Links: Gundlach, Prechter, Nenner, Koo, Whitney, Grantham (Deflation Theme)

The theme of this linkfest is deflation. The chart is of the 30-year Treasury bond yield since 1997. Is the U.S. turning into Japan?

  • Jeff Gundlach of DoubleLine Capital: Treasuries Could Rally Even Higher - Morningstar video at Pragmatic Capitalism

    "if you're going to address the deficit problem even incrementally, low Treasury bond yields make tremendous sense, because addressing the deficit fairly clearly leads to weaker economic growth.

    Already, we have $350 billion of fiscal drag coming our way in 2012 if policies are not changed with the sunsetting of tax cuts from the Bush era and also from the payroll tax reduction that was put in place at year-end 2010. $350 billion of fiscal drag is a lot, particularly when we're living with de minimis GDP growth to begin with, in the first half of 2011. Let's remember, the first half of 2011 GDP growth was a beneficiary of stimulus. (from Morningstar transcript)

  • "Meredith Whitney discussed how the US banking system is turning Japanese as zombie banks dominate the market" - CNBC at Pragmatic Capitalism
  • "Richard Koo (Nomura) discusses the balance sheet recession and how the U.S. is making the same mistakes as Japan (private sector de-leveraging during fiscal consolidation). - Bloomberg at Pragmatic Capitalism
  • Charles Nenner thinks gold is going to $2,500, the U.S. Dollar remains the world's reserve currency, and says own Treasury bonds not stocks during the deflationary depression - Breakout video #1, video #2

    "I don't see any idea why you should be long the market. What I see is why you should be long the bond market because as you know I've been calling for deflation. And not a recession, I think we could go into a depression during the next couple of years" (Charles Nenner in video #2)

China and Rare Earths - Monopoly for Now - Guest Post

Rare Earth Oxides (Wikipedia)
Guest post by John C.K. Daly of

China and Rare Earths - Monopoly for Now

First, the bad news - China's constrained rare earth supplies will be an "irreversible trend" and prices will remain at high levels, according to Zhang Zhong, general manager of Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co.

Zhang should know, as his concern is China's leading rare earths producer - the Baatou mine produces more than 95 percent of China's production, while Chinese mines currently account for 97 percent of global supplies.

The increase in global demand for rare earth metals has sent prices soaring in world markets. According to the China Nonferrous Metals Industry Association, since January rare earth metal product prices jumped 200 percent, with the prices of some of the rarer commodities rising 500-1,900 percent. Since January China's exports grew 830 percent to $1.54 billion.

Now, the good news - despite fears of Western capitalists, Beijing apparently has no immediate plans to curtail supplies.

And finally, the interesting news.

S&P Bounced Off 200 Month Moving Average, Could 50MMA Cross The 200MMA?

The S&P 500 is down 16% in a month and trading exactly where it was last year before Bernanke's Jackson Hole speech on QE2. The S&P crashed through the 50 month moving average (blue line) and bounced off the 200 month moving average (red). I think the 200MMA is a critical long-term support level to hold on the S&P. The S&P pierced the 200MMA in late 2008 during the financial crisis and now it's retesting that level. Other than late 2008 and early 2009, the S&P hasn't been below the 200 month moving average since the 1970s (see chart 3 below). I need more data to know exactly.

The S&P broke above the 50 month moving average during QE2, but failed a month after QE2 ended. So now the 50MMA is resistance along with the new downtrend line using the 2007 and 2011 peaks (chart 2). If you're a technical bull, are you thinking QE3 destroys these resistance levels? It would be interesting if the 50MMA crossed the 200MMA. The ultimate death cross.

Mongolia Energy Riches Attract Neighbors and Outside Interests - Guest Post

Tavan Tolgoi Coal Mine (source: Wikimedia Commons)
Guest post by John C.K. Daly of

Mongolia Energy Riches Attract Neighbors and Outside Interests

Pity poor Mongolia, bereft of fiscal resources, caught between the ambitions of its superpower neighbors, Russia and China.

Ulaan Bator's situation is akin to interwar Poland, dexterously attempting to reconcile its foreign policy between the USSR's hammer and Nazi Germany's hard place. Who will ultimately benefit is anyone's guess, but the country's nascent energy and mineralogical riches have opened the land of Genghis Khan to a fierce bidding war those ultimate outcome is unclear at best.

The nation is essentially empty, its 2.8 million citizens producing an average population density of just over 1 person per sq. km.

