Monday, 5 September 2011

Kraemer’s Mad Money

Some feel that hopes for the survival of the euro hinge upon a new framework that would allow members to collectively issue euro bonds - guaranteed by the zones members. A blow to this concept however may have come from the rating agency Standard & Poor's (S&P). We have to be wary of S&P’s communication in recent weeks, after their mathematical shortcomings nearly prevented them from downgrading America’s credit rating (once their error was revealed they went ahead and did it anyway).

'If we have a euro-bond, which is 27% guaranteed by Germany, 20% guaranteed by France and 2% guaranteed by Greece, than the rating would be 'CC', which reflects the credit rating of Greece.'

The quote emanates from the German language press (but has been translated on the NASDAQ website) and is attributed to Moritz Kraemer, S&P’s Managing Director and Head of the Sovereign Ratings Group. Herr Kraemer should not be confused with Jim Cramer of CNBC’s Mad Money although there is a definitely a hint of madness at the statement.

The example he gives suggests guarantee percentages which seem eerily (exactly) the same as those guaranteed by the triple A rated organisation the European Financial Stability Facility.  Of the EFSF’s existing €440bn of firepower the guarantees include 27.1% Germany, 20.4% France and 2.8% Greece. The EFSF pays 2% per annum to borrow for five years, the Greeks pay around 20%.

Maybe the fixed size of the EFSF is the difference but, presumably too, any Eurozone member would require the consent of their co-members to issue more euro bonds (such is the price of increased fiscal coordination that makes it so controversial) so it still seems a crazily inconsistent position from S&P.

GUY FOSTER, HEAD OF PORTFOLIO STRATEGY

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