Posts Tagged ‘Downgrade’

Fallout From European Credit Downgrades Still Underway

Monday, January 23rd, 2012

European leaders will this week try to deliver new fiscal rules and cut Greece’s onerous debt burden.  All this in the wake of Standard & Poor’s (S&P) Eurozone downgrades.

France was not the only Eurozone nation to feel the pain. Austria was cut to AA+ from AAA; Cyprus to BB+ from BBB; Italy to BBB+ from A; Malta to A- from A; Portugal to BB from BBB-; the Slovak Republic to A from A+; Slovenia to A+ from AA-; and Spain to A from AA-. S&P left the AAA ratings of Germany, Finland, Luxembourg and the Netherlands the same.

The European Central Bank (ECB) emerged unscathed.  The ratings agency said Eurozone monetary authorities “have been instrumental in averting a collapse of market confidence,” mostly thanks to the ECB launching new loan programs aimed at keeping the European banking system liquid while it works to resolve funding pressure brought on by the sovereign debt crisis.

The talks on Greece and budgets may serve as tougher tests of the tentative recovery in investor sentiment than S&P’s decision to cut the ratings of nine Eurozone nations, including France. If history repeats itself, fallout from the downgrades may be limited.  JPMorgan Chase research shows that 10-year yields for the nine sovereign nations that lost their AAA credit rating between 1998 and last year rose an average of two basis points the next week.

Policymakers worked doggedly to take back the initiative. German Chancellor Angela Merkel said S&P’s decision and criticism of “insufficient”  policy steps reinforced her view that leaders must try harder to resolve the two-year crisis. Germany is now alone in the Eurozone with a stable AAA credit rating. Reacting to Spain’s downgrade to A from AA-, Prime Minister Mariano Rajoy pledged spending cuts and to clean up the banking system, as well as a “clear, firm and forceful” commitment to the Euro’s future. French Finance Minister Francois Baroin said the reduction of France’s rating was “disappointing,” yet expected

The European Financial Stability Facility (EFSF), which is intended to fund rescue packages for the troubled nations of Greece, Ireland and Portugal, owes its AAA rating to guarantees from its sponsoring nations. “I was never of the opinion that the EFSF necessarily has to be AAA,” Merkel said.  Luxembourg Prime Minister Jean-Claude Junker said the EFSF’s shareholders will look at how to maintain the top rating of the fund, which plans to sell up to 1.5 billion Euros in six-month bills starting this week. In the meantime, Merkel and other European leaders want to move speedily toward setting up its permanent successor, the European Stability Mechanism, this year — one year ahead of the original plan.

Greece’s Prime Minister Lucas Papademos said that a deal will be hammered out. “Some further reflection is necessary on how to put all the elements together,” he said. “So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.”

Standard & Poor’s downgraded nine of the 17 Eurozone countries and said it would decide before too long whether to cut the Eurozone’s bailout fund, the EFSF, from AAA.  “A one-notch downgrade for France was completely priced in, so no negative surprise here, and quite logical after the United States got downgraded,” said David Thebault, head of quantitative sales trading at Global Equities.

Thanks to the downgrades, fears of a Greek default also increased after talks between private creditors and the government over proposed voluntary write downs on Greek government bonds appeared near collapse.  Greece appears to be close to default on its sovereign debt, eclipsing the news that France and other Eurozone members lost their triple-A credit ratings.  “At the start of this year, (we) took the view that things in the Eurozone had to get worse before they got better. With the S&P downgrade of nine Eurozone countries and worries about the progress of Greek debt restructuring talks, things just did get worse,” wrote economists at HSBC.

Additionally there are implications for Eurozone banks from the sovereign downgrades.

“The direct impact of further sovereign and bank downgrades on institutions in peripheral.  nations is perhaps neither here nor there given that they are already effectively shut out of wholesale funding markets due to pre-existing investor concerns over the ability of governments in these countries to stand behind their banks,’ said Michael Symonds, credit analyst at Daiwa Capital Markets.

