Credit and credibility
January 17, 2012
Germany's benchmark index of leading shares, the DAX 30, gained 1.32 percent early on Tuesday, while Britain's FTSE 100 and France's CAC 40 both climbed more than 1 percent shortly after opening.
The positive start to the day mirrored overnight developments on Asian markets, which were boosted by better-than-expected Chinese economic growth data.
The euro climbed out of a 17-month trough against the dollar after a successful French bond auction defied fears that Monday's downgrade of the eurozone bailout fund's credit rating would undermine confidence in the currency.
Second-rate
Standard & Poor's credit ratings agency stripped the European Financial Stability Facility (EFSF) of its AAA status on Monday, placing it one rank lower at AA+.
The decision followed Friday's national downgrades for nine eurozone nations, including France and Austria, which served as top-level guarantors of the bailout fund.
"The EFSF's obligations are no longer fully supported," the New York-based agency said in a statement.
However, the agency said it would reconsider the downgrade provided that certain assurances were made.
"We could raise the EFSF's long-term rating to 'AAA' if we see that additional credit enhancements are put in place," Standard & Poor's (S&P) said.
Lending capacity unaffected
In a statement, the EFSF said the downgrade would not affect its lending capacity, and emphasized that its short-term rating remained at S&P's top level.
"The downgrade to AA+ by only one credit agency will not reduce EFSF's lending capacity of 440 billion euros," said the fund's chief executive, Klaus Regling.
"EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs until the ESM becomes operational in July 2012," he added.
The ESM - the European Stability Mechanism - is a permanent rescue fund that is expected to have an effective capacity of 500 billion euros, based on paid-in capital of 80 billion euros and callable capital of 620 billion euros.
German Chancellor Angela Merkel's spokesman, Steffen Seibert told reporters: "The government has no reason to believe that the volume of guarantees that the EFSF has now should not be sufficient to fulfill its current obligations.
There was also support from Japan, with Finance Minister Jun Azumi saying Tokyo's trust in EFSF bonds, in which it has so far invested 21 billion euros, had not been shaken.
"Japan has bought them by certain amounts and our stance will not immediately change just because of the downgrade," Azumi told reporters after a cabinet meeting.
Standard and who?
European Central Bank chief Mario Draghi downplayed the importance of ratings agencies on Monday.
"I think what we should do is learn to live either without them or with them - but to a much more limited way than we do today," Draghi said.
"To a great extent, markets anticipated these ratings changes and priced their assets as if these ratings had already been issued."
However, Draghi added that eurozone leaders still needed to take decisive action, describing the eurozone's current situation as "very grave."
"We must not shy away from this fact," Draghi told a European Parliament committee in Strasbourg.
Thursday test
France successfully sold 8.59 billion euros of short-term bonds on Monday at a lower rate of interest than it paid at previous auctions. These lower yields suggest France has retained its market credibility in the wake of the national and eurozone downgrades.
An even bigger test will come on Thursday, when France holds an auction for long-term bonds worth between 7.5 billion and 9.5 billion euros (between $9.5 billion and $12 billion).
Analysts will be watching carefully to see whether Paris will pay higher yields or whether the markets will shrug off the downgrade as they did last year when S&P cut the Washington's credit rating.
"The longer-term debt auction on Thursday is much more of a challenge," Kathleen Brooks, research director at currency trading site Forex.com, told AFP news agency.
"Last week we saw good demand for short-term Italian debt, but a lukewarm reception to longer-dated securities issued by Rome. If that happens at the French auction on Thursday then we could see a sharp decline in euro-based assets."
French Finance Minister Francois Baroin voiced confidence ahead of the issue, describing his nation as a "no-risk bet" for investors.
"France is a great country with a solid ... diversified economy, a skilled workforce, a highly resistant banking system and a high savings level," Baroin said on Monday.
Author: Richard Connor, Sam Edmonds (AFP, dpa, Reuters)
Editor: Nancy Isenson