After Standard & Poor's downgraded France on Jan. 13, 2012, some analysts were shocked -- while others fiercely criticized the move. Notably, EU spokesman Olivier Bailly took a jab at S&P when he said the EU wants "to 'downgrade' the reliance of EU financial institutions on credit agencies."
But is it S&P they should be mad at? As editor Brian Whitmer wrote in EWI's European Financial Forecast in early December 2011: "[T]he market downgraded France months ago."
So, most readers weren't surprised by the sovereign downgrade, because they had received a heads-up more than a month before the downgrade. (The same applies to S&P's downgrade of two large French banks, Societe Generale and Credit Agricole, on January 24, 2012.)
Here are the charts Whitmer used to describe how credit rating agencies simply endorse the "judgments that stock markets render far sooner" (emphasis added):
"The three panel chart ... shows how the credit markets have already taken away France's Aaa borrowing privileges. French credit-default swaps, for instance, (left panel) have tripled since the CAC 40's February 2011 peak. Bond yields have climbed, too, sending 10-year spreads between French and German debt to all-time highs (middle panel). The last panel shows a potentially important addition to the usual medley: the price of the European Financial Stability Facility's 2¾ note maturing in 2016.... After rising throughout 2011, the 2¾ note peaked two months ago and briefly dropped back below par last month. Bear in mind, this is the facility that Europe uses to borrow on behalf of countries that can no longer borrow."
In other words, credit rating agencies don't determine the safety of financial institutions -- the market does. And even if S&P had abstained from downgrading France, the market's underlying reality would be no different.
What is that underlying reality? The new January 2012 issue of The European Financial Forecast gives you the latest independent analysis and forecasts of the CAC 40, DAX, FTSE 100, euro, and much more. And Whitmer studies the charts (like these) -- not the whims of the mainstream financial media.
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