For all those short gammas collecting theta over the weekend, there are some scheduled meetings to follow over the weekend. EU leaders to meet and primarily discuss the problems facing Spain and Italy. With all developments moving extremely fast, we won’t be surprised if the German Mark is reinstated asap, while the PIIGS start exiting the Euro Project. Bloomberg reports,

Euro-region central bank governors will hold emergency talks tomorrow aimed at stopping Spain and Italy from becoming the next victims of the sovereign debt crisis and limiting the market fallout from the first U.S. rating downgrade in history.

The central bank heads will hold a conference call at 6 p.m. Paris time, said a euro-area central bank official who declined to be identified because the talks are confidential. The talks come asStandard & Poor’s downgrade of the U.S. risks further derailing efforts to stop the debt crisis from engulfing the euro-area’s third and fourth-largest economies.

“Europe is in an incredibly dangerous situation,” Nick Kounis, head of macroeconomic research at ABN Amro in Amsterdam, said in an interview by telephone today. “The risk is that the U.S. downgrade is just going to unsettle everyone even more. It’s a unique situation in that we are essentially in the heart of a European sovereign debt crisis, which has reached its meltdown phase.”

Full article, click here.

It feels the World has changed dramatically over the last days, although none of the events should be seen as Black Swans, as it was all actually expected. Now China is delivering some harsh words vs the US and demanding a new World Currency. You can’t really blame them. From Xinhuanet;

The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor’s (S&P) for the first time on Friday.

Though the U.S. Treasury promptly challenged the unprecedented downgrade, many outside the United States believe the credit rating cut is an overdue bill that America has to pay for its own debt addition and the short-sighted political wrangling in Washington.

Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

Full article, click here.

Quick reminder of who is holding the US Debt.

Chart, Jessie

Question; No Risk?

Answer; No, no Risk.

Tim’s job is now a one week option expiring within a week.

Yes, the rumor The Trader wrote about yesterday proved right. S&P is downgrading the US, despite many well  respected pundits saying that was impossible. Interesting times ahead to continue. Although S&P’s timing is not the best, both for market volatility and their popularity, some of the effects are priced in.

Expect more volatility, as risk has been mispriced for several years. As we have written during the spring, too many young quant academics have been pricing risk looking back at Garch etc models, and giving the past year’s low volatility environment way too much weight. It will take time to rinse out all these wrongly priced risk. For more reading on volatility, check Broken Volatility, not any more…

From Bloomberg,

Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.

“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,” S&P said in a statement late yesterday after markets closed.

Full article, click here.

Expect war between the Fed and the S&P. First comments from Fed below. QE3 imminent? From Dow Jones,

Standard & Poor’s downgrade of the U.S. government’s debt will not affect the risk-based capital requirements for U.S. banks, federal regulators said Friday evening.

The Federal Reserve, Federal Deposit Insurance Corp. and other federal banking regulators said in a statement that the lowering of the U.S. government debt rating from AAA to AA+ “will not change” the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government or government agencies.

“The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected,” the regulators said.