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Home > Blogs > Anthony Harrington > Markets ignore ratings agency Greek debt downgrade

Markets ignore ratings agency Greek debt downgrade

Greece Downgrade | Markets ignore ratings agency Greek debt downgrade Anthony Harrington

With investors at last disposed to take cognisance of some of the “good news” signals being put out by the US and Chinese economies, and even the German economy, it is perhaps not surprising in the end to find the markets at last showing resilience in the face of ratings agency downgrades.

When Moody’s announced in mid June that it was downgrading Greek sovereign debt status by several notches, the market completely ignored the agency’s announcement and went on to post four week highs. Back on 17th April, when Standard & Poor’s downgraded the Greek government debt rating to junk and cut Portugal’s rating in the next breath, as it were, the markets fell over with fright and billions were wiped off share values around the world.

Between the two ratings pronouncements, of course, much has happened, including the €600 billion International Monetary Fund and EU bailout package. On top of that, having ignored all sorts of positive signals while they were in full retreat after the S&P pronouncement, by mid-June the markets seem to have decided that the global recovery could, indeed, have resumed its upward march.

Famed Reuters blogger, Felix Salmon greeted the market’s indifference to Moody’s pronouncement with some joy:

“… a monster downgrade of an EU country to junk status would have caused chaos in the markets not all that long ago. So well done, markets, for finally treating the ratings agencies with the respect they deserve—which is to say, none at all.”

At the time of writing the markets were on a five day roll, clawing back much of the positive territory they shed when S&P scared them to death over the dangers of euroland sovereign debt. The German DAX, which had been above 6300, dropped to below 5500 after the S&P Greek downgrade, shedding more than 800 points in two days. It has taken just five working days to get back to a smidgeon over 6200. The US index, the S&P 500 is back to the 11000s over the same time frame.

None of this, of course, means that the sovereign debt crisis in euroland has gone away. At the end of 2007, Spanish unemployment stood at 8.6%. By the end of the first quarter of 2010 it was up to 20%. A whole raft of mid tier and smaller Spanish banks are hugely stressed by non-performing loans. The FT pointed out on 15 June that Spanish banks had set a new borrowing record, borrowing €85.6 billion from the European Central Bank ECB in May, amounting to some 16.5% of the net eurozone loans provided by the ECB that month.

Again, that news would have afflicted the markets with another bout of euro jitters a few weeks ago. Now, however, it makes no discernable impact, with the Spanish Government able to raise €5.2 billion at a premium of “only” 75 basis points. The FT points out, however, that while Moody’s Greek downgrade has left equity markets unimpressed, it has had an impact on the market for Greek bonds, with the 10-year yield on Greek debt rising 74 basis points. So ratings agency opinions cannot be said, just yet, to be impact free as far as all markets are concerned.

And of course, they always score a hit on the target of the downgrade. The Greek government is less than chuffed with Moody’s, pointing out that it is now in a very good position to service its debts, thanks to its austerity measures and the IMF/EU bailout package, and wondering “why now?”.

It may be that within a short time, the power of the ratings agencies to move stock markets around the world will return, but for now at least, we can all celebrate the fact that the markets have grown considerably more indifferent to ratings. It may not last, but it’s good while it lasts…

Further reading on ratings agencies and debt downgrades

Tags: credit rating agencies , downgrades , EU , Greece , sovereign debt
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