Bank downgrades in Italy

While investors are focused on Greece and J.P. Morgan this week, the Euro crisis is just starting.  Look at the news released this week that investors have not focused on:
Moody's Investor Service cited Italy's recession and increasing bad debt as it downgraded the deposit and long-term-debt ratings of 26 banks in the country.  Meanwhile, the credit rating agency warned that Spanish banks face challenges despite setting aside €30 billion to cover losses related to real estate loans.  A Moody's official said the rating agency will postpone possible downgrades on more than 100 banks worldwide as it assesses fallout from JPMorgan Chase's trading loss and other factors.

The real underlying problem in the E.U. to focus on is Italy and Spain.  The other issue is if the E.U. and U.S. economies are slowing down or entering another recession/depression phase, China’s exports will slow popping the bubble in Asia.  Iron ore price has already fallen “off a cliff” and is one “canary in the coal mine” indicator to exit stocks.

While the Federal Reserve may announce QE 3 and the ECB will likely announce LTRO 3, how long before investors start to question the “lenders of last resort” cannot do anymore without running the risk of devaluing currencies around the world.  With the latest talk in Washington is focused on fiscal restraint or cutting spending, U.S. politicians must be careful just to cut wasteful spending or risk slowing the U.S. economy further.  Looking ahead the ECB, Federal Reserve, the European Union and the U.S. government are backed into a corner on monetary and fiscal policy. The real concern will be higher unemployment and the price level collapsing over the next year.  With the announcement this week by Moody’s, banks will be unwilling to lend and will be selling assets or shrinking balance sheets in the years ahead.  Let’s watch these events for a while to see if announcements may provide some short-term relief.