That said, the country's mineralogical riches are more than impressive. More importantly for global mining interests, Mongolia was a Soviet satrapy from 1924 until the 1991 implosion of the USSR and those reserves remained offline.

Until now.

Judgment Day Near For EUR/USD, SocGen and French CDSs Widen (AAA Rating a Risk)

EUR/USD Judgment Day
Judgment day is near for EUR/USD. It is currently down 1.25% at 1.41699 and inside an important symmetrical triangle. The pair is in a tug of war between slowing economic growth, the sovereign debt crisis in Europe and the recent downgrade of U.S.'s credit rating. France's AAA credit rating is now a worry, which is why Societe Generale (SOGN.PA) is down 14% at $22.18 and its credit default swap (cost to insure its debt) widened 24% earlier today. Also this is interesting: "French CDS Are Where Italian CDS Were In July" (chart at Business Insider). The French CDS quote is at Bloomberg.

SocGen's stock has been trending down for a while now and I don't see support until the March 2009 low ($17.40). SocGen's CEO was on CNBC earlier today, I embedded the video after the jump. More on French bank CDS action at Reuters:

EUR/USD 2 year (freestockcharts)
"BNP Paribas , Societe Generale and Credit Agricole CIB's credit default swaps widened sharply on Wednesday amid fears that France could soon lose its triple-A credit rating.

By 1510 GMT BNP Paribas' five-year CDS had widened 35 bps to 246 bps, Societe Generale's CDS was 65 bps wider at 334 bps while Credit Agricole CIB's CDS had widened 23.5 bps to 265 bps, according to Markit data." (Reuters)

John Taylor, who runs the $8 billion currency hedge fund FX Concepts, told BloombergTV on August 2 that he believes the Euro is going to 1.25 next!

CMA Adds CDS Data On Key Sovereign Debts To Its Free-of-Charge Daily Marketflash

If interested in following sovereign CDS (credit default swaps), CMA has a free product available.

CMA adds CDS data on key sovereign debts to its free-of-charge daily Marketflash

CMA Marketflash helps subscribers keep up-to-date with changes in sovereign credit risk quality

CMA, the leading source of reliable, independent OTC market data, today announced that for the rest of August it is publishing additional credit default swap (CDS) information on key sovereign debts to CMA Marketflash, its daily email sent free of charge to subscribers. This will help keep subscribers informed of changes in the quality of sovereign credit risk in the midst of increasing uncertainty following the rating downgrade of the United States credit rating and the continued volatility in European sovereign debt risk.

China's 5Y CDS Broke Out To Early 2009 Levels, FXI at 2010 Support Level (Charts/Links)

China 5Y CDS vs. FXI (see below)
China's 5-year credit default swap spread (CDS), or cost to insure its government bonds (or really credit risk that trades since China can always print Yuan), broke out to levels not seen since early 2009 this week (113 basis points on 8/8/2011). The CDS market is smarter than the rest, so I'm wondering what this means. It looks like FXI (iShares China 25 Index) and China 5Y CDS are inversely correlated, so does that mean FXI breaks through 2010 support at $35? Or will China hold on here. FXI is 50% weighted in financials. See charts below.

Why is China's sovereign credit risk rising? I remember last month Moody's released a report that said China's National Audit Office "could be understating banks' exposures to local governments" by $540 billion and said "these loans are most likely poorly documented and may pose the greatest risk of delinquency". According to The Diplomat (via Business Insider), China's Debt/GDP ratio could be much higher than reported (70-80% instead of 20%). Other than that, global economic growth is slowing, China is slowing, asset markets have been crashing globally, U.S's credit rating got downgraded (China owns $1.2 trillion of Treasurys and have a large portion of their $3.2 foreign reserves denominated in U.S. Dollars), the Dollar/Yuan peg hit new lows, PBOC has been raising rates and reserve requirements to try to curb inflation. So maybe all of this is starting to be priced in. Read all of these articles below on China's economy (and see FXI/China CDS charts).

FOMC Statement: Downside Risks To Economic Outlook, Low Fed Funds Rate Through Mid-2013

Federal Reserve (Source: Flickr)
Below is the full text of today's FOMC statement released by the Federal Reserve. FOMC members didn't announce QE3, but said ZIRP (zero percent interest rate policy) is expected through mid-2013.

"The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

They also see a "slower pace of recovery over coming quarters" and believe "downside risks to the economic outlook have increased".

David Rosenberg's Views On The Stock Market, Economy and Fed Meeting

David Rosenberg, chief market strategist and economist at Gluskin Sheff, shared his views on the market, economy and tomorrow's Fed meeting on Bloomberg TV last week (8/5/2011). Watch the clip below.

