These ratings will in large part determine the rate of interest countries pay to investors who loan them money via purchase of bonds. The lower the rating, the higher the risk the rating agency has determined the country is, and the higher the interest rate that nation will have to pay to attract investors to buy its bonds.

On the other hand, considering the role that the ratings agencies played in the sub-prime real estate implosion, someone may want to rate the raters…

Some selected countries and their ratings. What is striking is the number of “negative” outlooks…

Wake the President

Most days we can coast along, confident that tomorrow will be much like yesterday. On a very few days we need to look hard at the news headlines, click through to read the whole story, and then completely change a large chunk of how we thought the world worked. Today is such a day.

Everything you knew or thought you believed about the European economy – and the eurozone, which lies at its heart – was just ripped up by financial markets and thrown out of the proverbial window.

While you slept, there was a fundamental repricing of risk in financial markets around Europe – we’ll see shortly about the rest of the world. You may see this called a “panic” and the term conveys the emotions involved, but do not be misled – this is not a flash in a pan; financial markets have taken a long hard view at the fiscal and banking realities in Europe. They have also looked long and hard into the eyes – and, they think, the souls – of politicians and policymakers, including in Washington this weekend.

The conclusion: large parts of Europe are no longer “investment grade” – they are more like “emerging markets”, meaning higher yield, more risky, and in the descriptive if overly evocative term: “junk”.

This is not now about Greece (with 2 year yields reported around 20 percent today) or Portugal (up 7 basis points) or even Spain (2 year yields up 27 basis points; wake up please) or even Italy (up 6 basis points). This is no longer about an IMF package for Greece or even ring fencing other weaker eurozone economies.

This is about the fundamental structure of the eurozone, about the ability and willingness of the international community to restructure government debt in an orderly manner, about the need for currency depreciation within (or across) the eurozone. It is presumably also about shared fiscal authority within the eurozone – i.e., who will support whom and on what basis?

It is also, crucially, about stabilizing the macroeconomic situation without resorting to more unconditional bailouts. Bankers are pounding tables all across Europe, demanding that governments buy out their position – or bring in the IMF to do the same. We again find ourselves approaching the point when the financial sector will scream: rescue us all or face global economic collapse.

The White House did not see this coming – and the Treasury’s attention was elsewhere. The idea that we can leave this to the Europeans to sort out is an idea of yesterday. Today is very different and much more scary.

President Obama is wide awake and working hard. Someone please tell him what is really going on.

Law Provisions

The law makes it a state misdemeanor crime for anyone to be unable to prove lawful residence in the United States upon being asked to provide such proof pursuant to a specific section in Title 8 of the United States Code, and requires police to make a reasonable attempt, when practical to determine immigration status if there is cause to suspect they are illegal immigrants. Only when making lawful contact, anyone who appears to be an illegal alien upon reasonable suspicion and fails to produce such proof is subject to arrest without warrant, and, upon confirmation of the individual’s illegal status by the federal government, a fine of at least $500, and up to six months in jail.

A person is “presumed to not be an alien who is unlawfully present in the United States” if he or she presents any of the following four forms of identification: (a) a valid Arizona driver license; (b) a valid Arizona nonoperating identification license; (c) a valid tribal enrollment card or other tribal identification; or (d) any valid federal, state, or local government-issued identification, if the issuer requires proof of legal presence in the United States as a condition of issuance.

SB1070 also prohibits state, county, or local officials from limiting or restricting “the enforcement of federal immigration laws to less than the full extent permitted by federal law” and provides that Arizona citizens can sue such agencies or officials to compel such full enforcement.

In addition, the law makes it a crime for anyone, regardless of citizenship or immigration-status, to hire or to be hired from a vehicle which “blocks or impedes the normal movement of traffic.” Vehicles used in such manner are subject to mandatory impounding. Moreover, “encourag[ing] or induc[ing]” illegal immigration, giving shelter to illegal immigrants, and transporting or attempting to transport an illegal alien, either knowingly or while “recklessly” disregarding the individuals immigration-status, will be considered a class 1 criminal misdemeanor if less than 10 illegal immigrants are involved, and a class 6 felony if 10 or more are involved. The offender will be subject to a fine of at least $1,000 for each illegal alien so transported or sheltered.

Arizona is the first state with such a law. Prior law in Arizona, and the law in most other states, does not mandate that law enforcement personnel ask about the immigration status of those they encounter, and many police departments discourage such inquiries for fear that immigrants will not report crimes or cooperate in other investigations.

Is it just me or has Arizona Immigration Law SB 1070 not gone far enough? If the Arizona police are only going to be stopping Hispanic people and asking for their papers, won’t everyone else feel left out? Being a yoga teacher, this kind of thing concerns me.

So, what if we included everyone so that nobody feels excluded? I’ve sketched out a simple system that should make everyone feel good.

First, we’ll have the government give all the “legals” green armbands that they must wear at all times. It will be for their safety and would end pesky inquiries for papers from law enforcement. Police officers can get back to focusing on crime like robberies, rape, murder, and citizens can breathe a sigh of relief knowing that their brown-skinned neighbors are paying their taxes.

