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Euro Hit By S&P Downgrade of Italy

Last updated 9/20/2011 2:51 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

@import url(/css/cuteeditor.css); Standard and Poor cuts its rating of Italy to A, five steps above junk territory citing the country’s weak economic growth and fragile coalition as key  negative factors that could impact credit in the coming months. Italy’s debt is the third largest in the world and the country faces nearly 111 Billion dollars of refinancing over the next several months which it may find increasingly more difficult to do given tonight’s action by the S&P.

The S&P said that more subdued external demand, weak political leadership, increasing cost of funding and new budget austerity measures are all likely to dampen growth going forward. Slower growth could in turn cause Italy to  miss its fiscal targets set for next year as it generates a revenue shortfall.

The downgrade could increase Italy’s  borrowing costs just as the country  embarks on large refinancing program that entails nearly 30 Billion euros of gross issuance in October and November. These upcoming bond auctions could become the true test of country’s credit strength and if investors balk at rolling over its debt the downward pressure on the euro could quickly accelerate.

The euro fell nearly 100 points in early Asian trade in reaction to the news. but has since stabilized at the 1.3600 level as currency trader await the open of the European equity markets. The economic calendar  is relatively quiet but traders may focus on the latest ZEW survey expected to print somewhat lower at than the month prior. Consensus views are for a print of -44.3 versus -37.6 but given the recent turmoil in the financial markets chances are good that the reading may miss expectations. If ZEW misses its mark dragging equities lower the EUR/USD could probe the 1.3500 figure as the day proceeds.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.