*John Mauldin posted his full "Breakfast With Dave" report at Pragmatic Capitalism which is a good read.

"As we had suggested in recent weeks, a U.S. downgrade was going to likely be more negative for the equity market than Treasuries, and that is exactly how the week is starting off. The reason is that history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits. It is not just the United States — the problem of excessive debt is global, from China to Brazil to many parts of Europe. And let’s not forget the Canadian consumer." -David Rosenberg [continue reading]

Daily Technical Report By MIG Bank (August 8) - EUR/USD, USDX Featured

Below is a technical report on currencies and precious metals courtesy of MIG Bank, the first forex broker in Switzerland to become a Swiss bank. I presented their analysis on EUR/USD below, read the rest after the jump. Click here to read the full report on their website.

Source: MIG Bank
"EURUSD remains bearish under resistance at 1.4420.
  • Exited at 1.4205 (Breakeven). EUR/USD’s price activity remains bearish, despite a two-day reactionary bounce which failed in resistance at 1.4420. This confirms another bearish pattern, weighed down by additional failed breakouts from the major “Bermuda” triangle pattern. We prefer to open a trade setup once this pattern triggers a meaningful directional breakout.
  • Our long standing bearish view remains in play while the downtrend (from May) holds. A resumption of lower will target 1.3938 (200-DMA), where a large amount of die-hard trend followers will be watching closely for repeat support or a big squeeze lower. Only a close above 1.4580 will lead to a reassessment of this view.
  • Inversely, the US dollar index is resuming its oversold bounce from key support at 73.50-73.00. We expect this level to hold (as the last point of defence), helping launch a rebound back into 80.00 over the multi-week/month horizon."

Obama's Statement On U.S. Credit Rating Downgrade (Full Text/Video)

"THE PRESIDENT: Good afternoon, everybody. On Friday, we learned that the United States received a downgrade by one of the credit rating agencies -- not so much because they doubt our ability to pay our debt if we make good decisions, but because after witnessing a month of wrangling over raising the debt ceiling, they doubted our political system’s ability to act. The markets, on the other hand, continue to believe our credit status is AAA. In fact, Warren Buffett, who knows a thing or two about good investments, said, “If there were a quadruple-A rating, I’d give the United States that.” I, and most of the world’s investors, agree.

That doesn’t mean we don’t have a problem. The fact is, we didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction. That was true last week. That was true last year. That was true the day I took office. And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least. We knew from the outset that a prolonged debate over the debt ceiling -- a debate where the threat of default was used as a bargaining chip -- could do enormous damage to our economy and the world’s. That threat, coming after a string of economic disruptions in Europe, Japan and the Middle East, has now roiled the markets and dampened consumer confidence and slowed the pace of recovery.

So all of this is a legitimate source of concern. But here’s the good news: Our problems are eminently solvable.* And we know what we have to do to solve them. With respect to debt, our problem is not confidence in our credit -- the markets continue to reaffirm our credit as among the world’s safest. Our challenge is the need to tackle our deficits over the long term.

The S&P 500 Makes New Low In Gold, That Is Not Normal (SPX, VIX, VXX, GLD/SPY)

SPX:GOLD (see below)
Whether you think the S&P is undervalued or overvalued based on whatever financial metric you look at, the S&P in gold terms broke through the March 2009 low today, which is not normal. The fact that they aren't falling in tandem either is also strange. As noted in my previous post, the real value of the S&P 500 has been declining since 1999 when priced in gold. The S&P lost 6.66% today and futures are down another 2.25% overnight. Gold (XAU/USD) keeps making new highs. It is currently up 2.75% at 1,745 and broke above 1,700 last night. The VIX closed up 50% today at 48! What is this implying?

I compared the one month performance of VIX, SPX and VXX (VIX ETF) in a chart below. The VIX is up 200% in a month and a few days ago I noted that VIX futures and VXX volume made new highs. This action is interesting because the U.S. credit downgrade was expected and the ECB is buying Italian and Spanish debt (5Y Italy-German Bund spread was down 22% today). People are saying the sell off could be margin calls or a large hedge fund liquidating (BAC/Bank of America lost 20% today).

