Tuesday, December 06, 2011

Is the S&P trying to influence the EU Summit by Warning of Downgrades?

Is the S&P trying to influence the outcome of the EU Summit by warning of Downgrades?

From the Bloomberg,

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

The downgrade warnings come as German Chancellor Angela Merkeland French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year.

In my view, the answer could be yes, S&P may be using to credit rating standings as leverage. The timing of credit rating downgrade puts the S&P’s action in question. Although it seems unclear which agenda the S&P has been pushing.

Nonetheless, S&P’s warnings has lagged what’s been happening in the markets.


Chart from Danske Bank

In other words, the markets has already been downgrading the core Euro bonds, with current relief coming from the ECB’s bond purchases and the facilitation of swap lines from the US Federal Reserve.

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