Native Americans can get another color, since they sometimes, you know, look like Mexicans. Maybe turquoise blue, since that color is often associated with “Indians.”

Maybe we should go a step farther, and give all citizens with IQs under 110 an orange band. They will not be allowed to carry guns…

And all of us non-brown folks who have an IQ over 110 get a gold sparkly band, so we can do pretty much whatever we want.

Then, anyone who is overweight has to go to work repairing roads or sewers (for free) until they lose weight as payback to society for taking more resources than one person should. We can use the tax money that would have gone toward infrastructure maintenance and put it back into securing our borders. Hey, these armbands may be cheaper than fitting everyone with microchips but they’ll still cost something!

Anyone not wearing a band is subject to “treatment” – you know, the kind Rumsfeld seems to like. And every now and then, specific band colors (such as green) get special jobs, like cleaning up toxic waste dumps – stuff like that. We can just round them up and have them live in barracks…it’ll be nice for them. They can work all day and feel really good about it.

I haven’t worked out the system completely yet, but I’ve heard about someone from the last century who really thought this one out . . .

I mean seriously, some people are advocating for a fascist state…so why not give it to them?

Some commentary:

Mish’s Global Economic Trend Analysis

I do not like Munis here. For starters, I think there will be a number of counties in Florida that go bankrupt. Harrisburg, Pennsylvania (the state capitol) is likely to go bankrupt as is Detroit, Michigan.

Yes, everyone is aware of those.

However, when liquidity is flowing everywhere, as it has been since March 2009, nothing seems to matter. Indeed, it is easy to be complacent because nothing matters. The correct way of thinking about this is: nothing matters “now”.

Add in a few cities going bankrupt in California, and in a liquidity crisis I can practically guarantee it will matter. Although there may be some good bets out there, munis seem to be richly priced which means there are better opportunities ahead.

Liquidity is a coward. 2008 in the face of Bernanke’s heroic efforts should be proof enough. Should panic strike again, far better prices lay ahead.

What applies to munis also applies to junk bonds, corporate bonds, and the stock market as well. Whatever you are holding, take some chips off the table.

Bondview.com

Buffet says ” when the tide goes out, you get to see who is swimming naked”.

Harrisburg bonds (41473EFH9) are a mess due to what appears to be wasteful spending. Is this representative of a nationwide muni default? In a word NO. So what happened in Harrisburg?

According to our sources, the Harrisburg incinerator that will likely burn bondholders was a mechanical engineering boondoggle dating back to its inception and went through several refits in an attempt to get it functioning to meet environmental standards. But by then it had acquired so much debt, it could not possibly cover its costs. So now the city and Dauphin County are on the hook for what amounts to about $10k per citizen!

Here is the list of this bond’s trades.

It hasn’t traded Nov 2008. The lack of interest in trading this bear is no surprise since the Harrisburg municipality filed a July 2009 material events notice .

The former Mayor Reed – king of the city for 24 years may have tried to make the city a better place to live but the spending went far out of control. He spent tens of millions building the “national” civil war museum even though Gettysburg is just a 45 minute drive from Harrisburg with it’s own museum run by the national park system. When it was obviously not performing, the Mayor argued it was because the city needed a critical mass of museums before it could be a success. So he planned 5 more including a wild west themed museum! He spent tens of millions on acquiring artifacts, the purchase of which he allegedly personally handled. When finally forced to sell these, the city got less than 20 cents on the dollar. Turns out he’s quite the history buff and many of the artifacts allegedly decorated his office while awaiting the building of the museums. Gee if a small business owner did that an IRS agent would have a field day. But since it was public monies that were spent, no crime but certainly a foul.

This is a case of public spending gone crazy. Where were the auditors? Lumped on top of this self created mess is the local government can’t afford to continue to platinum healthcare & pension benefits to police, fire and teachers. In good times, fat pensions stress cities’ finances and increase our taxes. But In bad times, these debts break the camels back .

Good media sources on this topic include the excellent WSJ article “Muni Threat: Cities Weigh Chapter 9 (2/18/10) Harrisburg Authority, city miss debt payment; Dauphin County pays”

That said, the Harrisburg bond problem doesn’t seem representative of a nationwide muni default. With muni rates still low, the problem is a sick facility pushed over the edge due to unique bad economic times. What is interesting is cities may well choose, or be forced to use Chapter 9 causing sweetheart city employee union contracts to be squeezed followed by layoffs. But bondholders will suffer too. Interest payments may be frozen, effected bonds prices will drop 50%+ and when the dust settles, private equity players will swoop in and buy the distressed assets on the cheap. Bahhh and good luck to all

Also look at this “Risks Interconnection Map,” which shows “an overview of all risks and their interconnections.” It’s a little hard to understand but looks like someone really knew what they were doing when it comes to Adobe Flash.

Risk Interconnection Map

That’s messed up.