Euro Under Pressure After S&P Move - 6.12.2011

The single currency was hit yesterday after Standard & Poor’s announced that it puts 15 European nations on watch for potential ratings downgrades, including top-A rated Austria, Finland, France, Germany, Netherlands and Luxembourg. The rating agency believes according to its statement that European stresses stem from such factors as tightening credit conditions, markedly higher risk premiums on a growing number of sovereigns, continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis, high levels of government and household indebtedness and the rising risk of economic recession in the eurozone as a whole in 2012, currently with a 40% probability.

Another investors’ concern is Italy and the austerity measures the government is trying to implement. The nation’s Prime Minister Mario Monti however is being widely criticized by policy makers about the government’s 30 billion-euro program. Yesterday Monti submitted the program to the Parliament saying that “the situation is extremely serious and the government must respond with urgency and determination.” The measures however have been already positively taken by investors – the yield on Italian 10-year government notes dropped below 6% in the secondary market, while the spread with equal German debt securities declined below 400 basis points for the first time in more than a month. The euro is extending 2-day losses against the greenback: at the beginning of the European trading session the pair dropped to 1.3340 from yesterday’s close at 1.3394.