Troubles on Emerald Isle? By Fisher Investments Editorial Staff, 08/27/2010
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- Euro-jitters were stoked Tuesday as S&P downgraded Ireland's sovereign credit rating.
- A successful Irish auction, flexible ECB, and generally healthier banks show Europe isn't in such dire straits as thought only recently.
- Though investors are likely to remain very sensitive to sovereign debt developments in Europe, the situation looks to be firmly in hand.
Some renewed euro-jitters were stoked Tuesday as Standard & Poor's (S&P) downgraded Irish government debt from AA to AA- ahead of Wednesday's planned debt auction. Little of note has changed for Ireland, except S&P's estimate of the government's ongoing bank bailouts—which is as subject to revision as any other organization's forecast. The cut puts S&P's rating largely in line with the other rating agencies reconfirming what we already know.
As we've said, there's nothing particularly saintly about these firms' opinions or analysis. But Irish Treasury head John Corrigan was more than a little miffed, citing S&P's appraisal of bank recapitalizations as "at the extreme end of any analyst's comment." This year's fundraising is "99% done" and the Irish Treasury is financed through Q2 2011. In either case, Ireland was able to disprove naysayers where it counted most—at market on Wednesday. It would appear investors didn't much care for S&P's opinion. The Irish auction drew extremely strong demand at low rates. €200 million of six-month bills sold at 1.98% (vs. 2.46% on August 12th), receiving an astonishing 10 bids for every one fulfilled. An additional €400 million of eight-month bills sold for 2.35% (vs. 2.81% on August 12th), garnering 4 bids for every one fulfilled.
Some of the demand and falling rates may have had something to do with European Central Bank (ECB) purchases of sovereigns in the secondary market—which included Irish bonds for the first time. But it's encouraging European authorities remain committed to supporting the financial system. Beyond bond purchases, the ECB will keep bank liquidity facilities in place until at least Q1 2011.
Such monetary flexibility is key to confidence. Yet, notably, the need for liquidity facilities has diminished greatly in the last 12 months. Tuesday's ECB liquidity auction attracted a mere 49 banks for €19.1 billion compared to the 1,121 banks for €442 billion at a massive auction back in June 2009. Large multinationals are mostly back in wholesale money markets where they can get cheaper funding—a sign capital markets are functioning as they should. Investors are likely to remain very sensitive to sovereign debt developments in Europe, but the situation looks to be firmly in hand.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.