Tuesday, December 13, 2011

Downgrade driven by impact of funding constraints, deteriorating macro fundamentals

Paris, December 09, 2011 -- Moody's Investors Service has today downgraded the standalone bank financial strength rating (BFSR) of Credit Agricole SA (CASA) by one notch to C- from C (mapping to Baa2 on the long-term scale from A3 previously) and the long-term debt and deposit ratings by one notch to Aa3. The one-notch downgrade of the long-term debt and deposit ratings follows the downgrade of the BFSR. The long-term ratings now incorporate three notches of systemic support (previously two notches), derived from the rating agency's view that the probability of systemic support for CASA remains very high.

The rating actions conclude the review initiated on 15 June 2011 and extended on 14 September 2011. The lower BFSR reflects our view that CASA's prior credit-positive factors (strong domestic retail banking franchise, good diversification, stable earnings) are now offset by liquidity and funding constraints.

The outlooks on the BFSR and long-term ratings are negative. The Prime-1 short-term rating was affirmed. Dated subordinated debt securities were also downgraded by one notch to A1 and remain on review for downgrade pending our reassessment of systemic support for such debt.

As stated in our recent report "Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns", since the initiation of our review in June 2011, the severity of the crisis facing the euro area has increased. As a large bank in the euro area, the creditworthiness of CASA is necessarily affected by the fragile operating environment for European banks.

Following our review of CASA's ratings, Moody's has concluded that:
(1) Liquidity and funding conditions have deteriorated significantly for CASA and Groupe Credit Agricole (GCA), which have made extensive use of wholesale funding markets. The probability that the group will face further funding pressures has risen in line with the worsening European debt crisis.
(2) GCA's deleveraging plan will likely help somewhat reduce its need for wholesale funding. However, given that many other banks around Europe are engaged in similar programmes, there is a mounting risk that the asset sales, where required, could be detrimental for capital.
(3) GCA retains significant, albeit reduced, exposures to sovereigns and their economies that are themselves experiencing tighter refinancing conditions and declining creditworthiness, notably Greece, which in turn expose the bank to heightened credit and liquidity risks.

These considerations resulted in a lowering of the BFSR by one notch to C-. CASA's Adjusted baseline credit assessment (BCA), which continues to incorporate full cooperative support and thus the strength of GCA as a whole, has been lowered by two notches to A3 from A1.

We also believe that:
- The likelihood that GCA would benefit from government support (if needed) remains very high; this leads to a one-notch downgrade in the senior debt and deposit ratings, despite the two-notch reduction in CASA's Adjusted BCA; and,
- Conditions in the euro-area sovereign debt and banking markets -- as well as macroeconomic conditions overall -- lead us to assign a negative outlook to CASA's standalone and long-term debt and deposit ratings.

Moreover, Moody's will continue to monitor developments in the European bank debt markets and incorporate in GCA's and CASA ratings (i) any further deterioration; or (ii) an increase in the likelihood of such deterioration.


In its press release of 14 September 2011, Moody's concluded that although GCA had considerable resources to absorb potential losses it was likely to incur on its Greek government bonds (Greece is rated Ca, outlook developing) and its Greek subsidiary Emporiki Bank of Greece (B3/NP/E outlook negative), the exposures themselves were too large to be consistent with the existing ratings. As a result, CASA's BFSR was downgraded to C from C+ and its adjusted BCA, which takes into account cooperative support and thus the overall strength of GCA, was lowered to A1 from Aa3.

Since then, GCA has realised significant impairments on its Greek bond holdings, commensurate with Moody's own expectations earlier this year, and has now written-down 60% of its gross exposures, of which a material part are held by its insurance subsidiaries. GCA was able to do this while remaining profitable in the third quarter. In addition, Moody's continues to recognise important credit strengths, notably CGA's leading position in the domestic retail banking market, good diversification, stable earnings, sound capital, solid efficiency and strong overall loan book quality.

However, Moody's also noted the challenges to GCA's funding and liquidity profiles in light of worsening refinancing conditions, as well as the potential for these conditions to constrain GCA's franchise. This resulted in the extension of the review on CASA's ratings announced in September 2011.

-- Difficult refinancing conditions have reduced GCA's liquidity
Since June, GCA, in common with many other banking groups, has encountered materially more difficult refinancing conditions, due principally to investor concerns surrounding the European sovereign crisis and the consequent reduction in their appetite to invest in banks such as GCA, given its direct and indirect exposure to distressed sovereigns and countries. CASA has been able to issue some long-term debt (EUR6.6 billion between June and October), and has exceeded its refinancing plans for 2011. However, funding has proven to be more scarce, more expensive and shorter term than anticipated earlier in the year. This is particularly true of US dollar funding, since money market funds have significantly reduced their exposure to many European banking groups including GCA.

