(July 24, 2012) — The health of the Eurozone took a turn for the worst overnight as the previously perceived ‘strong men of Europe’ were pulled into the mire at the prospect of further bailouts within the single currency.
Rating agency Moody’s cut the Aaa ratings for Germany, the Netherlands, and Luxembourg from “stable” to “negative” over fears the countries would be forced into bailing out the fourth largest economy in the Eurozone: Spain.
Moody’s conceded that Italy could also need financial assistance, adding that Greece was not yet sure to remain part of the single currency.
Stock markets around the world reacted negatively to the news and Spanish bond yield shot up to record highs (within the timeframe of the Eurozone era).
The announcement from Moody’s and ensuing market chaos sent credit default swaps (CDS) on sovereign debt – insurance against non-payment of government backed debt – in the region higher. Data monitor Markit said the cost to insure the debt issued by Spain, Italy, France, and Germany had all risen on the news. The financial regulators in Spain and Italy jumped to impose short-selling bans, while LCH Clearnet announced a margin hike on holding the countries’ government bonds as collateral.
The movements have meant short-term shocks for investors in the continent. For example, yesterday some £29 billion was wiped off the value of shares on London’s FTSE 100, according to independent financial advisory firm the deVere Group.
Nigel Green, chief executive of the deVere Group, said: “The crisis in Europe is driving many investors into the gilts of ‘safe haven’ Britain, which is having the effect of pushing up their price, reducing their yield.”
Already several other nations have seen their government bond yields pushed into negative territory, making this staple in institutional portfolios very expensive, while also potentially pushing up liabilities.
Although these chaotic movements should not have singular impact on large investors, the double-whammy effect of driving up liabilities and reducing asset pools are likely to have an effect when corporate pension funds crystallise losses in their quarterly reports.