Writing in the Sydney Morning Herald, Ha-Joon Chang says that “Even the most rational Europeans must now feel that Friday the 13th is an unlucky day after all.  On that day last week, the Greek debt restructuring negotiation broke down, with many bondholders refusing to join the voluntary 50 per cent ‘haircut’  – that is, debt write off – scheme, agreed to last summer. While the negotiations may resume, this has dramatically increased the chance of disorderly Greek default.  The Eurozone countries criticize S&P and other ratings agencies for unjustly downgrading their economies. France is particularly upset that it was downgraded while Britain has kept its AAA status, hinting at an Anglo-American conspiracy against France. But this does not wash, as one of the big three, Fitch Ratings, is 80 per cent owned by a French company.”

Spain’s New Financial Hit: S&P Downgrades Its Credit Rating

Tuesday, November 15th, 2011

Standard & Poor’s slashed Spain’s credit rating to AA-, three steps beneath the highly desirable AAA, underscoring the challenges facing Europe’s major powers as they meet G20 counterparts over the eurozone debt crisis.  S&P, whose move mirrored that by fellow ratings agency Fitch, cited high unemployment, tightening credit and high private-sector debt.  Spanish 10-year government bond yields climbed slightly in response, although they are still nearly 60 basis points lower than those of Italy.

“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain’s main trading partners,” according to S&P.  Spain’s Economy Minister Elena Salgado noted that there would be some margin for maneuver this year thanks to about two billion euros raised by an auction of wireless frequencies and lower interest payments.  “Interest payments by the central government will be at least two billion euros below budget.  So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 percent (of GDP)” Salgado said.

S&P took note of Spain’s “signs of resilience in economic performance during 2011” but saw “heightened risks” to the country’s prospects for growth.  Elevated unemployment, tighter financial conditions, and an external debt-to-GDP ratio of approximately 50 percent and the likely economic slowdown of Spain’s main trading partners are the downgrade’s primary causes.  S&P noted that the “economy” variable in its credit-rating equation was responsible for the downgrade.  Spain’s GDP, according to S&P, will likely grow about 0.8 percent in 2011 and nearly one percent in 2012, weaker than S&P’s 1.5 percent estimate made in February.  S&P said that Spain is still in danger of another downgrade if the situation deteriorates.  According to their downside scenario, “We have also adopted a downside scenario, consistent with another possible downgrade.  The downside scenario assumes a return to recession next year, partly as a result of weaker external and domestic demand, with real GDP declining by 0.5 percent in real terms, followed by a weak recovery thereafter.  Under this downside scenario, the current account deficit would decline, but the general government deficit would remain above 5.5 percent of GDP, at odds with the government’s fiscal consolidation targets.”

Investors currently are focusing on“whether European governments can forge a political solution to the sovereign crisis,” said Guy Stear, Hong Kong-based credit strategist at Societe Generale SA.  The longer-term question is “whether austerity plans will work,” he said.

S&P pointed out ongoing challenges facing Spain. “The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further,” according to S&P analysts.  Spain is being held back by “uncertain growth prospects in light of the private sector’s need to access fresh external financing to roll over high levels of external debt amid rising costs and a challenging external environment.”

Simon Denham, the head of Capital Spreads, noted that “S&P and Moody are working overtime at the moment downgrading bank after bank and European country after European country which reminds us of the dangerous situation that the eurozone is in.  However, as mentioned, the overriding theme that something will be done to sort the mess out is keeping equity markets afloat and the FTSE remains just above the 5,400 level at the time of writing.”

Steven Barrow, currency strategist at Standard Bank, offers this perspective.  “The move follows a similar downgrade from Fitch last week and hence does not have a huge shock factor for the market.  Nonetheless, it clearly questions the markets ability to continue with the more optimistic tone towards the debt crisis that seems to have been reflected in the euro recently – although not necessarily in the bond markets.”

 

Catalina Parada, Marketing Consultant, is Alter NOW’s Madrid correspondent.