September 14, 2011 - Equities Up
U.S. equities increased this morning, in part based on the view that China may be a resource to offer support to the EU. However, China's harsh comments that "countries must get their houses in order" most likely serves as a warning that an EU/ECB plan must first be developed. The EU and ECB continue to struggle to develop a broad and feasible plan to settle the default and lending risks. For long-term investors, current events continue to cause a reduction in bank stocks, as investors also continue to move cash and money markets to non-EU institutions, a trend that commenced in 2010 and has accelerated over in the second quarter of 2011. Interestingly, for certain investors, the migration of funds could create tax exposures, which then necessitates careful planning.
1. Moody’s Investors Service today cut the long-term debt rating one level on Credit Agricole SA and Societe Generale SA, the country’s second- and third-largest lenders by assets, citing the euro-region sovereign debt crisis and concerns about the banks’ funding and liquidity. BNP Paribas SA, France’s biggest lender, was not downgraded. As we cited the week of September 5, French banks are the largest Greek Creditors.
2. To amplify U.S. concerns and offer constructive support, U.S. Treasury Sec. Geithner will be attending EU/ECB meetings later this week, focused on the ECB/EU restructuring options. Specifically, to be discussed is the European Commission's proposal to issue euro-bonds, as a tool to effectuate a master refinancing of ECB and EU debt. The bonds would possess a long-term maturity and commensurate interest rate; however, based on our understanding of emerging terms, 100% of current EU/ECB debt would not be refinanced, and EU countries (participants) would still need to adopt meaningful budget modifications which would include budget cuts and new tax revenues. Thereafter, to support the EU as an important China consumer, and perhaps also the U.S., may become bond investors and/or on a preferred basis.
3. Regarding 1., EU banks are relying on the ECB for short-term funding. Italy, Greece, Ireland, and Portugal and Spain have borrowed together about 450 billion euros since June 2011.