S&P Downgrades France, EFSF; Greece Defaults Shortly (EUR/USD, Bond Yield Reactions)

10-year Portuguese Bond Yield (Bloomberg)
European sovereign credit ratings are in the news again. Standard & Poor's downgraded nine European nations on Friday, including AAA France, AAA Austria, Italy, Spain and Portugal. Yesterday, S&P also downgraded the EFSF, or European Financial Stability Facility, which is dependent on France's creditworthiness since they fund a large portion of the fund. Moody's then spoiled the downgrade party by keeping France at Aaa with a stable outlook. However, markets, except for Portugal (see chart), treated the catalysts like they were priced in.

The 10-year French OAT yield opened at 3.06%, hit a high of 3.12%, but then closed at 3.03% (price moves inversely with yield). And the 5-year French OAT yield spiked to 2.05% at the open and then closed at 1.86%. The 10-year French-German yield spread opened around 1.35 but then tightened to 1.26 at the close. On the other hand, Portugal's government bond yields spiked after S&P downgraded the country to junk. The 10-year Portuguese bond yield opened at 12.65% and rose all the way up to 14.40% to make a new high.

EUR/USD initially rose to test the death channel's downtrend line when the ECB kept rates unchanged (read ECB President Mario Draghi's introductory statement and press conference transcript Q&A -link), but then rumors of a French downgrade sold EUR/USD all the way down to around Aug 2010 support (1.2587), hitting a low of 1.2644.

EUR/USD (source: FreeStockCharts.com)

Wow, at 9:32pm it seems like EUR/USD is shaking everything off, up 0.53% at 1.2713. It could perhaps test the downtrend line again. Some strategists, economists and money managers believe EUR/USD will hit 1.0-1.20 by the time this is all over. On BloombergTV today, Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor's, discussed the downgrades and said Greece will default shortly, but the hope is that it won't be disorderly. Here's a quote from the video.

"Well we think by our definition Greece will default very shortly because even the debt exchange that is being proposed is a default. By our definition it's a distressed exchange. Whether there will be a solution at the end of the current rocky negotiations, I cannot predict. There's a lot of brinkmanship going on right now. We think there's a lot at stake. And policymakers across Europe will be aware that if you have a disorderly default of Greece in March when a large bond comes due and cannot be refinanced, that the ramifications for other countries in the eurozone could be substantial. And I think there's a great political will to try to avoid the situation. So the game is still on. The negotiations may drag on for a little bit longer, but slowly but surely the two parties are running out of time."

This is why I keep blogging about the euro. Below are links to S&P reports and articles on the credit rating actions: