February 7, 2023

Players in a Greek Drama

Not only does he have the power to effectively put a “sell” on Uncle Sam, but on Friday he roiled global markets after he said the Greek rescue package would constitute a limited default on the country’s debt.

The analyst, who is based in London, oversees the 30-person government bonds team inside Fitch Ratings, which could soon downgrade the debt of the United States government from its historical, gold-plated, triple-A rating if politicians in Washington cannot agree to raise the debt limit.

And after two days of whirlwind conference calls with colleagues in London and New York to weigh what the Greek restructuring proposals might look like and how Fitch would respond, Mr. Riley and his team stamped a “restricted default” on Greece Friday morning. The details of the $157 billion bailout plan were announced Thursday by European leaders.

The reverberations of a downgrade by Fitch or its competitors, Standard Poor’s and Moody’s Investors Service, often send borrowing costs soaring for the affected governments while typically putting equity and debt markets into a tailspin as investors run for cover.

That power and responsibility has made Mr. Riley and his team figures — and often targets for critics — in the debt drama sweeping the globe this year.

“People don’t know who is selling Italian bonds or who is going short Spanish securities or who is betting on a Greek default,” Mr. Riley said in an interview. “But a headline that says ‘Greece downgraded’ is a simple one to understand and you can point the finger at who did it very easily.”

His team recently received hostile e-mails labeling them “idiots” or blaming them for the harsh austerity measures many European countries have adopted. He is on the speed dial of European policy makers and United States Treasury Department officials who are eager to convince him that their belt-tightening plans are sufficient to avoid a negative report. His days are filled with calls from managers of pension funds, sovereign wealth funds, insurance companies and other asset managers trying to gauge what might spur a downgrade or a default and how that would affect their holdings of that country’s bonds.

All the while, Mr. Riley and his staff are running internal “war games,” exploring what might happen to money market funds, financial institutions and even individual state finances if the United States were to default on its debt.

Some of the agencies’ harshest critics, however, wonder why the rating agencies still wield so much power. Are they acting like disinterested parties in the American debt-ceiling talks or driving the discussions and their own agendas through their demands, they ask. Standard Poor’s, for instance, has said that if any debt-ceiling deal did not include an agreement to reduce the nation’s deficit by $4 trillion over the next decade, the United States was still at risk of losing its triple-A rating.

“No nation, agency or organization has the authority to dictate terms to the United States government,” Representative Dennis J. Kucinich, Democrat of Ohio, said in mid-July after Moody’s placed the United States on review for possible downgrade. “Moody’s and its compatriot S. P. were the direct cause of the near-collapse of the economy of the United States.”

Mr. Kucinich and others place significant blame on the rating agencies and their conflict-ridden business models — they are paid by the issuers they rate — for much of the financial crisis around mortgage-related securities. The agencies put gold-standard ratings on mortgage-related securities that held increasingly risky home loans while raking in fees from Wall Street banks. Investors bought those securities on the belief that the triple-A rating made them as safe as United States Treasuries.

Others, however, say the agencies may simply be forcing governments, including the United States, to take some strong medicine.

“They do see their job as looking down the road” in asking that whatever debt deal is struck that it addresses the huge United States deficit, said Cornelius Hurley, director of the Boston University Center for Finance, Law and Policy.

Mr. Riley, a 45-year-old Briton and father of two, has spent the last decade inside Fitch evaluating governments around the world. He worked as a senior economist at UBS Warburg and, before that was an adviser inside Britain’s Treasury department.

To relieve some of the pressure, Mr. Riley says he tries to play with Fitch’s soccer team at lunchtime on Tuesdays and that he occasionally plays PlayStation games with his 17-year-old son.

He says he and his team at Fitch have developed thick skins to deal with the pressure.

Article source: http://feeds.nytimes.com/click.phdo?i=7c405b9823b3cd6f08a8f1683559db9a

Fitch Warns Against Rollover of Greek Debt

PARIS — Fitch Ratings said Tuesday that it would consider even a voluntary rollover of Greece’s sovereign debt as a default that would lead it to cut the country’s credit rating, while the U.S. Treasury Secretary criticized Europe for failing to speak with one voice on the Greek debt crisis.

European leaders have been desperately trying to prevent a Greek debt default, which would have an impact on global markets and could fatally undermine the monetary union. Some analysts have said it could have an impact on credit and debt markets comparable to the one that followed the collapse of Lehman Brothers in 2008.

The warning by Fitch kept pressure on the new Greek government, which faced a vote of confidence in Athens late Tuesday, as well as on European policy makers as they work on a second bailout for the country.

If the Greek government survives the vote, as expected, Parliament will be asked to endorse further spending cuts, which are a condition of receiving another disbursement of €12 billion, or $17 billion, from last year’s €110 billion bailout from the European Union and the International Monetary Fund.

“The assumption must be that if these two critical votes are passed, the short-term pressure on Greece will ease,” said Adam Cole, head of foreign exchange strategy at RBC Capital Markets in London.

