The word is that S&P will downgrade France and a number of other European countries. Market reaction has been ho-hum. French bond yields have hardly moved. Looks like people think this will play out the same way it did when S&P downgraded the US. Treasury yields fell sharply after that.
But is a downgrade of France (and other Euro nations) the same as a downgrade of the US?
Absolutely not. European countris are credit sensitive by virtue of the fact that they are not currency issuers. They do need external funding.
And here's the kicker...what has the ECB been doing in the last two weeks? Selling bonds! They've sold 50 billion euros worth of bonds in that time, reducing the size of their balance sheet.
Looks to me like investors don't know this is happening. Also looks like we're in for another round of funding crisis fears.
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Here's a question: If a ratings agency continues to downgrade debt, and yet the market never responds to the changed ratings, at one point do people begin to downgrade the stock of the ratings agency?
I mean, isn't this no different than a car company producing cars that no one is buying?
I guess people are still buying the ratings, but not acting upon them. But if I'm an exec paying for ratings that I never act upon, at some point don't I decide that I shouldn't be buying the ratings any longer?
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