Monday, May 31, 2010

Someone Told France She has hair underneath her arm pits, whole time she thought was looking good, ECB Bond Buys

1 · Spain was downgraded by Fitch during the middle of NY trading on Fri (right after the European close Fri); some color on the downgrade from JPMorgan’s TSY desk - Fitch changed the rating from AAA to AA+ before even putting Spain on neg watch; Note that Moody's still has Spain at Aaa while S&P had already downgraded them to AA back in late Apr (mid-AA, a bit lower than Fitch). This Fitch move occurred after most in London had left for the long weekend and the Sov mkt was closed. The expectation is that Spain CDS opens ~20bp wider on Tues. This Fitch action had been speculated for a while and it isn't a game-changer.

· France warns that its AAA rating could be in jeopardy - François Baroin, the French Budget
Minister, told local television stations that holding on to the country’s AAA rating would be a “stretch”.
Baroin toned down his comments later and said that the Government was committed to the
“demanding” target of maintaining France’s top credit rating. London Times.
· Spain’s ruling Socialist party faces plunging support; austerity measures could cause support
to drop further; A poll conducted for El Mundo newspaper by Sigma Dos showed on Sunday that the
opposition Popular Party (PP) would take 45.6 percent of the vote if an election were held now, 10.5
percentage points ahead of PM Zapatero's Socialists. Some think Zapatero will have to hold early
elections. Reuters
· Spain Labor market reforms have been pushed back 1 week from a prior May 31 deadline although
the government is rapidly losing faith in being able to secure a deal w/unions and may push ahead
w/its own reforms. Reuters
· Greece - Greece will not restructure its debt and will not need more cuts to achieve fiscal targets set
in the emergency funding program it agreed with the European Union and the IMF, its finance
minister told a Sunday paper. Reuters
· Greece – London economists recommend Greece leave the Euro and default on its debts; The
Centre for Economics and Business Research (CEBR) advised the Greek gov’t to exit the euro and
default on its EU300B worth of debt – London Times.
· Greece – WSJ discusses the IMF’s massive task of reforming the Greek economy (WSJ)
· Germany and ECB tensions on the rise; an ECB official on Fri publicly chided Germany, a rare
step – WSJ
· German short sale bans – the head of the London Stock Exchange was quoted as saying the
German short sale restrictions were mistaken and could wind up being counterproductive. Reuters
· ECB warns of additional bank losses in its Semiannual Financial Stability Review – banks in
the eurozone will suffer “considerable” loan losses this year and next; the combined losses could total
EU195B; says eurozone bank profitability likely to remain moderate; eurozone bank losses may
exceed current ests b/c of heightened sovereign risks and slowing growth owing to fiscal tightening
measures; that said, the ECB cut its cumulative forecast for eurozone bank losses for the period ’07-
’10 from EU553B to EU513B – WSJ
· ECB warns that government bond sales could wind up crowding out private sector bank bond
– Bloomberg
· ECB’s Stark says the European Central Bank may start to exit its extraordinary monetary
policy measures by Jul - "At the start of July the banks in the euro zone must return 442 billion
euros ($542.4 billion) to the ECB which it had lent them for a year," he said. "That would be a
possible start for the gradual exit, whereby we'll smooth the transition," Reuters
· ECB bond buys - The central bank said in a statement it had settled 35 billion euros in bond
purchases by May 28, up from 26.5 billion a week earlier – Reuters
· The ECB has been buying Greek bonds “by the bucket load” – German central bankers suspect
a French plot behind the move as the purchases are providing an excellent opportunity for French
banks to dump their Greek holdings – Spiegel

· ECB’s Weber and Draghi both urge a quick end to the ECB’s bond purchases – Bloomberg
· ECBTrichet defends the ECB in remarks over the long weekend; the ECB head reiterated that
its current policy of buying government bonds doesn’t represent QE and that he wasn’t printing
money (WSJ)
· ECB – the NYT warns that Trichet and the ECB are too focused on fighting inflation while deflation
may be setting in

· Eurozone credit/money supply data - More of the same in the April money and credit data: still
relatively soft headline figures, but encouraging details. It is too early to assess the effect of the
sovereign debt turmoil on credit demand and availability in the region, but in aggregate the data are
constructive through to April at least. At the regional level, a larger deposit outflow was observed in
Greece in April than in March. Bank loan growth nudging towards positive territory. Bank loans
increased €26bn in April, the largest monthly gain since January 2009. Fuzesi
· Eurozone inflation - Euro area flash inflation release shows HICP rising to 1.6%oya in May
(JPMorgan 1.6%, Consensus 1.7%), after 1.5%oya in April. No details are available at this stage, but
it seems clear from the national CPI releases for Germany, Belgium and Italy that core inflation
rebounded in May, thanks to some strengthening in service inflation connected to tourism(not in Italy,
though). Bastoni
· Russia cuts its main interest rate for a 14th time in as many months; Bank Rossii cut its refi rate
by 25bp to 7.75% -

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