December 8, 2023

Europe’s Credit Woes Make for a Shaky Day in Markets

The joint Congressional committee charged with drafting deficit cuts said after the markets closed in New York that, as forewarned, it had failed to reach a deal to trim $1.2 trillion from government spending over 10 years, setting the stage for the automatic adoption of spending cuts starting in 2013.

But although the likely failure of the negotiations had revived the issue of the impact on the United States credit rating, analysts said they believed that by Monday, the markets had already priced in the result.

“I think expectations are already pretty low,” said Mihir P. Worah, a managing director at Pimco. “I would tend to think what is happening in Europe is more influential today.”

The sovereign debt troubles remained front and center after Moody’s Investors Service warned that France faced a fight to retain its AAA credit rating.

The Standard Poor’s 500-stock index, a broad measure of the market, was down 1.86 percent to 1,192.98. The Dow Jones industrial average was off 2.11 percent, or 248.85 points, at 11,547.31 and the Nasdaq composite index lost 1.92 percent.

But even with the stalemate in the “supercommittee,” a Treasury bond auction was heavily subscribed Monday, and the dollar and long-term bonds rallied.

“Because of the situation in Europe, there is a de-risking across the board,” said Quincy Krosby, a market strategist for Prudential Financial. “The sovereign debt problems and the lack of a credible, viable solution trumped the deficit problem in the U.S.”

After the market closed, Moody’s and Standard Poor’s both affirmed their existing ratings on American government debt.

S. P., which downgraded the country’s AAA rating this summer based on what it saw as political brinksmanship, said the current AA+ rating would remain. Moody’s said its AAA rating would remain, but so would its negative outlook.

Some investors said the rating agencies would likely now focus on any attempts by Congress to replace or modify the automatic deficit cuts, known as a sequester, before they go into effect in January 2013.

“This was supposed to be a forum to showcase that politicians could come together and come up with a meager — which it really is — $1.2 trillion in cuts and revenue raises,” said Erik S. Weisman, a global bond portfolio manager at MFS Investment Management. “This is new information for the market, and the market needs to assess whether it is more or less likely that a grand bargain can be reached after the elections.”

Investors, however, were divided on what might happen to yields even if the credit rating were downgraded. This summer, after the S. P. downgrade, Treasury yields fell, but many said that was largely a reflection of investors fleeing the euro zone.

Others said no matter how bad the political and fiscal situation appeared in the United States, its prospects still looked brighter than in some countries in the euro zone.

David Coard, head of fixed income at the Williams Capital Group, noted that when Standard Poor’s downgraded the United States’ AAA credit rating in August, Treasury rates were low then as well.

“The flight to quality lives strong today,” said Mr. Coard. “We are still seeing a pretty strong bid for Treasuries out of the concern both for the European debt crisis and, to a lesser extent I think, the gridlock” over the deficit committee.

In the bond market, the Treasury’s benchmark 10-year note rose 11/32, to 100 10/32, and the yield fell to 1.97 percent on Monday, from 2.01 percent late Friday. Comparable German sovereign debt yielded 1.911 percent.

The yields on Spanish 10-year bonds rose to 6.472 percent on Monday, while the yield on Italian 10-year bonds held steady at 6.624 percent. The spreads between the French, Italian and Spanish yields, on the one hand, and the German yields, the European benchmark, on the other, have grown sharply this year, signaling market distrust of the bonds of euro zone members once thought to be safe.

The dollar was up against a range of currencies and the euro was little changed at $1.3534 from $1.3524 late Friday in New York.

“The market has been spooked over Europe and they are still not convinced that Europe is going to be able to pull out of this,” said Peter Cardillo, chief market economist for Rockwell Global Capital.

Moody’s warned in October that it might begin a review of France’s AAA rating, which is considered the most fragile of the top-rated European governments, if growing bailout costs threatened to overstretch its finances. On Monday, Moody’s said that rising borrowing costs and a deteriorating economic outlook were putting pressure on the nation’s creditworthiness.

Losing its status as a AAA-rated borrower would mean France’s borrowing costs would rise further and would weigh on the credit rating of the euro zone bailout fund, the European Financial Stability Facility. Standard Poor’s already startled French officials when it erroneously sent an e-mail on Nov. 10 that suggested it had lowered the rating on France’s sovereign debt.

“Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications,” Alexander Kockerbeck, a Moody’s analyst, wrote in a weekly report, noting that weak economic growth would further weigh on the country’s efforts to control spending.

The Euro Stoxx 50 index, a barometer of blue chips, fell 3.4 percent, while the FTSE 100 index in London fell 2.6 percent. The CAC 40 in France and the Germany DAX were down by 3.4 percent.

David Jolly contributed reporting from Paris and Julie Creswell from New York.

This article has been revised to reflect the following correction:

Correction: November 21, 2011

An earlier version of this article misspelled the name of Berenberg Bank. 


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