This has resulted in a reduction in the availability of funding to GCA, which has in turn contributed to a reduction in its pool of highly liquid reserves to EUR103 billion (post haircut) at end-September from EUR123 billion at end-July, although we understand it has since increased. We expect that central bank actions will ensure the availability of liquidity to the banking sector, and indeed we note that French banks' borrowing from the Bank of France materially increased in September. This is one indicator of the tension in funding markets, which is credit negative for GCA. Structurally, Moody's believes that liquid assets cover only a portion of short-term wholesale borrowing, even net of interbank assets, which renders GCA vulnerable to a continued lack of investor appetite for bank debt. Given the high and sustained disruption to funding markets, it is unlikely that term debt markets will return to any degree of normality in the near future; overall, Moody's believes that the risks are skewed to the downside.

-- Resulting deleveraging is challenging and poses risks
GCA has announced a deleveraging plan in response to these challenges, which it expects will reduce its wholesale funding requirement by EUR50 billion through asset reductions by the end of 2012. However, given that many banks in France and elsewhere are now engaged in deleveraging efforts, Moody's believes that there is a risk that, where asset sales are required, a lack of market appetite could lead to a shortfall against the targeted reduction, or it may be possible only at depressed prices. This could mean that the deleveraging plan might either fall short of its objectives and/or turn net-negative for capitalisation -- rather than positive -- should losses exceed expectations.

-- Some sovereign and related country exposures have become riskier
GCA has taken large impairment charges on its Greek government bonds, totalling EUR1.1 billion in the second and third quarters, leaving EUR0.2 billion of net exposure on its own bank balance sheet and EUR2.7 billion in its insurance subsidiaries. In the context of GCA's loss-absorption capacity, these exposures, together with those to Ireland and Portugal -- EUR0.2 billion and EUR0.7 billion for GCA and EUR1.5 billion and EUR2.2 billion for the insurance subsidiaries -- remain significant but manageable.

However, during the review Moody's concluded that the probability of multiple defaults (in addition to Greece's private-sector involvement programme) by euro-area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the higher the likelihood of sovereign or bank defaults, and ultimately the potential exit of one or more countries from the euro area. In particular, GCA retains a Greek banking subsidiary, Emporiki Bank of Greece, which had a gross loan book of around EUR24 billion and an NPL ratio of 31% at end-September 2011, with a cost of risk for 2011 year-to-date of about 520 basis points of loans, indicating the severity of credit issues in its lending. In addition, GCA provides significant cross-border funding to Emporiki (EUR7.8 billion at 30 September 2011), which would likely be subject to impairment in a scenario of a Greek exit from the euro area. Moreover, GCA retains a large exposure to Italy, which Moody's downgraded on 4 October to A2 from Aa2. Banking and trading-book holdings fell to EUR6.7 billion in the third quarter, but given the size of this exposure, GCA's creditworthiness is sensitive to a further deterioration in Italy's sovereign credit strength.


Moody's regards France as a high support country and GCA plays a major role as intermediary in the French economy and is integral to the banking system. Moody's assess the probability of systemic support for CASA in the event of distress as being very high. As such, the bank receives a two-notch uplift from its Adjusted BCA, which brings the global local-currency deposit rating to Aa3. The outlook is negative, in line with the outlook on the BFSR.


Given the negative outlook on the BFSR and long-term ratings, the probability of an upgrade in either is unlikely. The main factors that could lead to a downgrade of the long-term ratings include:
-- Any broader reappraisal of the implications of the highly fragile funding environment for banks that rely on wholesale funding and are vulnerable to a loss of investor confidence;
-- A deterioration in sovereign creditworthiness, especially of Greece and/or Italy;
-- An increase in our expectation of losses resulting from deleveraging;
-- An inability to meet capital targets;
-- Unexpected losses within the bank's capital markets activity;
-- A further material increase in the probability of a recession leading to higher credit losses; and
-- A deterioration in the creditworthiness of the support provider, France, or its ability and/or willingness to provide support to the benefit of creditors.


The ratings on the dated subordinated obligations of CASA are currently positioned one notch below the senior unsecured ratings. However, they are included within the reassessment of subordinated debt announced on 29 November 2011. This may lead us to withdraw entirely the systemic support of three notches from these securities and notch them from the bank's adjusted BCA, currently A3. For more details, please see our note "Moody's reviews European banks' subordinated, junior and Tier 3 debt for Downgrade", dated 29 November 2011.

