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Peter Zeihan, Stratfor VP of Analysis and European analyst, weighs in on S&P cutting the credit rating of the EFSF, and how this will impact mark...
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I first -- isn't surprised by the Stratford VP -- announces and a year analysts as well Peter no big surprise at -- ES -- fat -- assays getting downgraded here but you know.
I'm just reading a note friend -- ray Hennessey the director of business news here saying that actually ended the downgrade is a lot more impact full to all of -- -- because.
Overall it will impact borrowing costs in its ongoing tragedy.
Over time it's certainly will be you're gonna have to at least one of the other two major credit ratings agencies do another grounded of downgrades once you have to -- -- -- -- -- agreed that a lower greed is required.
That's when institutional investors start to change their -- lending and their investment portfolios now that'll probably happen within the first half of this year -- just not there quite yet.
Let's talk about the ripple effect that we conceive possibly with a big -- everybody's sort of waiting for the next shoe to drop but also with -- downgrade of the United States credit rating.
There really wasn't another shoe to drop so what can we expect to see happen in Europe.
-- you will see more impacting Europe and in the United States had to keep in mind that the United States still holds the global currency in T bills are the -- fault investment globally so when you had a credit scared because the US was downgraded.
Everybody ironically flooded into the United States congress was seen as the safe -- Europe doesn't have that advantage so when this next round of downgrades happen you will be having credit problems.
The strange thing is though despite all the problems of the Europeans find themselves in right now.
It really doesn't matter because back in December of the European Central Bank came onto the scene with two new facilities one of which basically guaranteed up to twenty billion euros of sovereign debt -- week.
And the other one which granted any banks who wanted it unlimited low interest long term liquidity -- Between those two programs European states -- default banks can't go wonder -- -- problems down the road.
But all these issues of credit defaults.
Credit rating problems of negotiations in Greece -- problems in Ireland.
They have all now been to a certain degree sequestered by ECB action and that buys the European some time I.
I'm -- you say that's really the issue that's another -- let me say it really doesn't matter giving us good examples also no big jolts to the credit markets in fact that they it seems a bond investors head.
Sort of four seen -- a long time coming valuing having a higher yield on on French debt -- Other AAA credit rated that -- sovereign nations out there so what does this mean about the -- ratings agency process -- if they're making these cuts and we don't really see any impact does the whole concept of credit ratings even matter in this environment.
It's not as important.
It used to be -- the ECB is artificially changing the game changing the rules as they go along in many ways similar to what the Fed did back in 2000 in 2009.
But the primary difference is the Fed eventually stepped back.
And those volumes of credit liquidity that the Fed put into the system were simply -- and especially on the bank liquidity system the Fed was only -- for about six months.
The ECB has been participating in that market now for the better part of three years and they just now went up to -- unlimited low interest levels.
So we're seeing the competitiveness.
Of European banks completely destroyed by this policy but it does keep them afloat.
The problem -- have moving forward is as he's arteries continued its downward.
European banks particularly French banks are gonna find that the only way they can maintain business is by going to the ECB day in day out sooner or later that's going to lead to nationalization.
Along and doing good enough is not good enough in this environments and certainly doing nothing for our confidence for investors as well Peter.
You've been on here a couple of times certainly over the last 34 months calling for the end of the year oh within a year we've got about nine months left in this year period that you're talking batteries sticking -- your predictions by the fall of this year.
Will we CD demise of the -- No -- -- -- -- assessment on that largely because of the ECB actions in December they have now pushed so much credit into the system and finally acted.
That the dead and the banks have all the credit they could possibly need they can't face a liquidity crunch.
And there's sufficient support even for countries like Italy that even at 7% of the ECB is now going in and providing enough demand to keep those yields under control.
So are you -- that the ECB and any good reason.
Are you guys are you saying that they year old stay intact.
For the the coming year in the real problem is going to be in 2013 now because right now we're negotiating a new treaty on fiscal controls.
That's gonna be negotiated this year it and -- ratified this year.
Implementation however that's when he thirteen and that's when countries have to decide whether or not they're gonna allow Brussels and Germany to controller budgets are not.
And then he austerity also kicks in as well -- -- -- -- -- thing that is very much for joining us today.
