THE TAKEAWAY: S&P downgrades France from triple A; Portugal cut to junk while Germany retains top rating > Markets had already priced in the possibility > EUR steady
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Standard & Poor’s announced the results of its assessment of the Eurozone countries it placed on review in December (outlook in parentheses):
-France: AAA to AA+ (negative)
-Austria: AAA to AA+ (negative)
-Slovenia: AA- to A+ (negative)
-Slovakia: A+ to A (stable)
-Spain: AA- to A (negative)
-Malta: A to A- (negative)
-Italy: A to BBB+ (negative)
-Cyprus: BBB to BB+ (negative)
-Portugal: BBB- to BB (negative)
-Germany: AAA (stable)
-Netherlands: AAA (negative)
-Finland: AAA (negative)
-Luxembourg: AAA (negative)
-Belgium: AA (negative)
-Estonia: AA- (negative)
-Ireland: BBB+ (negative)
As the markets had already been anticipating for hours – and as confirmed earlier by Finance Minister François Baroin – France lost its triple-A rating and was cut one notch to AA+. Austria – whose largest banks are heavily exposed to Hungary and where the government’s efforts to constitutionally mandate a debt brake have stalled – also lost its top rating. Among the peripheral countries, Italy was cut to BBB+, placing the Eurozone’s third-largest economy on the brink of losing its investment grade. Portugal was cut to junk, potentially affecting the use of Portuguese debt as collateral to borrow from the ECB.
On the positive side, Germany had its triple-A rating maintained and its outlook was moved off “negative watch” to “positive”.
A complication arising from the S&P’s wave of downgrades is the possibility that the EFSF could see its own top rating at risk unless it increases guarantees to maintain its effective capacity of 440-billion Euros. ECB Board Member and Austrian National Bank Governor Ewald Nowotny had already hinted at the possibility of raising the level of guarantees.
The Euro’s response was muted as rumors throughout the Friday session – as well as statements from top officials of the affected governments – had already allowed markets to price in the ratings action. EURUSD dipped briefly before making up ground, looking set to close near the 1.2675 mark for the week.