While you were sleeping September 20th

I think you should be happy. After last night there are only few countries in the euro zone that need to be downgraded and then it is all back to normal.
Seriously now, not really a surprise, Italy has been downgraded one notch by S&P. Immediate reaction on equity and currency markets here. And we should expect European equity markets to move lower today and safe haven currencies, USD, JPY and CHF to get stronger. CEE equities should move lower and currencies should weaken (in the absence of central banks interventions). Still for CEE I expect the cost of EUR and USD funds to climb higher which should make borrowing in local currencies by the government more expensive also. Finally on the market reactions, watch out for FX interventions from the Japanese Central Bank. We already know that Swiss Central Bank is in the market.
Those should just be immediate market reactions. But they are not certain as governments or other news can always intervene. What I find most interesting is that Italy has most of its debt owned by local banks. If in the case of US it was strange enough as the debt was in USD and they have almost (default is a political decision not economic) infinite amount of them. In Italy’s case the conventional wisdom (never trust conventional wisdom) would have you believe that default is impossible. Also, I know I posed this question before but what rating would EUROGROUP bonds will be carrying? There are not that many triple As left unless they will use a derivative to package it and sell it. Much like a CDS. Remember them ?

Furthermore, this situation has grave implications for a country like Romania. The government has tried very hard to convey a sense of stability of its finance situation by borrowing from local banks in local currency at short maturities. But as we see in Italy’s case the world sees things differently. Also, if the situation described here by me pans out than the Romanian government is in a heap trouble one more time.

The other important news from last night is the President Obama’s plan to create jobs in the US. I listened to it and in the heat of the moment all I heard was : “blah blah higher taxes on rich blah blah blah more taxes on the rich blah blah” . Here is Reuters summary and I will come back later with more comments if I find something interesting for you.

I keep looking for interesting things to comment about Romania. Nothing yet. Thank god for the MPC meeting next week.


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