Editor's Note: Elisabeth Afseth worked in bond for 17 years, from Williams de Broe. She is currently working as an analyst for the evolution of securities fixed income. She has a degree in economics from the London School of Economics and a master's degree in economics from the University of Oxford.
(CNN) - London Just when everyone was waiting for the rating agency Investors Service of the Moody to downgrade Italy, Standard & Poor gets first with which is a much more damaging decommissioning. Rating S & P of the Italy was already the lowest three major organizations and its decommissioning of A + A, with a negative perspective, he met three notches below rating of Aa2 from Moody (on the watch of decommissioning) and two encoches below AA - from Fitch Ratings.
Financial markets largely shrugged off the downgrading. While the bond yields on Italian sovereign debt - a risk indicator - rose slightly, European stock markets were positive through the day.
Some have argued that a downgrade so expect prices in. But it was not this decommissioning expected, nor the price in. It comes from the Agency with the lowest rating, who do not have even the sovereign on credit watch, but simply a negative perspective. Negative Outlook means usually there is a chance of one to three that the transmitter can be downgraded within two years, it is much less of a warning of an imminent downgrade as a watch for the decommissioning.
To illustrate this point, S & P has the U.S. rating on negative outlook after its decommissioning controversial in August. I think it would be fair to say that most participating in the market would be very surprised if the rating agency downgraded to United States in a few months.
How far is the decommissioning important?
It does not affect the admissibility of the Italian bonds as security for the European Central Bank, banks need to borrow funds. It does not cross any thresholds of key rating, is so little likely to trigger automatic sale.
What we must look at is the confidence of investors in Italy, and if these investors continue to buy the country's sovereign debt.
Italy must raise about 380 billion euros of funds at the end of 2012. After recently added austerity measures, Italy should run a deficit of 1.2% of the domestic product crude next year (although the rating in the yesterday report agency questioned projections of budget savings from the Government). This is not a large deficit by global comparison.
Also in Italy favour is its debt maturity profile - average life of the public debt is just over seven years, which is longer than most, although there are redemptions enough heavy over the next five years.
The main problems of the Italy are the lack of economic growth and a very high burden, to 120% of the gross domestic product, which almost inevitably means a large barrel of debt each year and therefore sensitivity to interest rate levels. The first problem to be addressed by politicians, implementation of structural reforms; the second requires the confidence of investors so that they continue to buy bonds. These issues are linked, as this confidence will be very difficult to maintain if the determination of the reforms appear to be managed.
The 380 billion euros Italy needs in the 15 months well enough would be wiping the current European bail out Fund even if the changes made to the installation are approved for him allow them, or European installation of financial stability - to increase its ability to loan to EUR 440 billion. The Italy is the third largest country in the euro area, generating approximately 17% of the total growth in the euro area (compared to the Greece, the Ireland and Portugal which combined represent about 6%).
No effect of contagion would be extremely serious. If the markets decide not to fund the Italy, it is very likely that the fourth largest country, Spain, will also need support. Spain is approximately 200 billion euros to cover redemptions and deficit financing of the requirements by the end 2012.
Italians and Spaniards have benefited from the support of the Central Bank in bond in six weeks. The ECB has bought up to about 80 billion euros of debt - that keeps the country financing low prices - since it has begun to intervene in the market.
We know that there is opposition to the program that allows this intervention, among the ECB and European politicians, but for now it seems the closest we are a solution to the European debt crisis.
The ECB maintains repeat, that it cannot solve the problems of the euro zone - which is the work of politicians and will require economic and financial changes. But the ECB and the expanded rescue funds can buy countries of deficit/debt that both need time.
We can just hope that this time is used more effectively that the revised S & p estimates suggest.
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