The ratings on the bank's hybrid obligation are notched off the Adjusted BCA of A3. Junior subordinated obligations currently rated at one notch below the Adjusted BCA remain on review for downgrade in conjunction with the above review. The ratings on other hybrid obligations are not on review and their notching from the Adjusted BCA is expected to remain as before.


The Aa3 long-term debt and deposit ratings were confirmed at Aa3 with negative outlook, in line with those of CASA. Moody's now assumes full cooperative support to CACIB from GCA, further to the publication of the decree by the French government confirming the modification of banking law, allowing completion of the affiliation process initiated by CASA in September. Moody's notes that CACIB will become formally affiliated to CASA after approval by the CASA Board of Directors, which we expect to take place in mid-December. At this point, CASA will, under French law, assume a legal responsibility for the solvency and liquidity of CACIB. In the unlikely event that affiliation does not take place as expected, CACIB's ratings may be lowered.


Moody's has also downgraded LCL's long-term debt and deposit ratings by one notch to Aa3 from Aa2 and affirmed its Prime-1 short-term rating. The subordinated debt ratings were also downgraded by one notch to A1 from Aa3 and remain on review for possible downgrade. The outlook on the debt and deposit ratings is now negative, in reflection of the negative outlook assigned to the debt and deposit ratings of parent CASA. LCL's BFSR of C+, mapping to a BCA of A2, is unaffected by the current rating actions and its outlook remains stable. LCL's adjusted BCA, including parental support, is changed to A2 from A1, reflecting CASA's lower adjusted BCA of A3. As a result, its junior subordinated MTN program has been downgraded by one notch to (P)A3 from (P)A2 and remains on review for possible downgrade.


The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published 17 November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.




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Watching The Wheels Come Off The Green Machine

A picture shows the new Nissan Leaf electric v...
Image by AFP/Getty Images via @daylife
The body count continues to rise as the Green Jobs Revolution sputters its way to the end of a disastrous 2011.  Few seemed to notice last week when the electric vehicle maker A123 Systems—poster child for successful clean tech investing—“temporarily” laid off 125 workers at its flagship manufacturing plants in Michigan on the eve of the Thanksgiving media break. It also reduced its earnings guidance for 2011 by $45 million, because its anchor customer, Fisker Automotive, “unexpectedly” delayed the production ramp-up for its Karma luxury electric car—again.
Could these be the same plants that Democratic congressional leaders hailed as the birth of a new era in American manufacturing? The same plants that received a $249 million U.S. Department of Energy grant from the same stimulus money bucket that funded Solyndra? The same plants for which Michigan shelled out $125 million in incentives to lure away from Massachusetts?
Environmentally correct planners put all this public money to work to relieve the technology bottleneck they believed held back our transition to electric cars. So they invested my money and yours into building the largest lithium ion automotive battery plant in North America—to supply a Finnish electric car manufacturer backed by Al Gore’s venture capital fund and which received $529 million in federal loan guarantees. That Finnish manufacturer was supposed to begin production in 2009, but to date has only shipped 40 cars into the U.S. Those cars were delivered to a handful of millionaires and billionaires like Leonardo DeCaprio and Ray Lane who received tax credits because they bought an electric car.
You can’t make this stuff up. Unless you are a central planner; then you can make up anything you want and get away with it as long as taxpayers keep writing checks, politicians keep spinning tales, and pundits keep giving them intellectual cover.
The coming glut of automotive lithium ion batteries will make for quite a fire sale. Forecasts made as recently as three months ago predicted that electric cars would become the leading application for lithium ion batteries by 2015, surpassing laptop PCs and other handheld devices. Who are they kidding? How many portable electronic devices do you own? How many electric cars have you ever even seen? By any rational standard the introduction of the Chevy Volt and Nissan Leaf, with fewer than 2,000 units sold between them last month, can only be described as disasters.
Investors who piled into the car battery market attracted by the flow of federal largesse had better put on their crash helmets. It’s going to get ugly when the reverse multiplier effect leverages hundreds of millions of public money into billions in private losses.
Watch this space for the post mortem when A123 is forced to declare bankruptcy just in time for the 2012 presidential election. Of course, this won’t happen until after the company blows through its next $134 million in scheduled DOE grants. Investigations to follow.
What is it that green planners don’t understand about the complexities of re-engineering an entire ecosystem? Do they think they’ll get an A for effort if they get a few pieces of the supply chain to work just as the rest come crashing down around them? Do they believe they can simply mothball the A123 plant while someone else figures out how to design and build an electric car that customers actually want?
Or maybe they believe all these problems can be fixed by forcing consumers to buy electric cars. After all, if we can be forced to buy health insurance, why not electric cars?
As silly as that sounds, this seems to be EPA Administrator Lisa Jackson’s plan. She recently overruled Congress by issuing regulations calling for America’s fleet of passenger vehicles to meet an average fuel economy of 54.5 miles per gallon by 2025.


