In a bold move late on Friday evening, Standard& Poor’s credit rating agency downgraded 9 Eurozone countries, citing “insufficient policy initiatives by European policymakers in recent weeks.” The decision managed to undo Mario Draghi’s good work earlier in the week when he managed to convince investors that the Long-Term-Refinancing-Operation (LTRO) was helping credit flow through the Eurozone. S&P’s decision leaked out during Friday afternoon giving markets sufficient time to act ahead of the weekend close; the Euro lost 1 cent against the Pound and 1.5 cents against the US Dollar.
Here is a rundown of the countries hit:
France and Austria were downgraded by one notch each from AAA to AA+ negative Outlook. Slovak Republic were downgraded by one notch from A+ to A with a stable outlook – Slovakia is the only downgraded sovereign that manages to hold a stable outlook, the others have all been put on negative watch. Malta was downgraded one notch from A to A-. Slovenia was also downgraded by one notch from AA- to A+. Cyprus were downgraded by two notches from BBB to BB+, Italy took a hit and fell two notches from A to BBB+, Portugal dropped two notches from BBB- to BB, and finally Spain were downgraded by two notches from AA- to A.
Although this batch of downgrades had been cautioned by S&P late in 2011, the fear factor caused investors to short the Euro with France – the Eurozone’s 2nd largest economy – the main cause for concern. The credit rating cut carried implications that the European Financial Stability Facility (EFSF) would not be able to persuade overseas investors such as China or Brazil, to pump money into the scheme if one of the trophy members did not carry a squeaky clean credit record of its own.
German Finance Minister Wolfgang Schauble, speaking on German radio station Deutschlandfunk, reassured Germans that the country would not be supporting the EFSF with further payments insisting that the current €211 billion is enough. His statement came after a warning from S&P on Friday that the EFSF could only keep its AAA rating with further support from other countries to guarantee France’s loss of firepower.
As markets adjust to the slightly different economic climate following the credit downgrades all eyes have turned to Greece and its attempt to settle a deal with private investors in order to receive its next aid tranche of €130 billion. Although Greek PM Lucas Papademos has stated today that the talks are on course for success: “I am confident that they will continue and we will reach an agreement that is mutually acceptable in time.” The general sentiment runs in contrast to this rose-tinted view of the situation with Charles Jenkins from the Economic Intelligence Unit (EIU) stating that Greece’s only negotiating weapon is the threat of default: “The mismanagement of the issue is making it more likely that Greece will default in a disorderly way and be forced out of the Euro.”
At midday today the Pound to Euro Exchange Rate stands at 1.208. We will see the full extent of the credit downgrades tomorrow when the US Markets reopen after a 3-day weekend due to Martin Luther King Day. With a Greek default looming large over the Eurozone, the single currency could be set to fall even further against the Pound unless a suitable agreement can be made – and it must be made soon.