The world media have been enthusiastic about Moody’s decision to cut Ireland’s credit rating to “junk”. The rating agency did it on Tuesday, saying that the debt-ridden economy will probably need extra financial aid.
Not so long ago the experts of warned that the eurozone’s countries would keep having their credit ratings cut as the amount of those countries would only grow. This is what we can see now. Just a week ago Moody's Investors Service downgraded the status of Portugal ’s T-bonds and cut Italy’s credit rating. Now it is Ireland’s bond rating that is cut to “junk”.
Ireland’s rating was downgraded on July 12th. The rating was decreased by 1 level - from «Baa3» down to «Ba1» - below the country’s investment rating. The forecast remains negative, which means that another cut may take place in the coming months. These days Moody’s Investors Service is the 1st representative of the “big 3” that have reconsidered Ireland’s sovereign rating. The other 2 agencies - Standard & Poor's and Fitch - are still uncertain about it, maintaining Ireland’s rating at "BBB+". Initially Ireland’s rating was “A” but it was downgraded to «Ba1» within 4 months (April-July 2011).
Why do the ratings of EU countries keep collapsing?
According to , the reason is that the EU finance ministers for the first time accepted that a selective default might be a necessity to help Greece reduce its public debt. If it happens Ireland’s rating may see further cuts:
· Ireland was the 3rd EU country that asked the EU and IMF for financial aid. The amount is 85 billion euro. The program is to be completed in 2013.
· The main reason for the series of rating cuts was the concern that after getting 85 billion euro Ireland will need more money to recover. It means that another round of external financial aid is still highly probable.
· Besides, Moody’s analysts doubt that the Irish government will manage to implement their austerity program to the full extent, especially as the current condition of Ireland’s economy leaves much to be desired.
Should rating agencies be blamed?
The Prime Minister of Ireland expressed his disappointment about the decision made by Moody’s.
1. Numerous Irish officials insist that the borrowed 85 billion euro will be enough to solve the country’s financial problems. They say that as opposed to Greece, Ireland is successfully solving its current financial problems and doesn’t need further external stimulation.
2. Some other EU officials are indignant at the rating agencies’ inadequate attitude towards some eurozone countries.
3. On July 13th the Euro Commission President, Jose Manuel Barroso, said that “yesterday's decision by Moody's to downgrade Ireland's credit rating is incomprehensible”.
Viviane Reding, European Commissioner for Justice, Fundamental Rights and Citizenship, in an interview with German daily Die Welt said that "either the G-20 states jointly decide to smash the cartel of the three US rating agencies -- for example the U.S. could be asked to make six rating agencies out of the [current] three -- or there will be European and Asian rating agencies created".
According to Michel Barnier, European Commissioner for Internal Market and Services, it is necessary to ban all rating agencies from rating those countries that received financial aid.
4. The rating agencies showed no emotions in return. They promised to keep cutting the ratings of those countries that would fail to comply with their obligations.
What was the market reaction to the latest news?
The decision made by Moody’s will probably influence the decisions that will be made by other agencies because the rating cut will probably make investors get rid of their Irish T-bonds.
· On Wednesday the Irish 10-year bond yield hit the record level of 13,71%.
· The interest rates of Ireland’s 2-year notes gained as much as 91pts, reaching the record of 18,65%
· On Wednesday EURUSD dropped down to $1,3976 then retraced up to $1,3988.
· Dow Jones Industrial Average lost 0,47%;
· The US T-bonds gained some value while their yield declined down to the lowest level seen in the last 3 weeks (2,908%).
Therefore, Moody's Investors Service once again succeeded in drawing investor’s attention to the eurozone’s debt problems and to distract them from the same problems in the US.
The experts of the Department of Masterforex-V TS note that EURUSD is forming a bearish retracement and will keep retracing until the MF pivot and sloping channel are broken ( as shown below). If it happens EURUSD will continue its long-term rally in the form of wave c(C ) of Weekly, with updating the high at 1.4925.
Market Leader and would be very grateful to you for participating in a survey. Please, visit the Academy’s forum and answer the question given below:
Do you think international rating agencies:
· can objectively evaluate the situation in some certain countries
· are biased (executing one’s orders)
· play their own games
