“Headline Risks” Emerge in Europe, China

Commenting on several “headline risks” emerging in recent days, J.P. Morgan’s Michael Jansen wrote the following in a note to clients this morning:

“There is a touch more headline risk about today. The first is that Fitch has been vocal in commenting that it would treat the planned French debt forgiveness/debt rollover plan as a technical default, a view which has similarly been embraced by S&P today. Moodys is the odd one out thus far as it relates to Greek debt defaults, but it has further soured the mood by releasing a report overnight saying that China’s local government debt may be RMB3.5 trillion larger than originally estimated.”

“This is a potential precursor to the agency downgrading the credit worthiness of Chinese banks and may add to unease in the investment community around the underlying robustness of the Chinese economy as Beijing seeks to evolve the growth model from one of investment/trade towards one of consumption. China bear.”

Despite the aforementioned headwinds, however, Jansen contended that “The expectation is that the debt ceiling debate in the US will deliver a compromise solution to avoid the US experiencing a technical default at a time that the European community is searching for an option that allows Greece to default on its debt without the ratings agencies declaring it as such (which would hinder the ECB’s ability to take Greek debt as collateral).”

“We hold the view that most of the event risk can be contained and that Greece will be allowed to roll-over its debt without a declared default,” he continued, “while the debt ceiling in the US will be extended allowing the machinery of government to operate.”