Sovereign Update

Some news in the sovereign markets today:


Start with Japan:

Standard & Poor's cut Japan's credit rating on Thursday for the first time since 2002, saying Tokyo lacked a plan to deal with its mounting debt, in a warning that will rattle other heavily indebted rich nations.

The agency reduced Japan's long-term sovereign debt rating by one notch to AA minus, three levels below the highest possible rating. It said Japan's fast-aging population, persistent deflation and the loss of the coalition's upper house majority had compounded the government's fiscal challenge.

"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said in a statement.

Japan is now rated lower than Spain with this downgrade.  The country has significant issues to deal with and nothing they have tried thus far has made significant headway.  One thing I will say is that their issues are on the table and really aren't that much more hot than they were a year ago.  The yen fell to a 15-day low of 83.23 against the US dollar at 3:10 am ET Thursday. This was down more than 1% from yesterday's closing value of 82.18.  The yen is also off approximately 1% vs the Euro.

Now lets move to Greece:

Greek Prime Minister George Papandreou ruled out defaulting on or restructuring his country's huge public debt but said he expected EU/IMF rescue loans to be stretched out and the interest rate reduced.

Papandreou told global business leaders at the World Economic Forum on Thursday that Athens hoped to return to capital markets even this year after implementing draconian austerity measures to slash its budget deficit.

"Of course the question of restructuring has been around. I can say that we're not going to default. I also say we're not moving to restructuring," he said.

"Yes, there will be a lengthening of the debt we have to the IMF and the EU, and there has been discussion about the terms of the loans. I think these are in the pipeline," he said, adding that easier terms would help Greece avoid a funding "bump" in 2014.

In other words, nothing is getting better in the Hellenic Republic.  Austerity measures look great on paper, but have yet to start filling the gap and will never be accepted by the populace which is used to something for nothing.  I am still cautious on the name while being long National Bank of Greece equity (a value play to say the least).  The Euro is stronger vs the dollar at 1.375, up 28bps on the day.

ECB:

European Central Bank policymaker Lorenzo Bini Smaghi warned on Thursday that an expected rise in imported goods inflation cannot be ignored, supporting the view that euro zone rates could rise sooner than previously thought.

Soon it will only be the US keeping rates artificially low.  How to win the debase race.