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Unreported Bedlam in Treasuries Signals Massive Panic

Massive tidal waves of panic capital flight have been overwhelming the Treasury market in never before seen numbers.

Last week was a light auction week with a net of just $3 billion in new supply settling on Thursday. That took the pressure off stock and bond prices. The fact that neither market could mount a sustained rally suggests that markets are weak. Stocks and bonds gyrated wildly but in the end remained in a tight range, in spite of all the bullish ballyhoo in the media. You would have thought that the Europeans saved the world on Friday. I don’t think so, and within the data there’s plenty of reason to continue to be concerned, if not scared to death.

Withholding tax collections remain weak, and the government had to raise $9 billion (11%) more than forecast last week. Next week the overshoot will be around $13 billion. That means that the economy is significantly weaker than government forecasters had foreseen just five weeks ago when these estimates were issued. The clues were available in the data at that time, and I correctly guessed that the auctions would begin to balloon in size.

At the same time, foreign central bank purchases of Treasuries are falling off a cliff again. But the markets aren’t paying attention or have not noticed these negatives because they have not had to. Massive tidal waves of panic capital flight have been overwhelming the Treasury market in never before seen numbers. The indirect bid tendered on the four-week bill last week was a mind-blowing $61.8 billion, or five to 10 times the norm! Even more startling, Primary Dealers (PDs) bid $268 billion on that issue. That’s over one-quarter trillion! One-third of the PDs are foreign banks. Seven of them are European banks. Is something rotten in Denmark, Brussels, Rome, and Paris? You bet your bippy.

Notably, the panic buying was limited to the four-week bill. The indirect bid was weak on the 13- and 26-week bills. This is short-term cash looking for a safe place to park, not long-term investable funds. It remains to be seen if this panic will slosh over into longer-term Treasuries. With the 10-year at a major inflection point near a yield of 2.10, the big week of auctions ahead could provide a watershed moment. If the 10-year moves above 2.10, the wheels could be coming off, with untold chaos immediately ahead. On the other hand, a drop back toward the lows might buy a little more time, but not much else.

If yields do move above 2.10, the other thing to watch is whether stocks rally with that move or begin to decouple from the lockstep risk-on/risk-off perception, where falling yields signal risk-off and falling stock prices, and vice versa.

Editor's Note: This article was originally published on Wall Street Examiner.

ETF And Central Bank Gold Lent To Banks Being Relent Into Market?

From GoldCore
ETF And Central Bank Gold Lent To Banks Being Relent Into Market?

Gold is trading at USD 1,680.90, EUR 1,267.70, GBP 1,075.30, CHF 1,564.40, JPY 130,750 and AUD 1,659.0 per ounce.
Gold’s London AM fix this morning was USD 1,680.00, GBP 1,077.06, and EUR 1,266.49 per ounce.
Friday's AM fix was USD 1,712.00, GBP 1,094.49, and EUR 1,281.34 per ounce.

Gold in USD – 2 Yrs (100, 144, 200 DMA)
Gold was steady in trade in Asia until 0322 GMT when sharp selling saw gold fall 1.3% from $1,708/oz to $1,684.75/oz in minutes. The fall may have been technical in nature after last week’s 2% fall in US dollar terms. The selling had the hallmarks of a large sell order or liquidation and Reuters reports that “the approaching year-end and funding difficulties caused by financial market turmoil have reduced liquidity in the gold market.”
Market reaction to the failed EU Summit was that gold, the euro, European equities and ‘PIGS’ debt all came under selling pressure this morning.
Gold is again testing support at the 144 day moving average at $1,674/oz. Below that is the major support of $1,617.25/oz (see chart above).

Gold Spot $/oz (30 days)
With concerns about liquidity and solvency in the European banking system, there is lending and possibly even selling of gold by banks to raise much needed cash. This may be creating short term weakness in gold bit is bullish for gold in the long term.
The FT reported last week that “gold dealers” said that banks – “primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars.”
The key question is who is lending and is their lending simply liquidity driven - to raise dollars or euros?
John Dizard, who frequently comments on gold in the Financial Times wrote on Saturday that,
“Gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks.
There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks, or by gold exchange traded funds.”

