November 27, 2020

Markets Brush Off S&P Downgrades, Focus on Greece

LONDON (AP) — European markets responded calmly on Monday to Standard Poor’s decision to cut the credit ratings of a number of euro countries, including France.

The downgrades, which were based on concerns over Europe’s ability to handle its two-year debt crisis and the lack of economic growth, had been anticipated for weeks so the market impact was muted, especially since the U.S. is on holiday for Martin Luther King Day.

Europe will likely remain the focus of attention all week as a number of bond auctions are due and Greece tries to clinch a debt deal with its private creditors. Last October, Greece’s partners in the eurozone sanctioned a deal whereby Greece’s creditors agree to take a cut in the value of their Greek bond holdings to help lighten the country’s debt burden.

The deal with private investors, known as the Private Sector Involvement, or PSI, aims to reduce Greece’s debt by euro100 billion ($126.5 billion) by swapping private creditors’ bonds for new ones with a lower value. It is a key part of a euro130 billion international bailout, the second one for Greece.

It is expected that talks on the PSI will resume this coming week after being abandoned last Friday.

On Tuesday, representatives of Greece’s creditors — the European Union, the European Central Bank and the International Monetary Fund — will visit Greece for yet another round of inspections of its efforts at fiscal and structural reform and negotiations for the next tranche, the seventh, from the first bailout.

Without a deal with its private creditors, Greece has been told it won’t get the next tranche of money due from its first bailout.

Without that money, Greece would be unable to pay a big bond redemption in March and would face the prospect of defaulting on its debts, potentially triggering more mayhem in financial markets.

Gary Jenkins, a director of Swordfish Research, reckons the Greek debt restructuring poses more risks to the markets in the short-term than SP’s decision to strip France of its cherished triple A credit rating or to downgrade eight other euro countries, including Italy.

“The progress or otherwise of these negotiations will probably dictate how the market trades over the next few weeks,” said Jenkins.

Greece’s Prime Minister Lucas Papademos insisted in an interview with CNBC that a deal will be hammered out.

“Some further reflection is necessary on how to put all the elements together,” he said. “So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.”

While investors awaited developments, markets were slightly lower, trading in fairly narrow ranges.

In Europe, Germany’s DAX was 0.3 percent higher at 6,161 while the CAC-40 in France rose 0.1 percent to 3,198. The FTSE 100 index of leading British shares was down 0.1 percent at 5,623. The euro was also relatively steady, up 0.2 percent at $1.2672. ON Friday, it had fallen to a 17-month dollar low of $1.2623 as speculation swirled in the markets of SP’s downgrades.

Earlier in Asia, markets responded more negatively to the SP downgrades, which were confirmed after U.S. and European markets had closed on Friday. Asian markets had already closed by the time speculation of the downgrades emerged.

Japan’s Nikkei 225 index slid 1.4 percent to close at 8,378.36 and Hong Kong’s Hang Seng lost 1 percent at 19,021.20. South Korea’s Kospi dropped 0.9 percent to 1,859.25.

In mainland China, the Shanghai Composite Index lost 1.7 percent to 2,206.19, while the smaller Shenzhen Composite Index dropped 3.3 percent to 818.17. Almost 70 companies plunged the daily limit of 10 percent.

In the oil markets, traders are fretting over simmering tensions in the Middle East and Nigeria.

The U.S. is trying to rally global support for sanctions against Iran for its alleged efforts to develop nuclear weapons. Iran, the world’s fourth-largest oil exporter, has vowed to retaliate by shutting down the Strait of Hormuz, the passage for one-sixth of the world’s oil. That could send prices skyrocketing.

Meanwhile, a threatened strike by oil workers in Nigeria, a top oil supplier to the U.S., has further complicated the picture. The threat is in response to the government’s decision to end fuel subsidies, which more than doubled the price of gasoline in a country where most people live on less than $2 a day.

Unsurprisingly, oil prices edged higher on the combination of concerns — benchmark oil rose 63 cents to $99.33 per barrel in electronic trading on the New York Mercantile Exchange.


Pamela Sampson in Bangkok contributed to this report.

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Trichet to Leave a Difficult Legacy at Central Bank

Time and again the bank and its president, Jean-Claude Trichet, have applied pressure when they thought heads of state were not acting responsibly. As a result, when Mr. Trichet’s eight-year term expires at the end of October, he will leave behind an institution that has grown substantially in stature and influence.

He also leaves behind a difficult legacy for his most likely successor, Mario Draghi, the governor of the Bank of Italy. Mr. Draghi appears to share Mr. Trichet’s ability to negotiate cordially with European leaders — and to browbeat them when necessary. But Mr. Draghi, already an influential member of the central bank’s governing council, will also inherit an institution that has become deeply entangled with the banking system, financial markets and the political process.

“The E.C.B. so far has done an admirable job, all things considered,” said Dennis J. Snower, president of the Kiel Institute for the World Economy in Kiel, Germany. “But it has found itself in a very uncomfortable place not of its own choosing. This place may become more uncomfortable as time goes on.”

In May 2010, Mr. Trichet and others pushed leaders to recognize that there was a crisis in the first place, and then to fashion a rescue package for Greece. The bank did its part by buying Greek government bonds.

This year, the bank has used its influence in the banking system to insist that Portugal and Ireland accept bailout loans. Mr. Trichet has also pushed governments, with limited success, to adopt tougher sanctions against euro countries that run up too much debt, with the goal of averting future crises.

In recent days, as the idea of allowing Greece stretch out its debt payments gained traction, the bank set itself up as the main opposition. It is not clear whether the bank will succeed in blocking a restructuring that many economists see as inevitable.

Mr. Trichet and others argue that a Greek default could disrupt financial markets in ways that would be unpredictable and impossible to control. But in recent weeks the bank has faced criticism that it has a conflict of interest.

In May 2010, the bank began buying Greek, Portuguese and Irish debt in an effort to stabilize markets for those bonds. The bank acted with the national governments, which at the same time set up a 500 billion euro, or $715 billion, bailout fund for the distressed countries.

As a result, though, the bank now holds 75 billion euros in bonds from those countries and would lose money if any of them defaulted.

In May, Mr. Trichet walked out of a meeting with leaders of euro zone countries in Luxembourg. He was upset that the politicians were toying with the idea of a Greek debt restructuring.

Yet the bank’s venture into politics also created strains in its own governing council. Axel A. Weber, the president of the German Bundesbank and a member of the council, argued that the bank was making a mistake by intervening in government bond markets.

Based on public statements Mr. Weber made later, it appeared that he thought the bank was moving too far into fiscal policy and letting governments off the hook.

“Primary decision-making over wide areas of economic and finance policy remains with member states,” he and two Bundesbank economists wrote in a March commentary published in The Frankfurter Allgemeine newspaper.

The ideological split had lasting consequences for the bank. Mr. Weber, who had long been seen as the front-runner to succeed Mr. Trichet, resigned as Bundesbank’s president at the end of April to avoid defending polices he disagreed with.

Even though European politicians seem to resent meddling, they have been glad to allow the central bank to deploy its financial resources at crucial moments, propping up commercial banks with cheap credit and intervening in bond markets.

In many respects, the bank is better equipped to deal with the crisis than national governments. It is a pan-European institution able to act quickly — and independently.

Liz Alderman contributed reporting from Paris.

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