CME: S&P downgrades were a "non-event" for many
The Chicago Mercantile Exchange says the range of country and EFSF downgrades were actually "non-events" - due to the markets already pricing in these moves in anticipation of a credit rating slash.
Just last week, credit ratings agency Standard & Poor's (S&P) downgraded the sovereign debt credit of nine countries, including stripping France of it's coveted AAA status.
Subsequently, the European Financial Stability Facility (EFSF), which has always been at pains to emphasise that its creditworthiness is based on the value of the guarantees provided by its AAA constituents, was downgraded on January 16 and the question is whether Moody’s and Fitch will downgrade it too:
After downgrading long-term ratings of the EFSF to AA+, "the rationale was that 2 of the guarantors, France and Austria had lost their previous AAA ratings. S&P's assessment of the EFSF‟s short-term debt was, however, reconfirmed at A-1+.2 Appendix A lists the ratings and outlook classifications for the affected eurozone countries," says the CME.
Well, of course, judging by the headline events, it would seem that there was some sort of element of surprise - maybe not on the credit worthiness of the countries and fund in question, but more to do with S&P taking the plunge and slashing the ratings that many previously though would be too difficult to make official.
However, the CME put out an interesting research note on how the raft of credit ratings downgrades has been more of a damp squib for the markets.
In the note on Monday, the CME said (emphasis ours):
The formal recognition of the "deterioration in confidence" is highly important.
During 2011, many market participants exclaimed how France was unlikely to be downgraded – not because it doesn't deserve to be, but mainly because of the political implications behind this.
Furthermore, a conflict of interest has been called into question, which led many to say that having a country like France being downgraded would be very slim:
However, also notably the CME recounted the current situation and has assessed possible implications for market participants in CME Group markets, which includes bonds and foreign exchange.
Here are some edited highlights:
And in currency - the CME says that the "Euro/U.S. dollar (EUR/USD) futures contract is the most obviously impacted of all our markets."
"The Euro declined dramatically during 2010‟s sovereign debt episode, which decline was stemmed with the IMF/EU €110 billion bailout package. After a recovery in late 2010 through early 2011, the Euro has tumbled from a rate of almost 1.50 Euros per USD to current levels near 1.25," it adds.
However, all eyes have turned towards Davos, as the European sovereign debt crisis is naturally the focus for all - especially Greece where disappointment over the lack of a deal has hit the markets.
"It remains unclear whether the European leaders will be able to solve the eurozone crisis. The economic and fiscal woes in Portugal, Ireland, Greece, Italy and Spain grow graver with every passing day and thus, the prospect of default remains a real possibility," says the CME.