Moody’s Downgrades Ireland’s Credit Rating to Aa2 from Aa1; Bundesbank Releases July Report
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EUR/USD: Moody’s downgraded Ireland’s debt from Aa1 to AA2 as the rating agency cited a rising debt burden. Dietmar Hornung, the lead analyst at Moody’s said that “gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability” is another reason for today’s downgrade. Meanwhile, Germany’s monthly report stated that economic imbalances in the European bloc pose risks to the 16 member euro area. The report also noted that “compensation measures from euro zone countries with current account surpluses by means of stimulating their domestic demand, for example with an expansive wage and fiscal policy, would be neither appropriate for the problem nor would they proved much relief given the minor transmission effect to deficit states.” On a positive note, the Bundesbank bank publicized that “real gross domestic product looks likely to have grown extraordinarily strong in the second quarter,” with the main driver being the recovery in the world economy. Taking a look at the economic docket from the 16 member euro area, the current account deficit widened to 16.7 billion euros from a revised 7.5 billion deficit. The breakdown of the report showed that the deficit in income account deepened to 15.6 billion while the goods account expanded a mere 0.6 billion, the European Central Bank if Frankfurt said today. At the same time, transfers accounts posted a 5.4 billion shortfall, indicating that local households have reduced the amount of capital support sent to their family members overseas. Going forward, we may continue to see the current account weaken for the second half of the year as austerity measures by governments threaten the recovery in the euro area. Looking ahead, all eyes are on the ECB stress tests measures which is scheduled to be released on July 23rd. To discuss this and other topics, please visit the EUR/USD forum.
Written by Michael Wright, Currency Analyst
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