Ireland joins Portugal, Greece in junk club
Moody's Investors Service resumed its crusade against peripheral European countries by downgrading Ireland's foreign and local currency government bond ratings by one notch to Ba1 from Baa3. The decision means the Euro zone has now three member states on junk status. The outlook on all of them remains negative, according to the rating agencies.
The key driver on Tuesday's rating action was the growing possibility that Ireland will need more rounds of official financing before being able to return to private markets, basically same story as Portugal. Besides, Moody's mentioned that implementation risk on further rescues is high in light of continued weakness in Irish economy. Further downgrade will be considered if Ireland fails to reach fiscal goals or Disorderly Greek default occurs.
The key driver on Tuesday's rating action was the growing possibility that Ireland will need more rounds of official financing before being able to return to private markets, basically same story as Portugal. Besides, Moody's mentioned that implementation risk on further rescues is high in light of continued weakness in Irish economy. Further downgrade will be considered if Ireland fails to reach fiscal goals or Disorderly Greek default occurs.
EUR/USD bulls show fatigue, unable to hold 1.4000 handle
The major damage on the Euro was seen through European hours, with EUR/USD being paid as low as 1.3835 after the Euro zone became prisoner of sheer panic on debt contagion fears. Then China stepped in to set the bullish tone for an incredible rebound 200 pips off lows, but that was not enough to hold back the bearish tide after the Irish downgrade, sending EUR/USD back below 1.4000.
European markets in panic
Widespread fears of contagion swept through the European marketplace once again on Tuesday, as finance ministers failed to come up with a plan to contain the ongoing debt crisis. Speculators drove the risk premium for Italian and Spanish government bonds to new highs, while at the same time pressuring the EUR to a fresh 4-month low under 1.3850.
By mid-day however, the panic had subsided ever-so-slightly as the Italian government successfully auctioned off 6.75 billion euros of 12-month bonds at an average rate of 3.67%, with bids exceeding supply by a ratio of 1.5. The relatively strong turnout given the current tense market environment helped stocks pare some of the earlier losses, while the common currency recovered towards 1.4000. What´s more, ECB first, then China were rumoured to have bought Italian and Spanish government bonds in an effort to contain the recent selloff, yet no official comment has been offered to confirm or dispel such reports.
The financial turmoil occured on the back of an emergency meeting by FinMin held on Monday, discussing the Greek mess and a potential debt contagion to Italy; After the meeting, the EU issued an official statement, failing to animate the Euro, as none of the headlines were ground-breaking. Leaders seem unable to keep pace with the fast-growing concerns of the sovereign debt woes.
Main highlights:
- Ready to take further measures to improve EZ ability to withstand contagion
- This includes enhancing flexibility and scope of EFSF
- Also includes lengthening loan maturities and lowering interest rates
- Proposals are to be presented to ministers
Key events to watch in the Euro zone crisis
Europe will be closely watching Spanish and Italian yields over Germany's, as further widening of the spread is likely to drive Euro even lower.
Debt rating agencies will also be in the spotlight, as they remain stubborn to give the blessing at extending creditos holdings for new, longer-maturing bonds. Bureaucrats in Europe can not afford a declaration of a Greek default, likely to push investors away from all bonds issued by peripheral Euro zone economies, including Spain and Italy.
"We believe that Portugal will further be downgraded by S&P and Fitch Rating much lower than current levels. A junk status could further push EUR/USD to the downside" said Andrei Tratseuski, Analyst at Forex Club.
Why Italy is a Much Bigger Deal than Greece - Kathy Lien
The following image is from the FT showing bank holding of PIIGS’ sovereign debt
If a second rescue deal to Greece is satisfactory to rating agencies, contagion effects to Italy can be contained. With the headlines this week focused on European sovereign debt crisis and the EU stress tests results due on Friday, there could be more volatility in the EUR/USD as investors speculate on the outcome, warned Kathy Lien, Director of Currency Research at GFT.
source: http://www.fxstreet.com
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