STOCK MARKET WATCH -- Monday, 16 January 2012

[Demeter]

19. Downgrading Europe: Why Analysts Say the S&P Debt Decision Could Have Been Much Worse

http://www.time.com/time/business/article/0,8599,2104519,00.html

...Investors had plenty of time to brace for the bad news. S&P put 15 countries, including Germany and France, on notice last month that they faced potential downgrades. The advance notice means the downgrades likely won't panic financial markets and drive up European governments' borrowing costs much higher than they already are. "People knew it was coming, and it was only one rating agency," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman. Moody's and Fitch Ratings have yet to follow S&P.

Stocks fell Friday as downgrade rumors reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall, when the debt crisis threw the markets into turmoil.
When the news came Friday, it wasn't as harsh as it might have been. S&P had threatened last month to knock France's credit rating down two notches. Instead, it settled for one, demoting France to AA+, just where it put the U.S. credit rating in an August downgrade. S&P spared Europe's mightiest economy the indignity of a downgrade, leaving Germany with its AAA rating intact. Austria lost its AAA status, while Italy and Spain fell by two notches and Portugal's debt was consigned to junk. S&P also cut ratings on Malta, Cyprus, Slovakia and Slovenia...The downgrades in Europe are "going to create bad headlines for a day or two," said Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics. But "there's no underlying new information ... This will be quickly forgotten."

...The downgrade of France could have consequences. It will put pressure on the fund that Europe uses to bail out the weakest countries that use the euro. The fund, after all, is only as strong as the countries that contribute to it, and France is the second-biggest contributor after Germany. The bailout fund may have to pay higher interest rates to borrow — and may have to charge higher rates to countries like Ireland that rely on it. For now, the fund still has a rating of AAA. That means that it can borrow on the bond market at low rates.