The credit rating agency Moody’s today downgraded Spain’s rating from AAA to Aa2 on negative outlook, a drop of 2 notches. This is mainly because the cost of bailing out the countries failed banks is expected to be much higher than was previously expected. Moody’s estimates the cost could rise to EUR50bn, comfortably higher than the Spanish governments expected EUR20bn. Moody’s today said “There is a meaningful risk that the eventual cost of the recapitalization effort could considerably exceed the government’s current projections”. Yield on Spanish bonds rose as a result and the cost of insuring Spanish debt also increased. This is major news as Spain is a very large economy and the credit rating downgrade is substantial, this again raised serious concerns about peripheral European debt.
This news came shortly after Greek sovereign debt was reduced to a highly speculative status, and a Portuguese debt auction was unsuccessful. The yields on 10 year debt and 5 year debt rose to 7.7% and 7.82 respectively. This is above the level of 7% that is considered to be unsustainable. The Euro lost significant value against the US Dollar today as a result of these sovereign debt concerns. This came after the Euro spiked at the start of the week on expectations of an ECB interest rate rise.
An interesting day in the UK saw the release of more strong manufacturing data. The Office of National Statistics reported a rise in manufacturing output of 1% in January. This is the biggest increase since March 2010. Output increased in 12 of the 13 manufacturing sub sectors and is clearly benefitting from a weak pound and downward pressure on wages.
Sterling rose on this news and then fell as news filtered through of an armed bomber in Heathrow Airport’s Terminal 5. Markets always take fright whenever there is a threat to national security, no matter how small. Pressure on the Pound is likely to continue after the Bank of England Monetary Policy Committee again failed to increase interest rates from a record low of 0.5%. We won’t know how the MPC voted until the minutes are released in 2 weeks. Given that inflation is high and manufacturing is strong it is still surprising the MPC are not taking action. It does suggest that the UK recovery is fragile and could struggle to cope with job losses in the public sector.
In other news instability in the Middle East and rising oil prices are having a big impact on the Turkish Lira. Turkey’s democracy is thought to be vulnerable as political changes occur throughout Arab states. The Turkish economy is also vulnerable to the rise in global oil prices. The Turkish Lira has dropped about 10% to the Euro since the start of the year.
