upgraded. Most of the strain is being felt by media and entertainment companies, which accounted for 17 of the downgrades.

•Increased profit strain. For the first time in years, companies are facing the prospect of shrinking profits, says Bonnie Baha of DoubleLine. Earnings are expected to contract 0.9% in the second quarter, marking the lowest growth rate since the third quarter of 2009, says S&P Capital IQ. Read more >>

5 Banks Downgraded in Spain Along With Largest Bank Bailout in Spain’s History

Tiffany Hsu
Los Angeles Times
Standard & Poor’s just slashed the credit ratings of five banks and said the country is headed into a double-dip recession. One of them, Bankia, just asked the government for 19 billion euros in aid - a roughly $23.8 billion boost.

That makes it the largest bank bailout in Spain’s history. Combined with escalating concerns that Greece is about to execute its so-called Grexit from the euro currency, the news is doing nothing to alleviate the heightened anxiety in the euro zone.

Biggest Weekly Loss For S&P Since November 2011

The world’s richest people lost a combined $32.8 billion this week as concerns over a possible Greek exit from the euro area pushed the Standard &Poor’s 500 index to its biggest weekly loss since November 2011.

Mexican Carlos Slim, 72, lost the most during the week, as shares of his Mexico City-based telecommunications company America Movil SAB fell 4.38 percent. Slim, who lost $4.1 billion, remains the world’s richest person with a $65.5 billion fortune, according to the Bloomberg Billionaires Index.

The S&P 500 fell 4.3 percent to 1295.22 during the week as Greece failed to form a government and Moody’s Investors Service downgraded 16 Spanish banks, citing a recession and mounting loan losses. The S&P 500 is down almost 9 percent since April 2. More...

Next Bailout: Spain - Economy Faces "Crisis of Huge Proportions"

BARCELONA, SPAIN - MARCH 30: A Carslon Wagonlit Traves employee is seen through a broken window on March 30, 2012 in Barcelona, Spain. 

Spain's sickly economy faces a "crisis of huge proportions", a minister said on Friday, as unemployment hit its highest level in almost two decades and Standard and Poor's downgraded the government's debt by two notches.

Unemployment shot up to 24 percent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the twenty-first consecutive month as a recession cuts into consumer spending.

"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions," Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.

Standard and Poor's cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth. More...

Spain Unemployment At Record Levels

Aljazeera.com
New figures show that Spanish unemployment has hit record levels, with nearly one quarter of the labor force unable to find work. The news was announced hours after the country's credit rating was cut two notches to "BBB " by ratings agency Standard & Poor's.

According to the new data released on Friday, unemployment levels hit 24.4 per cent at the end of March, the highest level since a statistical series began in 1996. The rate for people under 25 years of age was 52 per cent, up from 48.5 per cent in the previous quarter.

The number of unemployed people in the country has now risen to 5,639,500 people, according to the national statistics institute. This represents a rise of 365,900 from the last quarter. Total unemployment has risen 1.5 per cent, from a level of 22.9 per cent of the labour force in the final quarter of 2011. 

The institute also said that the number of households with every adult member unemployed rose by 153,400 to 1.7 million. Spain has the highest unemployment rate in the 17-member eurozone. "The figures are terrible for everyone and terrible for the government,' Jose Manuel Garcia-Margallo, the country's foreign minister, told Spanish National Radio. "Spain is in a crisis of enormous magnitude." More...

S&P cuts BofA, Citi outlook to negative

bizjournals.com
Standard & Poor’s Ratings Service said Tuesday that it downgraded its outlook on Bank of America and Citigroup to negative from stable.

The move underscored that the global financial crisis is far from over despite BofA, California’s largest bank, repaying the government’s investment of $45 billion in the bank under the federal Troubled Asset Relief Program in December. The revised outlook signals possible downgrades to their credit ratings.

S&P assigns counterparty and debt ratings on Bank of America and Citigroup of “A” and “A-1”

The ratings agency’s change in its outlook for the two big banks reflects the more onerous terms BofA or Citi would face if another government bailout is needed.

