Do the Markets Care About Ratings Agencies Anymore?
Early rumors have been proven true; S&P downgraded France's credit to AA+ from AAA, raising concerns over whether other Euro nations such as Austria will follow.
Uncertainty in eurozone economies was briefly offset after the ECB promised greater intervention in PIIGS bond markets last year, causing yields on Spanish and Italian bonds to ease slightly, allowing both Mediterranean governments an opportunity to borrow more at lower rates. Spain sold nearly twice its projected amount of bonds in an auction on Thursday.
The downgrade has left some analysts to wonder if we are living in a post-AAA world.
Commerzbank chief economist Joerg Kraemer told CNBC that a downgrade "may irritate markets in the short term but wouldn't be a big problem in a world where the U.S. and Japan also don't have a triple-A rating anymore. Triple-A is a dying species."
The Dow Jones bounced slightly in mid-morning trading after the news was confirmed by a French government official, although the market is still down nearly 100 points in intraday trading.
French stocks have been hit harder, especially in the financial sector. Credit Suisse Group (NYSE: CS) hit a low of 22.25 in intraday trading before the rumors were confirmed; since then the stock has recovered, but is still down by nearly 3%. However, European banks are facing similar results such as Deutsche Bank (NYSE: DB), which is down nearly 1.5%, and UBS (NYSE: UBS), which is down slightly over 2%.
Even without France's downgrade, today is not a good day for financial stocks, after JPMorgan (NYSE: JPM) posted low earnings due to a contraction in its investment banking operations and a depressed demand for consumer and business banking services. JPMorgan's results have set the tone for the financial industry as a whole, and most American banks are down on the news. We are unlikely to return to the schizophrenic volatility that came after S&P's historic downgrade of America last summer, for a variety of reasons. Firstly, the downgrade actually increased demand for U.S. bonds, suggesting that the market has more faith in the U.S. government than in S&P. Secondly, as Kraemer notes, AAA ratings are becoming a rarity in a post-subprime mortgage crisis world. With the largest economies in the world losing their AAA ratings and an economic system still dependent on government debt, we may see investors less interested in what S&P has to say than in the past. Plus, until Moody's and the other agencies follow suit, S&P is becoming a pariah in the government-debt downgrading game.
What is more important for the large banks isn't the judgment of S&P but the number of investment opportunities and the flow of global credit. If bond yields can stay tolerably low and confidence remains in the eurozone, credit should continue to flow between banks and governments. If a stronger bond market combines with greater confidence in investment instruments in general, we can see investment banks begin to rebound in 2012. S&P's ratings are being rendered increasingly moot.
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