Speaking in Washington on Tuesday, the U.S. Treasury secretary, Timothy F. Geithner, called on Europe to agree on a strategy on Greece and communicate their plans to the markets.

“It would be very helpful to have Europe speak with a clearer, more unified voice on the strategy,” Mr. Geithner said, according to Bloomberg News. “I think it’s very hard for people to invest in Europe, within Europe and outside Europe, to understand what the strategy is when you have so many people talking.”

Mr. Geithner said he told Group of 7 leaders last weekend that the European Union has “a very substantial financial arsenal” at its disposal and needed to ensure that it was “available to be deployed to do the kind of things they need to do to make this process work.”

“That means make it available so banks can be recapitalized where they need capital, to make sure there is a funding available to the banking system,” he said, according to Bloomberg. He added that there was “no reason why Europe cannot manage these problems.”

Euro zone finance ministers have said that a second Greek bailout would include a contribution by private holders of government bonds. Ministers have asked that the contribution be voluntary but “substantial,” but its exact nature remains uncertain.

That uncertainty has raised concerns at Fitch and other ratings agencies. Andrew Colquhoun, head of Asia-Pacific sovereign ratings for Fitch, told a conference in Singapore early Tuesday that Fitch would regard a debt exchange or voluntary debt rollover “as a default event and would lead to the assignment of a default rating to Greece.”

Cristina Torrella, senior director in Fitch’s financial institutions group, said in a statement that a restructuring or rollover of Greek government debt “would not automatically trigger a default by the major Greek banks.”

“The precise rating actions on the banks will depend on the full terms of the sovereign event and the extent to which this considers maintaining solvency and, vitally, liquidity in the Greek banking system,” Ms. Torrella said.

The most crucial immediate consideration for bank ratings, Fitch said, would be whether a mechanism remained for the European Central Bank to continue providing liquidity to Greek banks.

A month ago, Fitch downgraded Greece’s credit rating three notches to B-plus and warned it could cut it again, sending it deeper into junk territory. At the time, Fitch said that extending the maturity of existing bonds would be considered a default.

Standard Poor’s cut Greece’s rating to CCC from B last week, and warned that any attempt to restructure the country’s debt would be considered a default. On Tuesday, in an interview with a senior executive published by the German newspaper Die Welt, S.P. reaffirmed that a voluntary debt restructuring for Greece, as currently foreseen by euro zone governments, would probably be deemed a default.

The other big ratings agency, Moody’s Investors Service, has a Caa1 rating on Greece’s sovereign debt.

The International Swaps and Derivatives Association, an industry body, has said that a debt exchange that extended maturities would not be considered a formal default because it would not trigger payment on contracts to insure against default, which are known as credit default swaps.

The euro was quoted at $1.4357 in London before the crucial Greek vote, up from $1.4304 late Monday. European shares were mostly higher.

Article source: http://www.nytimes.com/2011/06/22/business/global/22euro.html?partner=rss&emc=rss

Allied Irish Reports $15 Billion Annual Loss

A former stock market darling with international ambitions, Allied Irish Banks has been effectively nationalized and saved from collapse by a bailout from the European Central Bank after being shut out of debt markets and losing 22 billion euros in deposits last year.

There were further “slight” deposit outflows this year, mainly from overseas corporate funds, but recent stress tests that require the bank to raise 13.3 billion euros in capital and an overhaul of the sector had stopped that outflow. “The news of the bank’s recapitalization has been viewed positively by the market and we hope that that now represents a turning point and we can now rebuild the bank from here,” the executive chairman, David Hodgkinson, told the state broadcaster, RTE.

Much of the 13.3 billion euros is expected to come from state coffers although the bank is expected to generate some capital from buying back 2.6 billion euros in subordinated debt at a discount.

Dublin has pledged to shrink its banking system as part of a bailout by the European Union and the International Monetary Fund and Allied Irish Banks will be one of two so-called “pillar banks” left.

Allied Irish Banks is hoping that 2010 will mark the nadir in terms of group losses but has said that it is too early to call the peak. The monetary fund slashed its 2011 growth forecast for the Irish economy to 0.5 percent from 0.9 percent on Monday, underlining the challenge ahead.

Dublin has put a price of 70 billion euros on drawing a line under its banking crisis and Allied Irish Banks is second only to Anglo Irish in the burden it is putting on recession-weary taxpayers.

A charge of 6 billion euros, representing 5.25 percent of loans, against potential losses helped drive bank’s loss, a company record, and more than four times higher than the 2.3 billion euros shortfall generated in 2009.

Allied Irish Banks said the scale of losses going forward would be different and that it hoped to return to profit on an operating level in 2012 and possibly on a net basis too.

Analysts said the bank had taken a lot of pain up front.

“They are hoping that 2010 is the peak,” Oliver Gilvarry, head of research at Dolmen Securities, said.

”There is no sense in not coming out and putting as much forward as you can in 2010 numbers when everyone is expecting the numbers to be poor.”

Article source: http://www.nytimes.com/2011/04/12/business/13aib.html?partner=rss&emc=rss