All of a sudden, 2012 is starting to look a lot like 2011. Yesterday's news of overwhelmingly positive results for Spanish and Italian bond auctions has immediately been followed by bad news that threatened to erase the memory of yesterday's good news. Standard & Poor's is expected to downgrade several European nations later today, including France and Austria.
Stocks, Euro Down
Concerns about a potential French downgrade have been present for some time, with rumors swirling for months. However, while much of the impact of the news appears to have already been absorbed, European markets closed down for the most part on the news. Fifteen of the 18 western European markets finished the day down, with the European Stoxx 600 off 0.3 percent, Britain's FTSE 100 Index dropped 0.7 percent, Germany’s DAX Index fell 0.9 percent, and France's CAC 40 tumbled 0.4 percent. The Euro finished down 1.2 percent at $1.2664 after falling as far as 1.2623 earlier in the day.
France should have its rating cut from AAA to AA+, the same one-notch downgrade anticipated for Austria. Among the other downgrades that are expected though not yet public include Italy going from A to BBB+ and Slovakia falling to A from A+. A variety of anonymous sources revealed that the AAA ratings for Germany and the Netherlands would go unaffected, but there was no word on the eurozone's other two AAA nations, Finland and Luxembourg.
Move Anticipated Months Earlier
The downgrade to France is hardly good news for the struggling eurozone, but it may also not be a major blow. Rumors about France's imminent downgrade have swirled for months, driving the yield up on French bonds. Many experts have speculated that the shift has already been priced in. "If France is downgraded by only one notch from AAA, that would be seen as something of a silver lining. We could see a sell the rumor, buy the fact reaction," said Brian Dolan, chief analyst at Forex.com in Bedminster, New Jersey. He continued, "We've been fearing a downgrade for months now and bond markets have already priced it in. French, Spanish, Italian debt has been trading based on lower ratings for some time. So the euro shouldn't collapse on any statement today. We may have already seen about 70 percent of the move."
Fifteen of the eurozone's 17 countries have been on watch with S&P since December. The downgrade of France's credit rating could affect the rating for the European Financial Stability Facility, EFSF, which is responisble for funding the bailouts of Greece, Ireland, and Portugal. The EFSF's credit rating is based on its financial backers, of which France is the second largest. Should its cost of borrowing rise, it would most likely mean passing the borrowing costs along to Ireland, Portugal, and Greece as they attempt to rebuild their ailing economies.
Financials Take Hit
As would be expected at this point, major banks took a hit on the downgrade news. ING Groep (ING) was off over 4.75 percent in early trading and Credit Suisse (CS) dropped over 3 percent. Among American banks, JP Morgan (JPM) reported that its investment banking arm saw Q4 net income fall 52 percent, leading an overall earnings drop of 23 percent that drove share prices down over 3.5 percent. Also losing ground were Citigroup (C), off almost 3.5 percent, and Morgan Stanley (MS), which lost almost 3 percent.
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