“We believe there is increased uncertainty about the U.S. government’s willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders,” S&P analyst John Bartko said in lowering the outlook on the banks.

“We previously stated our belief that the extraordinary support was temporary. We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions,” Bartko added.

S&P pointed to proposals to tax the big banks to help recoup the cost of the bailout and a bill introduced in December to prohibit company-specific bailouts as raising concerns about the terms of another big bank bailout, if needed.

S&P’s rating on BofA gets a lift of three credit notches based on expectations that the government would step in to help BofA (NYSE: BAC) and Citigroup, (NYSE: C) given their status as systemically important financial institutions.

“We are uncertain whether BofA will be able to show sufficient additional improvement over the next two years in its operating performance and profitability to benefit its stand-alone credit profile,” Bartko said.

Morgan Stanley accused of conspiring with rating agencies to defraud investors

Reuters
Morgan Stanley has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion (753 million pounds) of risky mortgage-related notes that it expected to fail.

The lawsuit filed December 24 in Manhattan federal court said Morgan Stanley collaborated with credit rating agencies Moody's Investors Service and Standard & Poor's to obtain "triple-A" ratings for notes marketed in 2007 as part of a collateralized debt obligation (CDO) known as Libertas.

According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial Corp, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block.

The complaint alleged Morgan Stanley knew the CDO's assets were far riskier than the ratings suggested, but was "highly motivated to defraud investors" with pristine ratings because it was simultaneously "shorting" almost all the assets. This was a bet that their value would fall, which they did in 2008.

"Morgan Stanley was betting the entire investment it was promoting would fail," according to the complaint, which was made available on Tuesday. "The firm achieved its objective."

Alyson Barnes, a Morgan Stanley spokeswoman, declined to comment. S&P spokesman Frank Briamonte had no immediate comment. Moody's did not immediately return a call seeking comment. Moody's, a unit of Moody's, and S&P, a unit of McGraw-Hill Cos, were not named as defendants.

Many banks face lawsuits from investors who say they were misled into investing in securities they believed were safe but which were in fact tied to risky subprime mortgages.

Morgan Stanley is also a defendant in a closely watched case in the same Manhattan court that concerns whether rating agencies deserve free speech protection for their opinions.

The December 24 complaint said Morgan Stanley knew securities in the Libertas CDO were suffering a dramatic rise in delinquencies, but provided a misleading "risk factor" in a prospectus that rising delinquencies "may" hurt values in the $1 trillion residential mortgage-backed securities market.

It called this representation "analogous to Captain Smith's telling passengers of the Titanic that some ships have 'recently sunk' in the Atlantic and therefore 'our ship may sink,' without mentioning the facts that his ship struck an iceberg, had a hole in it, and was filling with water."

The lawsuit seeks class-action status, and also seeks compensatory and punitive damages, among other remedies. It was filed by Coughlin Stoia Geller Rudman & Robbins LLP, a law firm specializing in securities class-action lawsuits.

Morgan Stanley shares were up 22 cents at $29.51 in afternoon trading on the New York Stock Exchange.

The case is Employees' Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co et al, U.S. District Court, Southern District of New York, No. 09-10532.

Credit Rating Agency Scam and Latest Dollar Rally

AL MARTIN via conspiracyplanet.com
The deteriorated credit ratings of sovereign debt, especially as we see it in Dubai, Greece and Ukraine, etc., has rankled global equity markets.

This has also driven money into the US Dollar and is primarily responsible for the recent rally we've seen in the Dollar.

Sovereign debt is the debt of foreign nations, Second and Third World governments, denominated in a currency other than its own, to wit US Dollars, Yen, Pounds or Euros.

This sovereign debt has been sold and is payable in a currency other than that of the issuing country.

Usually the largest amount of sovereign debt outstanding is denominated in US Dollars and Japanese Yen.