Cross Currency Table 
If this is the case it will raise further concerns about the possibility of double accounting of gold and concerns that much of the gold investments in the market are in fact ‘paper gold’ and not backed by physical as is believed by investors.
It will add to deepening concerns about the emerging scandal of rehypothecation where some banks, brokerages and dealers have been reusing the collateral pledged by its clients as collateral for their own borrowing.
Owners of gold exchange traded funds (ETFs) would be surprised and worried to discover that certain banks might be lending out gold that they have bought and believe that they own.
The leading gold ETF, GLD has been criticized by many analysts for its extremely complex structure and prospectus. Critics have also pointed out the possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold and overall lack of transparency.
If as has been suggested, European banks are lending gold into the market that has come from exchange traded funds then this would validate the many concerns raised about the gold ETF market. Questions would again be asked as to whether many of the ETFs are fully backed by the gold that they claim to own in trust on behalf of clients.
Already some hedge funds managers and investors have liquidated their ETF positions in favour of allocated physical bullion and we would expect that trend to accelerate as prudent investors rightly seek to avoid counter party and systemic risk.
? The flow of gold from Hong Kong to mainland China rose 51 pct in October to a record 85.7T, bringing the total amount of gold shipped for the year to October to 286.6T. (Reuters)
? Economist Dennis Gartman said he’s “being taken out of the remainder” of his gold position and investors should not own the metal priced in euros. Gartman had previously owned bullion priced in euros “Those not already out of the gold side of this trade should be out immediately,” he said today in his daily Gartman Letter. (Bloomberg)
? Gold could hit $2,500 if Euro fails in what would be a ‘horror story’ said Citigroup in a note. The Euro failing is a “low probability” event. Citigroup emphasizes it’s not forecasting $2,500/oz, though it says this could occur were the Euro to collapse. (Bloomberg)
? Gold’s premium to platinum may widen in months ahead, UBS Says. Gold’s premium to platinum “has room for further widening over the next few months,” Edel Tully, an analyst at UBS AG, wrote today in a report. The premium was at 12.4 percent today, Bloomberg data show. (Bloomberg)
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Britain 'faces power cuts' due to wind turbine plan

Wind turbines are an expensive 'lunacy', says National Trust

Britain could face power cuts within four years because of Government plans to rely on wind turbines, a leading think-tank will warn today. 

A report by the Adam Smith Institute and the Scientific Alliance claims that wind farms cannot meet the UK’s need for energy, leading to “a crisis by the middle of this decade".
It estimates that five turbines would have to be put up every day to generate the Government’s targeted amount of electricity from wind, which is championed by Energy Secretary Chris Huhne.
Martin Livermore, a director of the Scientific Alliance, said not enough wind turbines can be built quickly enough to replace Britain’s current coal and nuclear stations, which will mostly have closed by the end of the decade “It’s a real lack of energy security," he said. "The rather frightening comparison is with South Africa is where they didn’t build nearly enough power stations and they’ve had rolling black-outs for a number of years. Clearly if we made a real effort to encourage energy efficiency the situation might not be too bad it doesn’t look too rosy at the moment.”
The report challenges the Government's claims that generating energy from wind power will be cheaper in the long run.
Its authors say the market is “rigged” to make burning fossil fuels more expensive, because emitting carbon dioxide is taxed.

However, a Department of Energy and Climate Change spokesman said the report “completely misses the point".
"Our policies are aimed at developing a mix of energy sources here in the UK rather than relying so much on expensive fossil fuel imports, so we can keep the lights on and cut emissions as old power stations close," he said. "It would be madness to put all our eggs in one basket, ignore the UK’s huge renewables potential and just give away Britain’s share of the green energy revolution."
Renewables companies also said the report did not look at all the evidence.
Dr Gordon Edge, director of policy at RenewableUK said it was “simply another example of the same little clique of people repeating the same tired old arguments against renewable energy, regardless of the facts.”
“ Astonishingly, they seem to be suggesting that we should generate electricity by importing vast quantities of expensive fossil fuels from abroad, rather than utilising a free low carbon source - wind - which is abundant throughout the UK, onshore and offshore,” he said.
“We will continue to forge ahead with the successful deployment of wind energy".
The report comes as the head of the National Trust claimed plans to install wind turbines along the cost of Britain are simply expensive way of “giving rich people lots more money”.
Simon Jenkins, the chairman of the charity, attacked the “lunacy” of the industry, which is meant to provide a third of Britain’s electricity by 2020.
“They are a very, very expensive way of giving rich people lots more money,” Mr Jenkins told the BBC’s Andrew Marr Show. “The west side of the British isles will be covered in these machines if the planning goes ahead and it will be entirely at public expense.”