The S&P and the EU: Timing is Everything

Jan. 17, 2012— -- 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.

[Related: Amid Multiple Scandals, Standard & Poor's CEO Resigns]

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.