Financial Markets…Italy’s sovereign credit rating was cut to ‘BBB’ from ‘BBB+’ by Standard and Poor’s due to a weakening of the country’s economic prospects and financial system. S&P also said in a statement the outlook on the rating, two levels above junk status, remains negative. Italy’s benchmark 10-year yield rose 5 basis points to 4.45%, the most since July 3.
Important developments today:
1. Portuguese government bonds advance following successful short-term debt auction.
2. Deceleration in Eurozone manufacturing activity slows.
Global financial markets are eager for policy action. Bond yields for high-spread Euro Area sovereigns remain high, but eased somewhat this week with successful bond issuances by France and Spain and optimism that EU leaders will reach agreement to resolve the debt crisis at the forthcoming December 9th EU summit.
Old problems, wider tensions? In a momentous two weeks that saw two of the euro area (EA) countries under joint EU/IMF programs have their sovereign debt downgraded to “junk” status, market tensions widened to include two larger economies that together represent almost thirty percent of the whole EA GDP. Is this behavior by the markets truly justified?