Barron's
October 8, 2011
In a reversal of the recent flight to safety, yields on U.S. Treasuries rose as stocks mounted a midweek rally and the latest economic data showed growth with some forward momentum, however modest.
But the debt and equity markets continue to fret about the European crisis, which appeared about to claim its latest victim, Dexia Group, a French-Belgian institution that improbably has a significant role in the U.S. municipal-bond market. Late Friday, Moody's put its double-A1 rating of Belgian's sovereign debt under review, citing the difficulty it may face in funding its obligations, given the "challenges" facing Europe's banks and the increased possibility of having to bail out Dexia.
That followed Moody's downgrade of Italy's sovereign debt earlier in the week, a three-notch slash to single-A2, which was followed by reductions in Italy's and Spain's credit ratings by Fitch, to single-A-plus and double-A-minus, respectively. To help provide liquidity to the banks that are the main creditors to the euro zone, the European Central Bank Thursday said it will extend its lending plan and purchase up to €40 billion ($54 billion) of so-called covered bonds—collateralized obligations of issuing banks.
Outside the euro zone, Moody's downgraded 12 U.K. banks Friday, a day after the Bank of England announced that it will expand its quantitative easing by increasing its gilt purchases by £75 billion ($115 billion) to £275 billion. The move was prompted by what BoE chief Mervyn King described as "the most serious financial crisis at least since the 1930s, if not ever."
And to top that, wsj.com reported late Friday, the International Monetary Fund is putting together a new short-term credit facility for governments designed to stave off global financial crises like those that followed the failure of Lehman Brothers three years ago. With King's hyperbolic description motivating policy makers, it's clear the central banks and IMF are making sure that there won't be a Lehman 2.0 should Greece default. They have taken every step to ensure that liquidity is adequate, even though it is the solvency of sovereign debtors (and their creditor banks) that is problematic. French President Nicolas Sarkozy and German Chancellor Angela Merkel were scheduled to meet Sunday to discuss efforts to prevent a Greek default.
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