S&P Downgrades in Europe—Does it Matter?

By: Dr. Lynn Reaser

On February 13, S&P completed its review of 16 European nations and announced several downgrades.  Does anyone care?

The answer is ‘yes.’  Although credit-rating agencies lost much credibility during the 2008 financial crisis, downgrades (or upgrades) can still impact markets and politics.

The S&P latest downgrades were not unexpected, but they validated Europe’s ongoing struggle to solve its debt problems.  Europe needs a fiscal pact to enforce budget discipline, a larger funding backstop to bolster credit markets, and polices that promote economic growth rather than just austerity.  A lower credit rating typically raises borrowing costs.  Forced selling by funds requiring certain ratings could add additional pressure on European banks, companies, and country borrowers.

Bond purchases by the European Central Bank (ECB) could cushion the impact on interest rates, as done in the U.S., but debt issues must ultimately be addressed.


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