I got a nice mention in a CNBC article today:

Why Portugal Downgrade Didn’t Slam Stocks

By Antonia Oprita

July 13 (CNBC) — Investors do not see Portugal’s rating downgrade by Moody’s as an event that will shake the markets, but it confirms the fact that the outlook for some economies in the euro zone is still cloudy, economists and market analysts told CNBC Tuesday.

Moody’s slashed Portugal’s credit rating by two notches to A1, citing a deterioration of the country’s debt ratios and weak growth prospects.

Portugal’s debt-to-GDP and debt-to-revenue ratios have risen rapidly in the past two years, Anthony Thomas, vice president and senior analyst in Moody’s Sovereign Risk Group, said in a statement.

The euro fell after the announcement and the spread between Portuguese and German 10-year government bonds widened by 4 basis points to 290 points.

“The bond markets response hasn’t been dramatic,” Martin van Vliet, euro-zone economist at ING Bank, told CNBC.com.

The downgrade came a little before a Greek auction to sell 6-month T-bills, the first since a bailout package agreed by the European Union and the International Monetary Fund in May.

Greece sold 1.625 billion euros ($2.03 billion) of 6-month instruments at a yield of 4.65 percent, up from 4.55 percent in a similar auction on April 13, according to Reuters.

“The markets will probably reason that the risk of default in six months is small,” van Vliet said.

Growth Is Key

Economic growth in Europe’s peripheral countries will be crucial to bring back investor confidence but more and more analysts fear a slowdown in the second quarter everywhere in the world.

“The outlook for Portugal is not particularly optimistic,” David Tinsley, economist at National Bank of Australia, said. “It is in a very slow growth trajectory and therefore all its fiscal retrenchment has got to come from public spending cuts.”

Over the longer term, investors are still afraid of the risk of default and European Central Bank President Jean-Claude Trichet hinted that the need to intervene by buying bonds is not that strong any longer, according to van Vliet.

“My guess is that they will have to continue buying bonds,” he said. “It all depends on whether the economy will start growing in Greece.”

The risk of default by one of the southern European countries was the main fear in the markets earlier this year, when ratings downgrades sparked massive selloffs in stocks as well as bonds and investors were taking refuge in US Treasurys, gold and cash.

“The process of credit downgrades reinforcing confidence erosion, I think that’s a bit over,” van Vliet said.

Default Risk Is Gone

Investors will slowly realize that the risk of default by European nations on their debt is gone, and they will push up stock prices and the euro, according to economist Warren Mosler, founder and principal of broker/dealer AVM.

In June, Mosler told CNBC.com the euro was likely to rise to between $1.50 and $1.60 because of the austerity measures in Europe.

He reaffirmed his stance, saying that there had been a “mad rush for the exits” by Europeans, who bought dollars and gold, pushing the euro down, when the default risk was high.

But the ECB’s decision to buy Greek bonds showed the bank was ready to spend money to defend countries in the euro zone and “there is no limit to what the ECB can spend,” Mosler told CNBC.com.

The ECB has put itself in a top position by doing this, as it can impose terms and conditions on any country that sells it its bonds, he explained.

“What that did is it shifted power from fiscal policy to the ECB,” Mosler said. “I would say they will not buy these bonds unless they can impose their terms and conditions.”

“It allows them to cut out one member selectively, without the whole system collapsing,” he said.

9 Responses

  1. Good call and very nice mention! You’re the only one on that network who knows what he’s talking about. I feel sorry for Liesman–he’s been so marginalized, you can see it, he’s been made Rick Santelli’s (a total idiot) whipping boy!

    They need to sic you after Santelli now!!

      1. Speaking of Romans, was just glancing through the pdf of your book (looks good), and I wanted to comment that these three paragraphs are phenomenal:

        Our meeting, originally planned to last for only twenty minutes, went on for two hours. The good Professor began inviting his associates in nearby offices to join us to hear the good news, and instantly the cappuccino was flowing like water. The dark cloud of default had been lifted. This was time for celebration!

        A week later, an announcement came out of the Italian Ministry of Finance regarding all Italian government bonds – “No extraordinary measures will be taken. All payments will be made on time.” We and our clients were later told we were the largest holders of Italian lira denominated bonds outside of Italy, and managed a pretty good few years with that position.

        Italy did not default, nor was there ever any solvency risk. Insolvency is never an issue with nonconvertible currency and floating exchange rates. We knew that, and now the Italian Government also understood this and was unlikely to “do something stupid,” such as proclaiming a default when there was no actual financial reason to do so. Over the next few years, our funds and happy clients made well over $100 million in profits on these transactions, and we may have saved the Italian Government as well. The awareness of how currencies function operationally inspired this book and hopefully will soon save the world from itself. (p97)

        That’s a nearly perfect story (the only element missing is Monica Belluci), it sounds like something out of a Dos Equis ad.

    1. Anon,
      Here’s another beauty from Jeremy Siegel PhD at Penn’s Wharton…

      Excerpt: …”With interest rates on safe treasury bills now near zero, banks are holding large quantities of excess reserves because they wish to show a high level of liquidity to investors and regulators. The Fed should do all it can to encourage banks to lend out these reserves…..”

      I think he just wrote this earlier in July. Even Ben Bernanke has stopped using this language already a while ago. Siegel must not specialize in banking and monetary operations. He should put the pen down and perhaps put Warren’s new book on his summer reading list!

    2. anon, some time ago Mark Thomas decline an proposal to debate Bill Mitchell because Bill rejects the money multiplier.

      1. It’s our loss not Thoma’s. Ed Harrison and Rob Parenteau are doing this right. Warren’s CNBC interview was good for this too. Inflammatory statements get you back on TV, but crazy sounding ones don’t.

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