Ratings Hit Against Euro States: Some Impacts …

• January 16th, 2012
• Posted by EUEditor

The start of the business week on Monday saw impacts of the “Black Friday” lunge at European creditworthiness, by a leading US credit ratings firm.

The company, Standard and Poor’s, down -graded nine members of the 17-member Eurozone group, in its Sovereigns Ratings List, on 13.1.12.

It said those countries using the Euro currency were not doing enough to stabilise the crisis over state debt in Europe.

Five countries  – Austria, France, Malta, Slovakia and Slovenia – saw their ratings from the agency dropped one point; with Austria and France losing their coveted AAA ratings, coming down to AA+.

Larger, two-point reductions were dealt to Cyprus, Italy, Portugal and Spain.

The move irritated political leaders and officials from the European Commission in Brussels to the national governments affected, who called it “political” in inspiration, and “incomprehensible”, because lacking in full explanation.

Other analysts agreed to some degree, for instance a commentary from the Bloomberg news agency:

“History suggests fallout from S&P’s ratings downgrades of European countries may be limited. JPMorgan Chase and Co. research shows that 10-year yields for the nine sovereigns that lost their AAA status between 1998 and last year’s U.S. downgrade rose an average of two basis points the following week … ”

Said another commentary, in the Wall Street Journal:

“The rating companies’ reputations suffered in the 2007-08 financial crisis because the firms failed to spot weaknesses in complex U.S. financial products. Now, European governments see their actions as destabilising the region’s bond markets…”

Yet, the impact of the move, reflecting anxiety over high levels of sovereign debt, was being seen globally.

It was attributed to a falling off in gold prices; some weakening of the Australian dollar against United States dollars, and a drop in the order of 1.2% on the Australian stock exchange, in line with falls on Asian stock markets, during Monday.

Europe’s answer to the pressure on state debt, especially in Greece, Ireland and Portugal, the impacts being felt next in Italy and Spain, has included the building of joint EU intervention mechanisms – to have funds on hand to provide easier rates for governments in trouble with their borrowing. See EUAustralia Online, “Europe, debt and 2012”, 27.12.11.

In the last week the European Union has issued a long-term bond with 30-year maturity, to fund loans of €3 billion (A$3.68-billion; xe.com, 16.1.12) for Ireland and Portugal.

It called this a “statement of market confidence … on the back of strong and wide spread investor demand” carried out by the European Commission under the European Financial Stabilisation Mechanism (EFSM).

From the proceeds Ireland and Portugal are to  receive back-to-back € 1.5-billion (A$1.84-billion) each as part of their financial assistance packages.

“This long dated funding [first to be set at 30 years] will further extend the average maturity of the EU loans to Ireland and Portugal and thereby improve debt sustainability and the long term outlook of both countries”, said an EU bulletin.

France in the meantime was testing the market with an auction of up to € 8.7-billion (A$10.6895-billion) of bills on Monday, to be followed by a European Financial Stability Facility sale of € 1.5-billion (A$1.84-billion) sale set for the next day.

By Tuesday, the credit ratings company had produced a fresh move, down-grading also the European Financial Stability Facility (EFSF) itself, from AAA to AA+; government leaders in France and Germany saying the move, which might make funding for the scheme more difficult, did not demand any special measures in response.

Reference

Luke Baker, “S and P downgrades euro zone rescue fund”, Reuters, London, 16.1.12.
http://www.reuters.com/article/2012/01/17/us-eurozone-idUSTRE80E0RN20120117, (17.1.12).

Matthew Dalton, “Europe Walks Line on Ratings Firms”, WSJ, NY, 14.1.12. http://online.wsj.com/article/SB10001424052970203721704577158933873310876.html, (16.1.12).

European Union Delegation to Australia, Canberra, Newsletter 327, 13.1.12. “EU issues long-term bond …”http://www.delaus.ec.europa.eu/, (16.1.12).

David Gauthier-Villars and Charles Forelle, “Europe Hit by Downgrades: S&P’s Ratings on France, 8 Others Are Lowered, Sparking Fresh Worries”, WSJ, NY, 14.1.12. http://online.wsj.com/article/SB10001424052970204542404577158561838264378.html, (16.1.12).

Reuters, London, “Gold edges down as S&P downgrades fuel Europe worry”, 16.1.12. http://www.reuters.com/article/2012/01/16/markets-precious-idUSL3E8CG00O20120116, (16.1.12).

Standard and Poor’s Ratings Services, NY, Sovereigns Ratings List, 16.1.12. http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us/?sectorName=Governments&subSectorCode=39&subSectorName=Sovereigns, (16.1.12).

Lynn Thomasson and Yoshiaki Nohara, “Asia Stocks, Euro Drop on S&P Rating Cuts”, Bloomberg. NY, 16.1.12. http://www.bloomberg.com/news/2012-01-16/asia-stocks-euro-drop-on-s-p-rating-cuts.html, (16.1.12).

Wall Street Journal, “Australia Shares End 1.2% Weaker After S and P Downgrades In Europe”, 16.1.12. http://online.wsj.com/article/BT-CO-20120116-700359.html, (16.1.12).

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