It's Not Irrational Exuberance; It's Uncontrolled Craziness
"There's no one in charge of the global financial system ... It's crazy."
Jamie Dimon, head of JPMorgan Chase & Co. (JPM), made this statement during Friday's mediocre earnings conference calls for JPM. And ironically, it was one of the relatively positive highlights of the conference, which featured a 23% drop in earnings and a 17% decrease in revenue (yoy) for JPMorgan & Chase. However, this statement does bring to light an important issue that has dominated recent headlines: those dang Europeans.
On Friday, S&P downgraded France's coveted AAA rating to AA. Then the S&P went on a roll, cutting the credit ratings of Italy, Spain, Portugal, and Cyprus by 2 notches and slashing the ratings of Austria, Malta, Slovakia, and Slovenia by one notch. France, Italy, Spain, Ireland, Austria, Belgium, Portugal, the Netherlands, Finland, Slovenia, Cyprus, and Estonia were further assigned a 1/3 chance of being assigned a lower rating through 2013. Moreover, the European Financial Stability Facility (EFSF) was downgraded to AA+ from its current rating of AAA; seeing as how a majority of the EFSF's capital comes from non-AAA nations, the downgrade is hardly a surprise. France's downgrade also factored in, as it is the second-largest contributor to this bailout fund. It will be interesting to follow developments in the EFSF's efforts to sell six-month bills tomorrow for the first time. This sale will be one of the primary factors moving the markets tomorrow.
Elsewhere in the Eurozone, negotiations in Greece to persuade investors to take a voluntary cut on their Greek bond holdings are nearing collapse. Without a deal with creditors asking them to voluntarily write down 50 percent of the notional value of their bond holdings, Greece is likely to default around March 20, as international lenders won't bail out Greece a second time. These developments have resulted in the Euro falling to a 17-month low today. Alas, the S&P's cuts seem to have pulled the market back down to reality. For a few weeks now the market had been largely buoyed by moderately positive news coming from Europe. Italy and Spain had recently completed successful bond auctions, with Italy raising more than $6 billion. This reemergence of uncertainty in Europe shows that despite the best efforts of the Eurozone, the European sovereign debt crisis still continues down its path of "uncontrolled craziness."