So what does the credit rating downgrade of the government debt of Greece and Dubai debt really mean?

This is a problem which everyone knows about, but which has been, until recently, successfully hidden by what I call the Wanton Bullish Shills in the media.

Credit ratings agencies, like Standard & Poors, Moody's and Fitch's, are being disingenuous at best regarding their rating system.

They are independent for-profit corporations, yet they masquerade as allegedly objective credit ratings agencies in a monopolistic role deciding what is "credit-worthy” or not.

The problem with the credit rating agencies is the inherent conflict of interests and since there are only three of them, universally recognized by the central banks, the IMF, BIS, etc., they can get away with it.

The credibility of the credit rating agencies has obviously been hurt because they dragged their feet in downgrading Credit Default Swaps (CDS) and Collateralised Debt Obligations (CDOs) in 2007-2008.

The credit quality of that debt was obviously deteriorating, and it also pointed out the flaws in the credit rating agencies, namely that they are paid by the very same issuers of the debt they are rating.

The principal problem is that every effort that the Democrats have made to make the ratings agencies truly independent by either making them some sort of quasi-government entity, or by creating a so-called payment pool, or even a securities transaction tax that would be paid by the industry into a common pot that would then be managed by either the FDIC or SIPC, which in turn would pay the credit rating agency.

That would remove the direct connection between the issuers of securities and the credit rating agencies who are rating them. Every effort to make them more independent has been stifled by the Republicans.

And what about the weakness in the credit ratings of the sovereign debt of Greece and Ukraine? The agencies had been warning for the last half of 2009 that problems were coming in the Greek, Hungarian, Latvian, Ukrainian, etc. economies. They had acted to downgrade the sovereign debt of these nation-states.

In fact now Moodys, Standard and Poors and Fitch's have a total of 37 nation-states on their downgrade list. These are not Third World nation states, whose credit quality is perennially "junk" status anyway. What has become more troublesome is the sharp deterioration in the credit quality of so-called Second World nation state issuers as well. This would include Spain, Iceland, Greece Hungary etc.

At the same time, the credit rating agencies have also been warning First World nation-states like the United States and Britain that they can also lose their AAA credit ratings if they do not rein in their budget deficits.

Japan has also received similar warnings since the Japanese are now running a debt to GDP ratio of about 130%.

Greece Bankruptcy Could Doom Euro

Dan Weil
Greece’s debt has just been downgraded, and experts say that if the country goes belly up, the euro could be in big trouble.

"The Greek problem will be an acid test for the currency union," a senior German government official told German magazine Der Spiegel.

Fitch Ratings cut Greece’s credit rating to BBB+, the third-lowest investment grade.

Meanwhile, Standard & Poor's placed Greece's A- rating on watch for a possible downgrade, meaning it could be slashed within 60 days.

Greece is the lowest-rated country in the euro zone.

“Volatility is likely to continue for some time,” analysts at Barclays Capital wrote in a note to clients.

Greece is struggling with a weak economy and a massive debt burden.

The economy contracted 1.7 percent in the third quarter from a year earlier, and the budget deficit totals 12.7 percent of GDP.

While the government has plans to cut the gap, many analysts are skeptical.

"The likely rise in public debt to more than 120 percent of GDP next year and further to 125 percent in 2011 would leave the public finances highly exposed to shocks," Fitch analysts wrote in their report.

Experts are concerned that a Greek bankruptcy could spread to other countries in Europe.

“Greece is a whole lot more important than Dubai,” Uri Landesman, a fund manager at ING Investment Management, told Bloomberg.

“There are a lot of banks, in Europe especially, that have exposure to Greece.”

European Central Bank President Jean-Claude Trichet has said the euro-zone economy faces a rough road to recovery.

"The real economy is back to growth but we don't declare it (crisis) over. It is a bumpy road ahead, we have the sentiment that growth remains modest and we have to remain alert," Trichet said in an interview with the Europarltv, a television channel of the European Parliament.