Euro sovereign downgrades – a crisis accelerator

16 Jan 2012 | Research | Niels From

Standard and Poor’s downgraded nine of the Eurozone countries on Friday. France and Austria lost the coveted AAA rating leaving only Germany, Netherlands, Finland and Luxembourg holding the top S&P grade.

From the relative calmness we have seen in the two first weeks of the year, S&P’s rating action is a crisis accelerator and we expect the sovereign debt crisis to fill just as much in the markets as in November: Risk-off is likely to dominate markets.

Key conclusions:

S&P’s downgrade of nine Euro-zone countries is a crisis accelerator.
Confirms our view that the crisis will get worse before it gets better.
Rating action does not trigger a change to ECB’s policy rate itself, but feedback to markets and macro could.
ECB bond purchases to increase again.
Market implication: Risk-off for now.
Rating action was largely expected; impact may be larger in spread-over products than in cash: Euribor/Eonia wider; wider EUR swap spread; USD and Scandi liquidity to turn more expensive vs. EUR in xccy basis.
Credit: SenFin to underperform SovX.

Please find the full update on Friday’s sovereign downgrades by S&P attached below.

Regards,

Niels From