Downbeat Italians and Oddly Cheerful Greeks

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Last night Italy's debt was downgraded one more notch by S&P, while the 'negative outlook' was retained. As CNBC reports:

"Standard and Poor's downgraded its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a major surprise [not really, ed.] that threatens to add to concerns of contagion in the debt-stressed euro zone. The single currency skidded over half a cent to $1.3606 after S&P said the cut reflected its view of Italy's weakening economic growth prospects.

Italy's fragile governing coalition and policy differences within parliament will likely limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment, the agency said.

"In our opinion, the measures included in and the implementation time line of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program," said S&P.

The move from S&P came as a surprise as the market had thought Moody's was more likely to downgrade Italy first. Moody's last week said it would take another month to decide on its action [oh, so the surprise wasn't the downgrade, but who did it. OK, ed.]

As a reminder, below is the schedule of Italy's debt rollovers for the next several years. As can be seen, the downgrade couldn't come at a worse time, as the the great bulk of Italy's government debt is maturing over the next two years.

italy bonds come due

Italy's government debt maturity schedule is heavily front-loaded, with enormous amounts coming due over the next few yearsclick for higher resolution.

However, the world's stock markets have chosen this morning to focus on another event. Worries about Italy have been set aside for now in favor of another strong dose of 'Greek hopes' and presumably, 'Bernanke hopes' (the latter are set to be disappointed on Wednesday).

The hopes regarding Greece have been re-kindled by what the WSJ called 'oddly cheery Greek pronouncements' in the wake of yesterday's telephone conference call between the Greek government and representatives of the so-called 'troika' of EU, IMF and ECB.

"All sorts of cheer at the end of the Conference Call to Save the World!

Michael Casey has already written about the oddly buoyant email from the Greek finance ministry about the call ending. I think they were just giddy they didn't have to be talking on the phone into the wee hours of the morning.

But to add to the degree of enthusiasm, somebody in the Greek finance ministry is also saying Greece's next rescue package is all but wrapped up. Reuters reports:

Greece is near an agreement with its international lenders to continue receiving bailout funds, a Greek finance ministry official said on Monday after a conference call between Finance Minister Evangelos Venizelos and inspectors from the EU, IMF and ECB, known as the "troika."

"Some work still needs to be done. We are close to an agreement," the official said on condition of anonymity. "Some measures (for 2011 and 2012) need to be quantified." The official would not elaborate.

Adding to this odd cheerfulness over Greece is the fact that the 'troika' has decided to continue with the conference call today. According to Reuters:

"As it happens regularly, the mission chiefs of the Commission, the IMF and the ECB held a conference call with the Greek Minister of Finance and senior officials of his ministry on Monday 19 September," Commission spokesman Amadeu Altafaj said in a statement.

"Another conference call will take place tomorrow evening. In the meantime, technical discussions are ongoing in Athens," he said."

In addition, the Greek government has denied reports that were circulating yesterday regarding a planned referendum on whether Greece should remain in the euro-area. Given that a possible Greek withdrawal from the euro-zone has been more often and more vehemently officially denied than we can count, it is a good bet that it actually remains very much on the agenda. The government must deny all such rumors of course, as otherwise an even bigger run on Greek banks would immediately ensue (thus far it has been a 'slow motion' bank run), as desperate savers would try to rescue their funds. Reuters reports:

"Kathimerini daily wrote on Tuesday, citing unnamed sources, that Prime Minister George Papandreou was considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the euro zone or by exiting the single currency.

The government has long said it was planning a referendum on political reforms but has repeatedly denied that it would concern the country's euro membership.

Asked if the referendum would be about staying in the euro zone, deputy government spokesman Angelos Tolkas said: "No. We haven't discussed such an issue, definitely not." He said the government had put to parliament on Monday a bill aimed at allowing the country to hold referenda but without specifying any issue.

"Yesterday we tabled a bill about referenda … but we have not discussed anything more than holding a referendum."

When a government spokesman utters the phrase 'definitely not' the correct translation usually is 'definitely yes'.

greek bonds come due

The maturity schedule of Greece's government debt. The biggest bulk of government debt rollovers looms in 2017click for higher resolution.

dax german composite 20 sep 2011

Germany's DAX index as a proxy for European stock markets – it is bouncing again in spite of the downgrade of Italy's debt by S&P. It is a good bet that the markets weren't really surprised by this downgrade – instead the focus has shifted back to the likelihood that the Greek debt can may be kicked down the road one more time, while the FOMC presumably stands ready to announce fresh inflationary measures on Wednesdayclick for higher resolution.

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