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Markets in Europe Little Moved by Downgrades

President Nicolas Sarkozy of France, in his first public comments since Standard Poor’s cut the country’s rating Friday by one notch from the top AAA grade, said that “in the final analysis, this doesn’t change anything.”

Speaking in Madrid at a joint news conference with the Spanish prime minister, Mariano Rajoy, Mr. Sarkozy said France and the other European countries that were downgraded “must cut our deficits, cut spending and improve the competitiveness of our economies to return to growth.”

Market activity was subdued Monday, with Wall Street closed for the Martin Luther King’s Birthday holiday, but analysts were looking ahead to a flurry of activity ahead of the European Union’s next summit meeting, which is to be held Jan. 30 in Brussels.

Much of the attention is focused on Greece, where talks on the amount by which private-sector lenders would write down the value of their holdings of Greek bonds broke down last Friday, but were to resume this week.

“The progress or otherwise of these negotiations will probably dictate how the market trades over the next few weeks,” said Gary Jenkins, the founder of the fixed-income analysis and consulting firm Swordfish Research, according to The Associated Press.

Mr. Rajoy, who broke a pre-election promise by raising taxes, told journalists that he did not think additional tax increases would be necessary. He also said Spain should continue to hold a seat on the board of the European Central Bank.

Herman Van Rompuy, the president of the European Council, met Monday in Rome with Prime Minister Mario Monti of Italy. “Market players or rating agencies sometimes consider our response as incomplete or insufficient,” Bloomberg News quoted Mr. Van Rompuy as saying at a news conference after the meeting. “Yet real progress has been made in reshaping the euro area in order to build on its fundamentals, which are on average sound.”

The decision by S.P. to cut France’s credit rating had been widely expected, especially after the agency accidentally released a draft downgrade announcement in November, and it apparently had no immediate effect on the market for French debt.

In its first test of investors’ appetite since the downgrade, the French Treasury on Monday sold €8.6 billion, or $10.9 billion, of short-term debt securities at yields slightly lower than in the previous auction. The yields on the country’s 10-year bonds fell 0.04 percentage point by late Monday, to 3.014 percent.

Moody’s Investors Service, a rival to S.P., on Monday said it was maintaining its own top rating of France, at Aaa, for the time being, with the results of a review that is currently under way to be announced before April.

In trading Monday, the Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 1 percent, and the FTSE 100 index in London rose 0.4 percent. Indexes rose in France and Italy and were little changed in Spain.

In addition to France, S.P. also cut the ratings of Austria, Italy and six other European countries last week. The agency cited a deteriorating economic situation and disappointment with leaders’ efforts to address the euro crisis.

On Monday, yields on Italian 10-year bonds edged down one basis point, to 6.581 percent, while Spanish 10-years were yielding 5.117 percent, down four basis points. A basis point is one-hundredth of a percentage point.

Reuters cited unidentified traders as saying the European Central Bank had intervened in the secondary bond market again, buying Italian and Spanish securities to relieve some pressure on yields.

Yields on German 10-year bonds, the European benchmark, were unchanged, at 1.764 percent.

The dollar was mixed against other major currencies. The euro slipped to $1.2673 by late Monday in Europe from $1.2680 late Friday in New York, while the pound rose to $1.5325 from $1.5317. The dollar fell to ¥76.75 from ¥76.97, but rose to 0.9538 Swiss francs from 0.9524 francs.

Asian shares fell. The Tokyo benchmark Nikkei 225 stock average slid 1.4 percent. The Sydney benchmark index fell 1.2 percent. In Hong Kong, the Hang Seng fell 1 percent and in Shanghai the composite index declined 1.7 percent.

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Portugal’s Debt Rating Cut to Junk by Moody’s

Moody’s cut its rating on Portugal’s long-term government bonds to Ba2 from Baa1 and said the outlook was negative, suggesting more downgrades might be in store.

Even though Portugal negotiated a $116 billion rescue package in May, the ratings agency cited the risk that the country would need a second bailout before it could raise funds in the bond markets again and that private sector lenders would have to share the pain.

It also warned that Portugal might fall short of the financial goals it had worked out with the European Union and the International Monetary Fund under the terms of its bailout because of the “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.”

The downgrade came a month after a general election in Portugal in which voters unseated the Socialist government of José Sócrates. Since then, the new center-right coalition government, led by the Social Democrats and Prime Minister Pedro Passos Coelho, have pushed ahead with austerity measures and other reforms pledged by Portugal in return for its bailout.

Among such austerity measures, Mr. Passos Coelho’s government said last week that it would need to raise taxes to meet its budget deficit target. Under the plan, the government hopes to collect 800 million euros ($1.2 billion) in additional tax receipts this year by introducing a special tax that will amount to a 50 percent cut on the traditional Christmas bonus given to Portuguese workers, equivalent to one month of salary.

Responding to Moody’s decision on Tuesday, the finance ministry said in a statement that Moody’s had “ignored the effects” of the tax plan outlined last week in Parliament. The tax increase, the ministry added, “constitutes a proof of the government’s determination to guarantee the deficit targets for this year.”

The finance ministry said Moody’s downgrade vindicated the government’s recent policy initiatives since “a robust program of macroeconomic adjustment constitutes the only possible approach to reverse the tide and recover credibility.” The new government has also shelved several infrastructure projects, including a new high-speed train link between Lisbon and Madrid, as well as pledged to speed up the privatization of state-controlled companies.

Still, proposals like raising taxes will most likely yield more pain for citizens of a country whose economy is forecast to contract 2 percent this year and next.

As a practical matter, the downgrade “means that a smaller universe of investors can hold Portuguese debt on their books,” said Carl B. Weinberg, chief economist at High Frequency Economics in New York, referring to rules banning many investment vehicles from holding debt rated below investment grade. Portugal does not have to borrow in the markets, he noted, so the immediate damage to government finances is limited

Still, with all the confusion about another bailout for Greece, “this adds to the perception that there might not be a ready solution,” Mr. Weinberg said. “It revives the concern that a multicountry sovereign default could happen.”

“They’re playing with dynamite in euro land,” he added.

Hopes that Greece’s problems might be brought under control soon were deflated after Standard Poor’s said Monday that a proposal by French banks to help Greece to meet its medium-term financing needs would constitute a de facto default because banks would be required to roll over loans for a longer term at a lower interest rate.

“We’re continuing to work for a possible solution,” Michel Pébereau, chairman of BNP Paribas, the biggest French bank, said Tuesday at the Paris Europlace conference, a gathering attended by hundreds of international bankers. If the current ideas do not work, Mr. Pébereau said, “we’ll come up with something else.”

French and German bankers were scheduled to meet Wednesday morning at BNP Paribas’s headquarters in Paris with central bank officials, under the auspices of the Institute of International Finance, an association of the world’s biggest financial companies, to discuss how to proceed, said people briefed on the plan who were not authorized to speak about it publicly.

Raphael Minder contributed reporting from Lisbon.

Article source: http://feeds.nytimes.com/click.phdo?i=26270a7a94996e7a877a25adb0ed5f2d

Markets in Europe Little Moved by Downgrades

Portugal’s Debt Rating Cut to Junk by Moody’s

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