The meltdown rages on

Moody's cuts Spain by 2 notches, sees funding risks

(Reuters)  Moody's Investors Service on Tuesday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stress.

Worsening growth prospects for the euro zone will also make it more challenging for Spain to reach its ambitious fiscal targets, the ratings agency added.

Spain could be downgraded again if the euro zone debt crisis escalates further, Moody's warned.

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S&P downgrades 24 Italian banks, financial firms

Tue Oct 18, 2011 5:18pm EDT

Reuters) - Standard & Poor's on Tuesday downgraded 24 Italian banks and financial institutions, citing renewed "market tensions" and lower economic growth prospects.

The action was taken after a review of the implications of a tougher-than-previously-anticipated macroeconomic and financial environment for the Italian banks, the credit rating agency said.

"In our opinion, renewed market tensions in the euro zone's periphery, particularly in Italy, and dimming growth prospects have led to further deterioration in the operating environment for Italian banks," it said in a statement.

Central banks may need to burst bubbles: Bernanke

...or else what?

BOSTON | Tue Oct 18, 2011 5:23pm EDT

(Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday that central banks may need to resort to monetary policy to combat asset bubbles, although regulation should be a first line of defense.

"The possibility that monetary policy could be used directly to support financial stability goals, at least on the margin, should not be ruled out," he said at a conference at the Boston Federal Reserve Bank.

Bernanke did not directly discuss the outlook for the U.S. economy or monetary policy in his speech, which offered thoughts about how central banking might shift in the wake of the financial crisis.

The crisis has brought the goal of financial stability into co-equal status with macroeconomic health as a central banking goal, elevating the importance of regulation to guard against systemic risks, Bernanke said.

However, he said it was too soon to say how effective regulation would be in warding off financial imbalances.

As for monetary policy, he said it was unlikely central banks would move away from the current focus on so-called flexible inflation targeting, in which they make clear their inflation goals as a way of ensuring the public's expectations of inflation remain low.

Bernanke said that in the United States, policymakers were still striving to refine their communications. "The (Fed) continues to explore ways to further increase transparency about its forecasts and plans," he said.

To help spur stronger growth, the Fed is considering ways to assure financial markets it won't tighten financial conditions any time soon.

It has already said it expects financial conditions will warrant extremely low interest rates at least through the middle of 2013, and officials are discussing setting explicit goals for inflation and unemployment.

Despite an aggressive easing of monetary policy by the Fed, the U.S. economy continues to suffer from the effects of a burst real estate bubble.

Economists have long debated whether central banks should prick perceived asset bubbles when they are forming.

Before the financial crisis, most central bankers, Bernanke included, argued against using interest rates to lean against bubbles.

While those views have softened, Bernanke said regulation, supervision and monitoring would remain "the first line of defense" against the threat of financial instability.

"The evolving consensus ... is that monetary policy is too blunt a tool to be routinely used to address possible financial imbalances," he said.

China Reduced Its Holdings of U.S. Treasuries by Most on Record in August

Bloomberg,

Oct 19, 2011 10:03 AM GMT+1300

China, the largest-foreign lender to the U.S., reduced its holdings of Treasuries in August by the most in at least a decade as the stripping of America’s AAA credit rating by Standard & Poor’s sent yields to record lows.

The world’s second-largest economy cut its position in U.S. government securities by $36.5 billion, or 3.1 percent, to $1.14 trillion, according to Treasury Department data released yesterday in Washington. At the same time, the data showed total foreign ownership increased 2 percent to a record $4.57 trillion as global investors sought a refuge from the financial market turmoil that followed the downgrade.

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