No Valentine’s Day love for Euro sovereign debt
THE move made by Moody’s this week to downgrade a number of Eurozone sovereigns, as well as putting the UK and France on the naughty step, caused more of a political fall-out than any real effect on the markets. Politicians squabbled like teenagers as to whose economic policies were the object of Moody’s affections, but the markets were largely nonplussed by the move. Political leaders may, however, have been less than enamoured with the ratings agency’s timings: “In a sovereign debt crisis the credit rating agencies seem to have a dark side in choosing the dates of their announcements to bring bad news,” says Chris Towner, director of FX advisory services a HiFX. “Last month we saw S&P downgrade France’s credit rating on Friday 13 and today we have Moody’s St Valentine’s massacre downgrading Italy, Spain and Portugal’s credit ratings as well as downgrading the outlook for the UK and France.”
COLD SHOULDER
Despite pouring cold water on any romantic feeling between European policy makers and the ratings agencies, the market reaction was subdued: “For France itself, this seems more like a St Valentine’s gift than massacre as having their outlook downgraded is an upgrade compared to the outright cut they received from S&P in January,” says Towner. “However this all weighs on sentiment and indeed drives investors away from the EU and towards the US again.”
LEAST UGLY GIRL
With the Moody’s move widely anticipated, yesterday’s FX moves were driven by sentiment rather than any change in fundamental outlook as a result of Moody’s pointing out the obvious – that Britain is at risk due to “materially weaker growth prospects over the next few years” and that it needs to “place the debt burden on a downward trajectory by fiscal year 2015-16.” The warning constitutes a 30 per cent chance of a downgrade of the UK sovereign debt rating over the next 18 months, but taking the example of the US downgrade last year, even if this were to go ahead, it would not necessarily change the state of play in the FX or debt markets. As George Osborne, chancellor of the Exchequer, said on the news of the downgrade:“It was a reality check for the whole political system that Britain has to deal with its debts, that we can’t waver in the path of dealing with our debts.”
For the time being, with the floor in the euro-Swiss franc still being defended by the Swiss National Bank and the Bank of Japan ramping up its asset purchases and intervening in anything that moves, the dollar will remain the object of affection on an FX dancefloor full of decidedly ropy offerings.