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Markets Calm After European Credit Downgrades

  • Al Pessin

Traders look at a stock index board at Madrid's stock exchange, January 16, 2012

Traders look at a stock index board at Madrid's stock exchange, January 16, 2012

European markets reacted nonchalantly Monday after credit rating agency Standard & Poor's downgraded nine countries, including France and Austria, late Friday. The widely followed agency also reduced the ratings of Italy, Spain and Portugal, as well as Cyprus, Malta, Slovakia, and Slovenia.

Far from the sharp drop some had expected, Europe’s major market indexes stayed close to their Friday closing levels for much of the day, finally closing up slightly. The main stock price averages in Germany and Britain were both up - the German by more than one percent. Even in France, which suffered the small downgrade from its top credit rating Friday, the market was up nearly a full percentage point.

Economist Zsolt Darvas at the Bruegel Institute in Brussels said despite Friday’s big news from Standard & Poor’s, Monday’s market calm did not shock him.

“I think this is not that surprising. Basically, what happened is something that S&P initially has initially indicated, it has been decided. I think markets have anticipated,” said Darvas.

Darvas noted that bond markets also were relatively calm Monday, even though France and the other downgraded countries will have to pay higher interest rates on their bonds. France had no trouble selling 8.5 billion euros worth of short-term bonds. The French president noted his country still enjoys the highest rating from the two other major credit agencies.

Currency markets were somewhat more volatile, with the euro losing a quarter of a percentage point against the dollar. But Darvis is not concerned, saying the euro’s value has been unjustifiably high in recent months.

“What happened in the past few days and during last week is that the euro became less over-valued than it was before. So I think that nothing wrong has happened to the euro so far,” said Darvas.

Although the credit downgrades did not have a big impact on the markets Monday, they do provide further warning signs for the economic state of Europe.

The credit crisis is spreading beyond over-indebted countries like Greece, Italy, Spain, Portugal and Ireland to more solid economies like France and Austria. Darvas said that means the situation European leaders were trying to avoid is now more likely.

“I think it is increasingly likely that the euro zone will face a recession this year. It will be very, very difficult to avoid it,” said Darvas.

Darvas and other experts say European leaders need to do more to support the troubled economies and promote economic growth - subjects that will be high on the agenda at the next European Union summit at the end of this month.