5 Implications of the Latest S&P Downgrades of EU Countries

It

won’t

be

a

surprise

for

you

if

I

told

you

that

Standard

&

Poor

has

downgraded

nine

eurozone

countries

last

Friday.

The

downgrades

were

not

even

a

surprise

for

the

markets

since

most

of

those

downgrades

has

been

expected

since

around

two

weeks

ago

and

a

leak

of

those

decisions

went

out

to

the

public

on

Friday

morning.

Whenever

a

rating

agency

takes

a

decision

to

change

a

rating

for

a

country

it

has

to

warn

those

officials

of

that

downgrade

at

least

12

hours

before

the

official

statement.

So

here’s

your

answer

if

you

are

asking

yourself

how

that

sensitive

information

was

leaked

long

before

the

official

downgrade.

S&P

downgraded

9

countries:

France

and

Austria

lost

their

AAA

ratings

while

Malta,

Slovakia

and

Slovenia

were

cut

by

a

one-notch

downgrade,

other

countries

like

Italy,

Spain,

Portugal

and

Cyprus

were

cut

by

two

levels.

I

won’t

comment

a

lot

on

the

downgrades

themselves,

I’m

sure

you

have

already

read

a

lot

on

those

downgrades

and

there

is

nothing

I

can

add

to

what

has

been

said.

Instead,

I

will

focus

on

the

aftermath

of

those

downgrades.

First

of

all,

while

European

politicians

are

criticizing

these

downgrades,

they

have

to

thank

Standard

and

Poor

that

they

officially

announced

the

downgrades

when

markets

were

almost

closed

on

Friday.

Otherwise,

it

would

have

impacted

the

day

and

the

week

and

sent

the

euro

few

more

hundred

pips

lower.

Second,

the

S&P

was

very

clear.

It

blamed

those

same

politicians

for

the

downgrades.

I

quote:

“…

rating

actions

are

primarily

driven

by

our

assessment

that

the

policy

initiatives

that

have

been

taken

by

European

policymakers

in

recent

weeks

may

be

insufficient

to

fully

address

ongoing

systemic

stresses

in

the

eurozone,”

S&P

has

been

hovering

around

the

problem

for

months

without

any

decision

that

puts

the

finger

on

the

wound.

When

commenting

on

the

Brussels

summit

agreement

(9th

of

December)

they

said:

“has

not

produced

a

breakthrough

of

sufficient

size

and

scope

to

fully

address

the

eurozone’s

financial

problems,”

Third,

European

politicians

criticism

of

the

downgrades

and

their

call

to

have

European

rating

agencies

(as

if

those

agencies

will

have

compassion

with

the

bleeding

Europe)

are

simple

non-sense

(I

would

have

used

another

word,

but

will

keep

myself

under

the

censorship

line).

As

a

matter

of

facts,

S&P

is

now

threatening

the

EFSF

itself

of

being

downgraded.

Let’s

face

it,

the

EFSF

holding

an

AAA

rating

is

the

funniest

joke

of

the

21st

century.

I

mean

c’mon!

France

guarantees

around

the

fifth

of

the

EFSF

so

a

downgrade

of

that

EFSF

after

France

lost

its

AAA

is

a

must.

Fourth,

remember

that

most

of

the

European

banks

have

a

big

exposure

to

those

sovereign

bonds

and

a

downgrade

of

these

banks

will

soon

hit

the

wires.

As

a

matter

of

fact,

the

banks

will

rely

more

and

more

on

the

ECB.

ECB’s

balance

sheet

is

already

growing

in

a

fast

way

and

is

now

even

bigger

than

the

balance

sheet

of

the

Fed

and

the

Bank

of

England

reaching

a

EUR

2.73

trillion.

When

banks

will

start

to

rely

more

and

more

on

the

ECB

to

solve

their

problems,

the

balance

sheet

will

keep

on

expanding

even

more

thus,

throwing

the

Euro

to

new

record

lows.

Fifth,

the

implications

are

very

serious.

You

cannot

disregard

those

downgrades

(despite

what

politicians

say).

Rating

agencies

are

the

gurus

of

bond.

Any

bond

trader

or

investor

relies

on

those

ratings

and

outlooks

before

buying

bonds.

Last

week,

we

saw

good

Spanish

bond

auction

and

acceptable

Italian

bond

auctions

but

this

may

not

be

the

case

anymore

and

it

can

dramatically

change

in

the

near

future.

Written By: George Dagher