S&P, Greek standoff pressure euro zone to boost defenses

Sun Jan 15, 2012 5:13pm EST
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By Mike Peacock

LONDON (Reuters) - Financial markets are unlikely to be derailed by mass euro zone downgrades but with Greek debt talks at an impasse, pressure has been loaded on the bloc to shore up its defenses and glimmers of optimism from last week have been firmly doused.

With the United States and Japan already downgraded from "AAA" the likes of France and Austria are in good company and Standard & Poor's ratings cuts had been flagged in December. Nonetheless, the upbeat tone that surrounded last week's strong Spanish bond auction now seems a distant memory.

"The euro zone crisis is now dominating market activity again, after a period in which better economic news from the U.S., and easier monetary policy in China had helped markets move higher," said Dominic Rossi, chief investment officer, equities, at Fidelity Worldwide Investment.

U.S. markets are closed Monday for the Martin Luther King holiday but the euro zone will not have to wait long for a test of investor appetite.

France will attempt to sell up to 8 billion euros of debt on Thursday and Spain will tap the market again after a successful bond auction last week where it raised twice as much as expected at lower borrowing costs.

Analysts put that success down to the flood of cheap 3-year money the European Central Bank pushed into the banking system in December. It will make the same offer in February, fostering hopes that it can avert a credit crunch and helped bolster struggling euro zone debt issuers to boot.

But the twin blows of the serial S&P downgrades and the stalled Greek bond swap talks have cast another pall of gloom. This time, Spain will try to sell longer-term debt, which could be tougher.

"While the market impact of the downgrades is unlikely to be very significant in the short term, they serve as a stark reminder that the euro area sovereign crisis is here to stay," analysts at RBS said. "We continue to expect the crisis to deepen eventually leading to further widening in spreads across countries vis-a-vis Germany."   Continued...