Randomly Noted

The bailout package for Greece has not stemmed the bleeding in global markets, but for Asia the declines in currencies and stocks may soon lure investors back in.

What we are seeing is Asia and the U.S. catching a cold from Europe, as violence grows in Greece over the planned austerity measures and as ratings agencies sound warnings on the fiscal health of others in the region, including Spain and Portugal.

Just as an example, Hong Kong’s share market has fallen three days in a row, losing 3.7% over that period, while the Taiwan dollar Wednesday fell to its lowest level against the greenback since April 9. Thursday, the Nikkei is down more than 3.0% and South Korea’s Kospi has shed 2.3%, with the Korean won around six-week lows against the U.S. dollar.

The declines in Asia, which have included a widening in credit default swaps in an otherwise encouraging environment for the region’s companies and debt, come as investors react to the latest woes in the euro-zone.

The contagion though for now is peripheral; it’s just the end result of a fading global mood for risk. Strip that away, and what do you find?

Asian banks have minimal exposure to European debt–certainly that from Greece, Spain and Portugal. It seems prudence continues to win the day. Asian banks and their economies came through the recent U.S.-induced financial crisis in relatively good shape precisely because they had steered clear of subordinated debt products and repackaged debt generally.

Asian governments have also–some more so than others–worked to overcome the frailties in their banking and financial systems that were exposed so violently when the Asian financial crisis hit more than a decade ago. That’s left systems in much stronger shape, and central banks much better armed with foreign exchange reserves.

The region’s economies have also been faster and more convincing in their recovery over the past six to 12 months. Many challenges remain, none the least from how and when to exit the large spending measures put in place during the crisis, and how and when to tighten monetary policy (as inflation starts to rise), but if there’s one place that offers any sort of sanctuary right now, it would be Asia.

The region needs Europe and the U.S. to keep buying its products, but intra-regional trade has taken up some of the slack, particularly from China.

Sounder economic fundamentals and a stronger banking system mean Asian markets may soon appear more attractive to investors in currencies and stocks (and also the better Asian credits), even if the Greek wobbles continue. It would take a lot more than what we’re currently seeing to suggest we’re heading anew for some sort of global banking or debt crisis.
That may mean the declines start to slow over the coming week as value appears.

Ask a child who broke a chair or drew on the walls or put cat food in shoes what happened, and they are liable to answer: “Dolly did it”.

Apparently dolly is also now to blame for what’s happening in Greece.

We have murmurings that Greece’s woes–the latest being the downgrade of its sovereign debt to junk by Standard & Poor’s amid worries about its financing risks and growth outlook–aren’t of its own making. It was the euro that did it.

Czech President Vaclav Klaus has been quoted in the German daily Frankfurter Allgemeine Zeitung as saying the real cause of Greece’s crisis lies in the euro and not the country’s economic policy. It is “the euro that causes this tragedy,” he’s cited as saying.

In a way it’s surprising that we haven’t heard more of this sooner. Greece’s problems, and the worries about others in the region, like Portugal and Spain, provide the perfect chance to hammer the euro-zone and the euro in particular.

Finance ministers in the euro-zone haven’t shied away in the past in complaining about the euro’s level. It’s either too strong, or too weak, but never just right. The European Central Bank has been much more relaxed about the euro’s level than individual countries, in part because its primary monetary policy objective is to maintain price stability; certainly it’s not indicated any inclination to intervene in the market to adjust the currency.

Finance ministers also tend to grumble about the difficulties of a unitary monetary policy system. Interest rates that suit one country may not suit another.

But that’s not what caused Greece to get into such a mess. Blaming the euro is like giving Greece a leave pass for all its silly mistakes.

Its problems came about in some measure at least because it fudged its fiscal position to gain entry to the euro-zone. That fudging continued after it joined, and allowed government officials for years to sweep the budgetary problems under the carpet and operate in an increasingly precarious position.

Greece ignored its own difficulties, no doubt hoping that if it closed its eyes it’d all magically disappear.

People can argue that an elevated euro hurt the country’s exports or that interest rates were too high (though the ECB has kept them low for some time), and this sorry episode has highlighted the issues of a union like the euro-zone where there is a one-size-fits-all currency and monetary policy, but the Greek tragedy is largely one of its own making.

There’s a new player in the corporate ratings game who is introducing a business model very different from the one used by more established agencies. Morningstar announced today that its research team that analyzes companies from an equity investment perspective will apply some additional metrics to come up with corporate credit ratings. It released a list of the first 100 companies it has rated. Click here to see the ratings. An interesting twist is how Morningstar will make money on this new service. Firms like Standard & Poor’s, Moody’s and Fitch charge issuers of debt securities to analyze them and come up with ratings. And that model has led to criticism about how impartial the ratings agencies actually are when they are being paid by an issuer for a rating. That criticism really heated up following the subprime mortgage disaster. Mortgage-backed securities were issued a few years ago with AAA ratings, many of which eventually blew up because the subprime mortgages that backed the securities were no good. So, Morningstar will give away its ratings for free but will charge institutional investors for a service that compares comparably rated bonds and their secondary market prices to determine whether they are overvalued or undervalued. Obviously, you get pricing distortions in illiquid markets, which is what many corporate bonds become once they are seasoned. But that said, it is good to see someone taking a stab at a new ratings model.

Sallie Krawcheck writes an interesting op-ed piece in today’s Financial Times that takes a close look at what worked and didn’t as part of the big overhaul in equity research departments a number of years ago. And she applies those lessons to the discussion of how credit ratings agencies business model needs to be changed in order to catch disasters, like the one called the credit crisis, before they happen.

One lesson – the pendulum often swings too far in one direction in reaction to a problem unnecessarily.

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In the run-up to the big announcement later this week about what the Obama administration really has in mind for financial regulatory reform, two big guns took to the op-ed pages to presage the plan.

U.S. Treasury Secretary Timothy Geithner and Director of the National Economic Council Lawrence Summers penned a Washington Post opinion piece published today that laid out the general rationale for reform.

What caught this reader’s eye was some of the specifics about the regulatory changes in store for asset-backed securities. Included in that is a statement about reducing the role of the credit-ratings agencies.

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