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S&P downgrades are not surprising

Rating agency S&P recently downgraded the credit ratings of several countries in the Eurozone, including France. As these downgrades were already priced in by the markets, the view of the Core Fixed Income team of ING Investment Management on euro sovereigns does not change.

Last Friday, January 13, S&P downgraded the rating of nine countries in the Eurozone. The long-term ratings of Italy, Spain, Portugal and Cyprus were lowered with two notches; the long term-ratings of France, Austria, The Slovak Republic, Slovenia and Malta with one notch. This announcement was not a surprise because S&P already placed these countries on CreditWatch early December of last year. The market already discounted relatively high risk premiums for these countries and we can conclude that the downgrades were priced in, according to the limited market reaction. The view of the Core Fixed Income team of ING Investment Management on the euro sovereigns does not change due to the rating downgrades.

Spreads of 10-year government bonds in the Eurozone

We remain cautious however for the following reasons:

•	Recession in Europe: European leaders are currently focussed on government austerity measures, to the detriment of economic growth. Economic growth is of vital importance for the Eurozone to grow out of the crisis.
•	The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) are still too small to provide confidence to the markets.
•	There is still no decision about the restructuring of Greek sovereign debt. On March 20, 2012 a large amount of Greek government bonds will expire.
•	The ECB now provides liquidity to banks, which is partly used to buy euro sovereign bonds. The ECB has however still not indicated whether it wants to buy government bonds on a massive scale in order to restore market confidence.

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