The market gave back all of its gains since QE2 started in November 2010, when the Fed started buying $600 billion worth of Treasurys to lower credit spreads, mortgage rates and boost asset markets. There is a Fed meeting tomorrow, so I'm wondering if another round of quantitative easing (QE3) is coming to save the markets? In June at a Federal Budget Committee Conference, hedge fund manager John Burbank of Passport Capital said: "I think the biggest thing is QE2 is ending and many investors assume QE3's magically right around the corner. If it's not, asset prices are going to fall. They are going to fall 10, 15, 20% and then the market can start speculating on QE3." That happened... See charts after the jump.

Coal and Ethanol Are Not Alternative Energy Policy - Guest Post

Wind power farm (source: Flickr)
Guest post by Andrew Smolski of

Coal and Ethanol Are Not Alternative Energy Policy

The domestic alternative energy policy in the US seems to rotate on semantics and adding words to other words to make it look like something is going on. However, the truth of the matter is, energy policy is as defunct as ever and on most fronts the US is lagging far behind. Mostly it is a disregard of what the economist Herman Daly has pointed out about the macro-view of the macro-economic system. His idea is that the ecological system is closed and finite, not infinite created by God for our own personal use, which needs to be included into economic models. As pointed out by this author in, The Need For a Real Domestic Alternative Energy Policy, the US will need this Energy policy to spur growth, create jobs, and remain competitive going forward. Yet, with words out there such as "clean coal" and "corn ethanol" as our savings for the future, it seems that the US gets further and further from the ability to save the economy and closer to suicide.

First, let us make the argument for alternative energy, because in the end if it has no argument, then it has no point to have a policy. Can the world be powered by alternative energy? Well, let us think about this in terawatts, terawatts being a million megawatts, and humans on this Earth of ours generate and utilize 15 terawatts per year. Solar energy from the sun per year produces 101,000 terawatts on Earth, the majority of which is not captured and utilized by us for energy, but it hasn't been lost on the plant life the importance of that statistic. Wind is producing roughly 72 terawatts of energy in only the United States, once again above demand. And of course, with advances in conductors and decentralizing through not having large electric plants, energy loss could be cut down from the 6.5-7.5% annually that we have now. Therefore, it is not "do we have the capacity," we very much do, but do we have the political will to make this happen. That is in order to save our country from a possible Japan-style lost decade or complete financial collapse.

S&P Future Down Over 2% Pre-Open, Watch Peter Lee's Targets (1,120-1,150)

courtesy optionsxpress
Equity index futures are down more than 2% pre-open after S&P downgraded the U.S.'s credit rating to AA+ last Friday after the close. The sovereign debt crisis in Europe is also on the minds of traders (ECB news). Gold broke above 1,700 in USD and the E-Mini S&P 500 Future is currently down 2.48% at 1,168 (around 7am est).

Peter Lee, Chief Technical Analyst at UBS, warned everyone on Breakout last week that a break below 1,250 support on the S&P would hit stops and send the S&P down to 1,120-1,150. The E-mini future hit a low of 1,161 five days later. Amazing call. This chart definitely looks like a bounce is ahead, but it could hit those shoulders from 2010 at some point, which happens to be around Peter Lee's targets. In other technical news, judgment day is near for EUR/USD in the symmetrical triangle. I'm waiting to see if the Dollar or Euro breaks down.

Links: US Downgrade, Goldman Targets, Bill Gross, Hussman, Alan Greenspan - 8/8/2011

Frankfurt Exchange (Source: Flickr/orb_cz)
Bank of America: S&P May Downgrade US Again in November (CNBC Fast Money)

Goldman Hikes Its 12 Month Gold Price Target From $1,735 To $1,830 (Zero Hedge)

Goldman Puts The Sell-Off In Perspective (Pragmatic Capitalism)

Goldman Sachs slashes December target for Australian S&P/ASX 100 benchmark index (Australian)

Goldman Sachs upgrades India to market weight (DNA India)

Recession Warning, and the Proper Policy Response (John Hussman)

China official media: U.S. woes threaten global recovery (Reuters)

Yuan Jumps Most Since April on U.S. Downgrade (Reuters)

Bill Gross Tells The Truth: "S&P Finally Got It Right. They Are Enforcing Some Discipline. My Hat Is Off To Them" (Zero Hedge)

Japan rice futures jump in debut amid radiation worries (Reuters)

A.I.G. to Sue Bank of America Over Mortgage Bonds (New York Times)

Alan Greenspan talks about the U.S. Downgrade, Treasury bonds, the U.S. stock market and Italian debt on Meet The Press (video below). When asked how the market will react to the downgrade, Greenspan said:

"It's difficult to say, but the only test we have at the moment is the Israeli market which is open today, and it has tanked. The problem I have with that however is there are real significant protests within Israel at the moment, so I can't tell whether it's one or the other. But considering the momentum at which the market went down over the last week, it is very unlikely, if history is any guide, that this isn't going to take a while to bottom out. So the initial reaction in my judgment is going to be negative."

