S&P Threats ‘Amplify’ Risk of EU, ECB Meetings: Analyst Comments

Strategists comment on Standard & Poor’s decision to place 15 euro-area nations on review for possible downgrade. The ratings may be cut depending on the result of a summit of European leaders on Dec. 8-9, S&P said yesterday.

The comments were collected from investor reports.

Steve Barrow, head of research for Group-of-10 nations at Standard Bank Plc in London:

“We are not convinced that S&P will downgrade the euro zone at this stage. We do not think that the Merkel/Sarkozy plan is the solution but as long as other euro zone members agree to it, we think that S&P will not carry through their threat to downgrade. And we believe that other euro-zone members will agree to the Franco-German package.

‘‘Interestingly the reaction in the euro has been muted. This might reflect market confidence that there won’t be a downgrade but, perhaps more likely, reflects the fact that many traders and investors want to stay away from the market at this very tricky time of the year.’’

Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London:

‘‘The market is anticipating a strong signal from the ECB that it will aggressively increase its crisis-fighting role at this week’s policy meeting.

‘‘The joint announcement yesterday from German Chancellor Merkel and French President Sarkozy to call for a Treaty change to enforce automatic penalties going forward for members who run budget deficits greater than 3% of GDP is a tentative step towards closer fiscal union which may prove enough to satisfy the ECB to take more decisive action to boost near-term market confidence.

‘‘Such a step may prove enough to prevent S&P from implementing a mass credit downgrade for euro-zone members. However, it still remains unclear whether the ECB is willing.’’

Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong:

‘‘Much of the damage to sentiment was seen in the immediate aftermath of the announcement.

‘‘The relatively muted risk-off move is likely down to the fact the review will be dependent on the outturn of the EU Summit and ECB, which only serves to amplify the market’s notion of how important those event risks were already.’’

Steven Major, global head of fixed-income research at HSBC Holdings Plc in London:

‘‘S&P’s decision late last night is expected to put upward pressure on bund yields whatever the outcome of the EU Summit at the end of this week. If the outcome of the summit is favourable there will likely be new contingent liability and greater burden-sharing for Germany, in the opinion of HSBC FI Research.

‘‘On the flip side, if the summit is deemed to be inconclusive, the downgrade of Germany’s credit will push bund yields higher, reflecting the new status. Spreads of other AAA Euro zone countries already imply lower ratings, so the impact will be less.’’

Analysts led by Erik Nielsen, global chief economist at UniCredit SpA in London:

The ‘‘S&P decision will add more uncertainty to the picture and, if anything, should weigh more on top-rated countries where it comes as more of a surprise. We would not expect a big repricing in terms of yields, however, as the negative outlook does not imply a downgrade and more uncertainty means more flight to quality.’’

Laurent Fransolet, head of European fixed-income strategy, and Cagdas Aksu, analyst at Barclays Capital in London:

‘‘The lack of many viable AAA alternatives in case of widespread downgrades makes it, if anything, less likely that there will be massive reallocations from the various AAA countries in the near term, albeit with France being at risk of a two-notch move.

‘‘Overall, the S&P move will also probably continue to lead to a reassessment of the role of rating agencies, and the coveted AAA rating status as such.’’

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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