Mike Lenhoff's market tactics - 16 January 2012
Last week’s lowering by Standard & Poor’s of the credit rating for more than half the members of the eurozone serves as a reminder that a long hard slog still lies ahead for eurozone’s leaders in resolving the issue of sovereign debt sustainability.
It is doubtful though that the downgrading of sovereign debt for France, Austria, Italy, Spain, Portugal, Malta, Cyprus, Slovakia and Slovenia will have more than a passing influence on bond yields and stress in bank funding markets. The ECB is likely to support sovereign markets with its Securities Market Programme, that is, if it judges the action to be at all warranted. The banks on the other hand may simply be encouraged to take up more medium terms funds that the ECB will make available at its second three-year Long-Term Refinancing Operation at the end of February.
Hopefully, what the S&P downgrades will do is apply pressure on eurozone leaders to sign up to the fiscal compact with its enforcement mechanism on the desired date (March 1). The S&P action may also add to the downward pressure on the euro which will be no bad thing at a time when the eurozone is heading for recession, if not already in one. On Greece, the talks that broke down with its creditors at the end of last week over the bond swap are due to resume this Wednesday but the prospect of a default is getting to be touch and go, as is its survival in the eurozone. More >