European stocks shrug off downgrade

January 16, 2012•3 Minutes
RTC Director RTC Director

European stocks had a subdued reaction Monday to Standard & Poor’s downgrade of nine euro-zone governments.

European stocks wavered between gains and losses in morning trading. Britain’s FTSE 100 (UKX) slid 0.2%, the DAX (DAX) in Germany edged higher by 0.1% and France’s CAC 40 (CAC40) shed 0.3%.

S&P said Friday that it had downgraded the credit ratings of nine euro-area governments, including previously AAA-rated France and Austria.

S&P also lowered its rating for Italy, Spain, Portugal and Cyprus by two notches. The move means Italian bonds are now rated BBB+, dangerously close to the junk bond level that could make it even harder for the government to raise money.

France and Austria both had their top-tier credit rating lowered by one notch to AA+, the credit ratings agency said. But Germany, Finland, the Netherlands and Luxembourg all maintained their AAA ratings.

S&P cut the ratings of Malta, Slovakia and Slovenia by one notch.

The agency said the downgrades reflect a combination of economic and financial issues, as well as “an open and prolonged dispute among European policymakers over the proper approach to address challenges.”

Europe can’t catch a break

Specifically, the agency pointed to weakening economies, tightening credit conditions across the eurozone, rising interest rates for a growing number of nations, and the “deleveraging” of both governments and households.

As the downgrade chatter circulated, stocks sold off in Europe and the United States on Friday. The S&P 500 (SPX) lost 0.5%, the Dow industrials (INDU) dropped 0.4%, and Nasdaq Composite (COMP) fell 0.5%.

U.S. markets are closed Monday for Martin Luther King, Jr. Day.

Last August, the United States had its AAA rating cut one notch by S&P amid a political impasse over the nation’s debt ceiling.

The U.S. downgrade initially sparked a sell-off in the stock market. But the reaction in the bond market was muted, with yields on U.S. government bonds holding steady at low levels.

Asian markets ended lower Monday. The Shanghai Composite (SHCOMP) dropped 1.7%, the Hang Seng (HSI) in Hong Kong shed 1% and Japan’s Nikkei (N225) lost 1.4%