Markets have been taking Standard & Poor’s (S&P) downgrade announcements in stride and have not reacted as badly since the news had already been discounted by many investors in the market.
S&P cut the ratings of nine European nations and stripped AAA ratings from both France and Austria on Friday and eventhough euro fell sharply on the news on Friday, the single currency has been holding steady in the start of the new trading week and has been trading mostly range-bound against most major counterparts, with some bounces on the upside.
Many European policymakers pointed out that the downgrades were already expected. France was quick to downplay the news. The French Finance Minister, François Baroin, sought to calm markets on the issue: “It’s like a pupil who had 20 out of 20 for a very long time and now has a 19. It’s still an excellent grade.” Indeed, S&P does define France’s new AA+ rating is investment grade for “quality borrowers” that have “a bit higher risk than AAA”. Also, the vice president of the French senate’s finance commission, Fabienne Keller, assured markets that her country losing the AAA rating was “not a catastrophe and was already included in the markets”.
Robert Corbett, member of the European Council, suggested that S&P was actually “behind the curve” and admitted that “the democratic processes move more slowly than the markets”.
Edward Nowotny, member of the European Central Bank (ECB) Governing Council, was also quick to stem fears resulting from the rating downgrades. “For the European Central Bank’s part, everything that is within our possibilities will be done to bring about a relaxation (of the tension caused from the downgrades). We have made additional liquidity available and I think it’s very important that, overall, a certain calming down takes place,” Notwotny said.