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Peak Debt/ Peak Credit


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Not sure if this is the best thread for this "developing story" but it'll do.


The goss is that one of the major US credit rating agencies, S&P, is about to downgrade US government debt.




And here is the first analysis of the event, and it comes from a fairly respected right-of-centre commentator.




And the article by Ken Rogoff referred to by the blogger is a good one imo (I will have to force myself to read Mr Rogoff's book).




The thing is, the US is not about to collapse. But it is nevertheless stunning that the word of the government that runs the printing presses for the world's reserve currency is now being doubted.

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Now confirmed: S&P have "have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating."


Here is the full text of S&P's announcement.




From what I have been able to read, the initial reaction will be amongst holders of US long-term debt who are prohibited from holding anything but AAA rated assets, pretty much like a stop loss on bonds. But will that have the effect of causing a stampede for the exits?

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Well, if you don't even look at Italy and Spain, I can see why they might say that.


Don't forget we have had a lot of news about lay-offs in the coming weeks and this will not be reflected in the data last Friday. Next, those workers will not be spending money, they don't have.


Any business can make a profit after a good labour trim but it still has to function. A service provider that cuts a lot of staff will simply have a blip in profit followed by a lower turnover in a few weeks / months.


I have worked with too many fools to see this behavour in action. Cut staff to raise a profit followed by a dumb look as to why their turn over is down in the next months invoices.

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Yeah but from what I can see most of those predictions were made before 10 o'clock Saturday morning our time. The US getting downgraded has sort of pushed us into a parallel universe and what was said and done before then probably does not have relevance anymore.


This blogentry picks up on a comment by another blogger as hitting the nail on the head:


...the US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America's ability to pay is neither here nor there: the problem is its willingness to pay. And there's a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default.




So yes on the face of it the idea that there is any risk that the US would default on its debt is preposterous so the outrage being expressed by Americans at the rating downgrade is understandable. But that outrage ignores the fact that there is a group of influential players in the US who think it would be a cool experiment to see what happens were the US to default.


I read one lark suggest that the US should get together with Greece and put together derivatives based on both their bond products so that S&P would hand them back their AAA ratings (which is what S&P did with derivative products based on junk subprime loans).


I see that the Europeans are holding emergency meetings over the weekend to decide whether the European Central Bank should start buying Italian and Spanish bonds whose yields are already at historic highs for the euro era relative to German bond yields. I guess there is a risk that bond holders will decide that US bonds remain a safe bet but decide to channel their angst towards other bonds which are under stress, like Italian and Spanish bonds.



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I have worked with too many fools to see this behavour in action. Cut staff to raise a profit followed by a dumb look as to why their turn over is down in the next months invoices.


Our good old mate from yesteryear , Al " Chainsaw " Dunlap springs to mind ............. mindless sackings and the company in freefall for several years afterwards !!! What a disaster he was !!!





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  • 8 years later...

Guess what, folks ... it's back.

from the Federal Reserveâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s Monetary Policy Report published in February 2020.


âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“... business debt levels continue to be elevated compared with either business assets or gross domestic product, with the riskiest firms accounting for most of the increase in debt in recent years.


In addition, about half of investment-grade debt outstanding is currently rated in the lowest category of the investment-grade range (triple-B), a share that is near an all-time high.


The concentration of investment-grade debt at the lower end of the investment-grade spectrum creates the risk that adverse developments, such as a deterioration in economic activity, could lead to a sizable volume of bond downgrades to speculative-grade ratings.


Such conditions could trigger investors to sell the downgraded bonds rapidly, increasing market illiquidity and causing outsized downward price pressures.


The Markit iTraxx Crossover Index above comprises 75 equally weighted credit default swaps on the most liquid junk-rated European companies.


A credit default swap pays out if the underlying company defaults, therefore think of it as an insurance policy.


As the creditworthiness of a company declines the cost of insurance rises.


We have seen an absolutely stunning surge from 202 basis points on 10 January to an intra-day high of 389 basis points overnight. (Friday)


The equivalent measure/index in the U.S high yield corporate bond market saw a similar surge.

Any sign of severe stress, or dislocation, in the corporate credit markets and you will see a swift response from the Fed, and we did, they implemented an emergency cut of 50 basis points. They will cut again by 50 basis points on the 18th March, if not before.


The Fed is in full panic mode.


They need, in market parlance, to get ahead of the curve, but that horse has already bolted and out of sight.

....and with the oil price shock (in reverse) I was reading something about the debt piled into USA shale producers. Another soon-to-be disaster. I'll trt to find it again

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This bust will show folly of last US oil reboot


Wall Street must finally, after this latest bust cycle, come to grips with the US energy sectorâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s fundamental inability to carry mountains of loans and bonds.


The Lex Column - 10 March, 2020

The largest industry sub-sector among US junk-rated companies is energy. Over the weekend, Saudi Arabia pledged to ramp up oil output to punish Russia for not agreeing to supply cuts.


The US WTI benchmark dropped almost a third to $US30 per barrel on Monday morning, before staging a smaller rebound. It is down by almost a half so far this year. A wave of brutal distress is once again gripping weak credits.


This latest body blow will lead to more sector bankruptcies in the US, where the numbers had already ticked up in 2019. Fresh capital, and debt in particular, kept flocking to cash-guzzling companies, many of them shale oil producers, after the price implosion of 2015 and 2016.


Wall Street must finally, after this latest bust cycle, come to grips with the US energy sectorâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s fundamental inability to carry mountains of loans and bonds.


There will be no shortage of capital standing ready to recapitalise the energy sector. Preqin estimates that there is more than $US800 billion ($1.2 trillion) of assets in so-called private credit alone. Alternative managers such as Blackstone can quickly make direct loans into companies outside the traditional leveraged finance markets.


The timing of rescue financings is crucial. Moodyâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s estimated that recoveries among energy defaults in 2016 averaged a near 50 cents on the dollar compared with the sparse 21 cents for 2015 defaults.


As commodity prices rose between 2016 and 2018, capital gushed back into the sector, which drove up production and asset prices âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€šÃ‚ but not so much profits. The default surge in 2019 included three so-called âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Chapter 22sâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€šÃ‚ companies going through Chapter 11 reorganisations for the second time.


Plenty of blood has already been spilled in 2020. CreditSights counts six companies, including Chesapeake Energy and Whiting Petroleum, whose debt had fallen more than 20 per cent this year through last week.


The temptation to bolster these companies with fresh borrowings is understandable in a world of zero interest rates.


Equity is a more expensive funding choice for businesses that pass basic viability tests. But, given energyâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s sharp vulnerabilities to geopolitics and other exogenous shocks, it is a wiser one. Five years on from the first reckoning of the shale era, it is time to learn its lessons.

Financial Times

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