In a move that came as no surprise to the markets, Standard & Poor’s have cut the credit rating of both Greece and Portugal.
With the yield charged by investors to hold Greek bonds still rising and default fears failing to ebb, S&P reduced Greek debt to “junk” status. Portugal also suffered a downgrade, with S&P maintaining a negative outlook, as the troubles in Greece show signs of spreading.
Investors are fearful that the problems in Greece are spreading to other peripheral nations; Portugal is looking set as the next target. Bond yields swiftly rose following the country’s credit downgrade and are continuing to do so.
Duncan Higgins, senior analyst at Caxton FX comments, “Clearly the danger for European officials is that the fiscal turmoil in the eurozone will spin out of their control. It now appears that Portugal is treading a precariously similar line to Greece.”
A report today suggests that the IMF may increase its share of financial aid to Greece by €10 billion euros from the current €15 billion euros already agreed. This does seem to have helped calm the markets momentarily and stemmed the euros losses. Focus heavily remains on the sustainability of the bailout programme. After two months of negotiations, investors want clarification that the conditions agreed will be sufficient to cover Greece’s debt obligations.
Greece has immediate debt obligations of €8.5 billion due May 19th, and the market is extremely wary that it may not meet these in time. Conditions of the bailout are still to be finalised and Germany, the main EU contributor, is acutely aware of the growing opposition to putting taxpayer’s money on the line in Greece.
“There is a risk that the market may start to bet against all heavily indebted eurozone nations, which could lead to a real crisis for the single currency. There is a lot resistance supporting the euro from sliding further against the dollar, with the price already at a one-year low. With EU talks as yet failing to show any positive results and fears quickly spreading, we anticipate a move to $1.25 in the next month,” continues Higgins.
The weakness in the euro is also spilling over to the sterling / US dollar rate. With investors buying back the safer currency, the greenback is gaining across the board. The pound is currently trading at a three-week low against the greenback. With a positive statement expected from the Fed this evening, we now expect to see sterling below $1.51 in the near term.
