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.