Traders Ignore S&P Decision to Cut Netherlands Credit Rating

The Netherlands lost its top rating at Standard & Poor’s amid weakening economic growth prospects while Spain’s outlook was raised, decisions that were largely ignored by bond investors.

The Netherlands was cut to AA+ from AAA, leaving Germany, Finland and Luxembourg as the only euro-area countries with a AAA rating at the three main ratings companies. Of those, only Finland has a stable AAA rating with all three companies. S&P said its view of Spain, which has a BBB- rating, improved as growth “gradually” resumes.

The yield on the Netherlands’ benchmark 10-year bond rose one basis point to 2.03 percent at 11:33 a.m. in Amsterdam. Equivalent Spanish debt declined three basis points to 4.11 percent.

Global bond yields showed investors ignored 56 percent of Moody’s Investors Service and 50 percent of S&P’s rating and outlook changes last year, more often disagreeing when the companies said governments were becoming safer or more risky, data compiled by Bloomberg show. Spain’s 10-year bond has returned 16 percent since it was last downgraded by S&P in October 2012, according to Bloomberg World Bond Indices.

“Most people who are investing in government bonds have their own view on the credit,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London. “We’re getting more rating agencies recognizing the stability of peripheral markets. It’s being reflected by the agencies but it’s nothing that the market hasn’t already got in its price.”

Dutch Debt

Dutch government debt has handed investors a return of 4.1 percent since its last upgrade by S&P in January 2012. Belgian debt has gained 17 percent in the same period, while Germany’s has increased 3 percent.

The Dutch economy is weighed down by falling real estate prices and consumer indebtedness, with 16 percent of households owning homes worth less than their mortgages, S&P said today. Unemployment is set to reach 8 percent next year, double the 2009 rate, and government efforts to cut the budget deficit will restrict growth next year.

“We do not anticipate that real economic output will surpass 2008 levels before 2017,” S&P said in its statement. “The strong contribution of net exports to growth has not been enough to offset a weak domestic economy.”

Political Negotiations

U.S. debt has returned 4.1 percent since it lost its top rating at S&P in August 2011. French bonds have gained 11 percent and Austria’s 12 percent since both nations’ ratings were cut to AA+ from AAA in January 2012. France is currently rated AA by S&P.

S&P’s decisions may affect the dynamic in European Union economic policy negotiations, according to Jacques Cailloux, chief European economist at Nomura in London. The Netherlands is among the northern European nations, most of them with AAA ratings, that forced peripheral euro members into record budget cuts in exchange for financial aid.

“This might be welcomed by countries with a lower rating,” Cailloux said in a telephone interview. “It does have an impact on the political front.”

Spanish economic growth will accelerate to 1.2 percent in 2015 as exports drag the country out of its five-year slump, S&P said. The economy would likely recover more quickly if Spanish companies didn’t face such “high” costs of borrowing, the ratings company said.

Credit Default Swaps

The cost of protecting Spain’s debt from non-payment was little changed today, with credit-default swaps at 151.8 basis points at 9:53a.m. in London. There were 190 trades covering a gross $3 billion of debt in the week through Nov. 22, bringing the total outstanding to 7,986 contracts covering a net $9.8 billion, the fifth-highest among sovereigns, according to data compiled by the Depository Trust & Clearing Corp.

Contracts on the Netherlands dropped 0.6 basis point to 37.3 basis points. There were 11 trades covering a gross $322 million of debt in the week ending Nov. 22.

“Investors often ignore these ratings and yields in the Netherlands are up,” Colin Bermingham, an economist at BNP Paribas in London, said in an e-mailed note. “Despite the change in the rating, the Netherlands still offers a low-risk proposition to investors with a yield premium of approximately 30bps relative to German bunds.”

(Updates with Dutch bond returns in sixth paragraph, CDS prices in 13th.)
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