10.5.11

S&P Greek Downgrade: Ratings Agencies Still Behind the Curve?

Financial markets seemed briefly shocked by S&P’s downgrade of Greece this morning, but they shouldn’t have been. The credit-default swap market was warning of just such a downgrade for months.
After the S&P headline early today, the euro traded lower, but has since come up off its lows. Still, the common currency is trading lower against just about everything late in New York. European shares finished the day lower, despite modest gains in the U.S.
As far back as January, the CDS market was treating Greece as if it already had the “B” credit rating S&P slapped on it today, according to data provider Markit.
And that still might be too high. Since January, Greece’s implied rating has fallen to CCC, Markit says. Portugal and Ireland are also trading like CCC credits, while Italy is priced like a BBB. The major ratings agencies all have higher ratings on those countries.
You might want to sit down for this, but the CDS market is not perfect! It can also change its mind. Back in January, it was treating Spain like a “B” credit, too. Since then, the market has upgraded Spain to a “BB” credit. Trouble is, that’s still lower than the agencies are grading Spain.
The market has shaken off Greece’s downgrade, for the most part. It might have a harder time swallowing a Spanish downgrade, or even the threat of one.

http://blogs.wsj.com/marketbeat/2011/05/09/sp-greek-downgrade-ratings-agencies-still-behind-the-curve/?mod=WSJBlog

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