Jim Rogers: Japan Tried It This Way and Their Stock Market is Down 75%

Source: Bloomberg
On BloombergTV today, Jim Rogers, chairman of Rogers Holdings, shared his views on the U.S. credit rating downgrade and told viewers that money printing, bank bailouts and quantitative easing (QE3) by the Federal Reserve will not work to help the economy. He thinks QE3 will just bring more inflation and social unrest. He also shared his views on gold, silver, EUR/USD, commodities and the fall in equities. Watch the Bloomberg video after the jump.

"The only thing that works is to face reality. Let people who are bankrupt go bankrupt. The Japanese tried it this way, they have not let anybody go bankrupt for 20 years. You remember zombie banks, zombie companies. The Japanese stock market is 75% below where it was 21 years ago. This system doesn't work. The Americans have already had one lost decade, we're going to have two lost decades or three lost decades at the rate things are going"

Since QE2 ended on June 30, 2011, the S&P has given up almost all of its gains since Bernanke's Jackson Hole speech on QE2 (on 8/27/2011),  which sparked the Tepper rally. Many fund managers, analysts, bloggers and twitterers I follow expected this to happen.

ECB President's Statement on Securities Markets Programme (Bond Buys), EUR/USD Reaction

EUR/USD is trying to digest the U.S. downgrade, ECB bond buying program and slower economic growth.

7 August 2011 - Statement by the President of the ECB

1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.

2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.

3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.

4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.

6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.

European Central Bank
Directorate Communications
Press and Information Division
Kaiserstrasse 29, D-60311 Frankfurt am Main
Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404

Article at Reuters: ECB to buy Italian, Spanish bonds to stop contagion

Tel Aviv 100 Index Down 7% After Growth Warning, US Downgrade and Inflation Protests

The Tel Aviv 100 Index lost 7.19% today and broke through major support levels after S&P downgraded the U.S.'s credit rating. According to Bloomberg, the Bank of Israel on August 2 lowered its 2011 and 2012 economic growth forecasts and "Finance Minister Yuval Steinitz called the downgrade a “warning sign” for Israel’s economy". You can't see it on the chart, but 1,000 was an important support level to hold (the 6/30/2010 low). TA100 closed at 972 and the trend looks down for now. Also, over the weekend 250,000 Israelis protested the high cost of living. Watch the CNN video after the jump.
Tel-Aviv Index Courtesy of

More markets fell in the Middle East:
Israeli Stock Index Tumbles Most Since 2000 (Bloomberg)
Dubai Shares Drop Most Since February (Bloomberg)
Saudi Shares Plunge as U.S. Downgrade Fuels Concern Over Global Economy (Bloomberg)

S&P Downgrades U.S. to AA+ On Political Risks, Rising Debt Burden; Outlook Negative

Treasury Secretary Tim Geithner Watches
Senate Vote on Debt Ceiling Bill (Flickr)
Standard and Poor's downgraded U.S.'s credit rating to 'AA+' from 'AAA' on Friday after warning on July 14 there was a "50% chance of a downgrade in the next 90 days". The Budget Control Act, or debt ceiling bill, failed to hit S&P's deficit reduction target of $4 trillion, which would have prevented a downgrade. The Treasury Department in a blog post on Saturday said S&P made a $2 trillion mistake (hat tip Bloomberg).

"In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one." (read more at

This credit downgrade will go down in the history books, but will the "risk free rate" (Treasury yields) move even lower from here? Futures and currencies will be interesting to watch tonight.

Interesting articles:

  • U.S. Downgrade Will Have Impact on Munis (Bond Buyer)
  • China Tells U.S. It Must ‘Cure Its Addiction to Debt’ (NYT)
  • China state paper says U.S. debt downgrade a "warning bell" (Reuters)
  • Instant view from Analysts: U.S. loses AAA credit rating from S&P (Reuters)
  • U.S. Downgrade Heralds a New Financial Era by El-Erian (
  • El-Erian Says U.S. Downgrade Casts Doubt on Other AAA Countries (BusinessWeek)
  • From 8/3/2011: China's Dagong downgrades US credit rating (

Full text of S&P's downgrade:

"United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative


• We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

• We have also removed both the short- and long-term ratings from CreditWatch negative.

• The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

• More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

• The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.