Markets were agonized on Friday and the euro was under heavy downside pressure with the selloff across the board on the news that France lost its top credit rating, and as the news were confirmed from Standard & Poor's after the exit of European markets for the weekend the agony is likely to remain on Monday on Asia and on Europe especially with the lack of major data and absence of U.S. markets.
Standard & Poor's stripped France and Austria of their top triple-A rating alongside other seven nations in the euro area acting on its December warning and dismissing some comforting signs from Fitch earlier last week that France might be safe from downgrades this year.
S&P said in a statement that the decision was mainly driven by their assessment that the initiatives taken by policy makers 'may be insufficient to fully address ongoing systemic stresses in the euro zone'.
The agency cut its long-term rating on Cyprus, Italy, Portugal and Spain by two steps, while Austria, France, Slovakia, Slovenia, and Malta were lowered by one notch.
Of the infamous focus, France now with Austria lost the AAA rating and are rated AA+, Italy is now rated BBB+ while Portugal slipped to Junk status. S&P left the rating for Germany, Belgium, Netherlands, Estonia, Finland, Ireland, and Luxembourg unchanged.
The agony did not end there, as of the 15 nations, only Germany was left intact with a stable rating and outlook, where the remaining 14 were still placed on a 'negative' outlook which could mean more downgrades.
Markets now focus on how deep is the impact and whether it was merely expected or not. There are key things to watch out for which are: the move followed by other rating agencies, worsening debt market status and borrowing costs, other downgrades for the bailout facilities and starting with the EFSF, those factors will be the main focus for the coming period to see if the impact of the move will be drastic on the market and the sentiment.
From their part France downplayed the move from S&P where the nation loses its rating for the first time since 1975 and France with its neighbors surely hope that other rating agencies will not follow and force the S&P move to be a forgotten fact in a short period such as their unilateral move on the U.S. rating that quickly was forgotten after August!
Despite the fact that S&P attributed the downside pressure on the nations and the reason for the downgrade was the absence of strong action, it did praise the ECB's saying it is playing a 'constructive role'. They see the response from Europe not reflective to the risk and that the December 09 summit decision for a fiscal pact was no 'breakthrough'.
Merkel shrugged the comments from S&P and on the contrary reiterated her commitment saying that the move reinforces the German stance that Europe has to redouble the effort and it's 'a long way ahead of us before investor confidence returns'.
There are wide views that the news impact on the market might not last, but for us that is still too early to tell and even if it will die soon the impact will still be felt in the coming session and especially on Monday as France prepares to sell as much as 8.7 billion euros of bills.
More volatility is likely to be seen with the markets opening on Monday in Asia that still did not react at all to the news and then into the European session the focus will be on the debt sales from France and other nations.
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