Home > 2012 > Personal Finance

The S&P and the EU: Timing Is Everything

Advertiser Disclosure Comments 0 Comments

In keeping with a tradition firmly established in the 20th century, Europe suffered a late-night bombing raid on Friday evening. This time the attacker was Standard & Poor’s, everybody’s favorite rating agency, which announced well after the markets closed in New York it was downgrading the debt of no fewer than nine European countries. France was dropped one notch and therefore lost its prized AAA rating, and Italy and Spain both dropped two notches. Portugal’s sovereign debt, like Greece’s, has now been relegated to “junk” status.

This was not a sneak attack. In December, S&P had given broad warnings that steps such as these might be taken. Furthermore, late last week rumors were circulating in markets around the world that S&P was getting ready to lower the boom, so to speak.

As you will no doubt recall, S&P downgraded United States debt late last summer, making the US for the first time in history a less than AAA borrower. As a result of that step, S&P was the subject of heavy criticism, not to mention a federal investigation. On the other hand, the downgrading of US credit had relatively little effect in the marketplace; after all, the United States is still the world’s largest economy (unless you amalgamate all the economies of the EU, which fewer and fewer people do these days,) and is still seen as a bedrock of cool in a world which is getting ever warmer, financially and politically as well as climatically.

The always decorous French were particularly stung by so déclassé a thing as a credit downgrade. In France, a AAA rating was something of a matter of national pride; a financial Maginot line. Worse, always stylish French president Nicolas Sarkozy is facing a stiff electoral challenge early this spring from the Socialist party, which will certainly characterize the downgrade as a slip-and-fall on the Sarkozy runway prance. Despite the lateness of the hour, everyone in Paris was ready with predictable statements, downplaying the significance of the S&P assessment.

They’re probably right. Many observers believe that the downgrade was already “baked into” market action on both sides of the Atlantic, and although there will certainly be a reaction when the markets reopen it may well be mild.

The principal reason that I expect market reaction to be muted is because of the timing of several events, all of which occurred late last week. For example, S&P did not release its new report (which was blandly entitled “Standard & Poor’s Takes Various Rating Actions on 16 Eurozone Sovereign Governments”) until after the markets closed New York. This is standard operating procedure in order to give traders time to think it over and therefore react more sensibly. From that standpoint, last Friday was a particularly propitious time, given the fact that it preceded a three-day weekend in the US. And since it was late-night in Europe, everyone there could sleep on it a couple of days before getting to their screens on Monday morning. There’s nothing unusual about all of that.

However, on Thursday Spain conducted a debt auction, which was, in the view of many observers, a remarkable success. It sold about 10 billion euros’ worth of bonds, twice the expected amount, at prices yielding a full percentage point less than those of previous auctions.

So, on Thursday morning Spain’s cost of borrowing was substantially reduced in the face of suddenly strong demand for its sovereign debt, but by Friday evening S&P saw fit to downgrade it a full two notches. The luck of the Spanish?

I wonder what the result of that auction would have been had it been held on Saturday morning instead of Thursday morning…

Even more curiously, Italy conducted an auction of its sovereign debt on Friday morning, within a few hours of the S&P announcement, which also went quite well — all things considered. It sold about 4.8 billion euros’ worth of bonds and found at least decent demand, with rates dropping about 15% as compared to the results of its last sale.

All of this occurred at the tail end of a week that had seen the euro climbing in value against the dollar. Clearly, the EU had had a pretty good week until the S&P catcall. But most strangely, the announcement of the results of the Italian auction were delayed inexplicably, a fact that was generally overlooked in most of the reporting of the auction results. Perhaps the delay was merely the result of an overlong espresso and biscotti break, perhaps not– curiouser and curiouser.

The European debt crisis is now two years old, and a double dip recession seems very likely since no real progress has been made in resolving that crisis, as S&P very correctly pointed out in the report that accompanied its new ratings. A default by one or more members of the EU, or even just another recession, could have a quite nasty ripple effect throughout the world — particularly in the US which is a major trading partner of the EU countries, and whose banking system is intertwined with all of the central banks and financial institutions that would be severely damaged by such events. Many observers believe that the EU, at least in the form that in which it has existed for some time now, would not survive a real meltdown. Given the fact that pretty much all markets in all countries seem to be more and more vulnerable to psychological factors, I suppose it is in the best interests of all governments around the world to manage information so as to minimize mayhem and fear, irrespective of what actually happens in the coming months. After all, what really goes on in Area 51 makes no difference to our daily lives, unless and until there is an actual alien invasion, right?

So the balanced seesaw of news that has characterized all of the financial events in Europe lately will probably continue until the crisis blows up or blows over. It really is all about timing; one does not need too much imagination to speculate that the Italian and Spanish debt auctions went well BECAUSE THEY HAD TO GO WELL, given the fact that everyone knew that S&P downgrade was likely imminent. If those auctions had produced a disastrous result, there would have been an awful lot of unsettling bad news in a very short time.

Aside from the fact that I love espresso and biscotti, I really wish I could have been present at whatever conversation caused the delay in the announcement of the Italian auction results. Whatever else is true, right now, Europeans are trying to buy a stairway to heaven by buying time–and it makes me wonder…

Image: Funky Tee

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team