EU ratings day: Portugal modest thumbs up, Dutch unscathed, Ireland awaited

January 17, 2014

Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.

S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.

The ratings agency said it expects Lisbon to meet its budget deficit target this year based “partly on indications that the economy has been showing signs of stabilization since mid-2013” – another fillip as Lisbon tries to follow Dublin out of the bailout exit door this year.

Portuguese Prime Minister Pedro Passos Coelho will take part in his first parliamentary debate of 2014, after a roaringly successful bond issue last week, which has helped to bring debt yields in the secondary market to their lowest levels since 2010. He is likely to be asked whether the country will need a precautionary loan after the end of the bailout.

Fitch is also out with its verdict on the Netherlands, keeping its AAA rating with a negative outlook. The Dutch have already lost a triple A rating from S&P.
Fitch said public finances had deteriorated but remained within the “tolerance” of a top-notch rating, some relief to the Dutch government although the agency’s forecast of stagnation this year followed by anaemic 1 percent growth in 2015 is hardly cause to put out the bunting.

Perhaps most importantly, Moody’s is due to pronounce on Ireland following its bailout exit and could push it back up to investment grade or at least raise its outlook to positive, signalling a future intention to do so. Having said that, the agency was on the slate to opine on Portugal last week and didn’t.

The other main agencies already have Ireland well above junk and If Moody’s restores the country to investment grade, large, mainly Asian-based ratings-sensitive funds would be free to rejoin the market for Irish debt. Having successfully exited its bailout, Dublin got away a large bond sale last week which means it has already met about half its 2014 funding needs.

Klaus Regling, head of the euro zone’s ESM rescue fund, and Irish Finance Minister Michael Noonan will hold a news conference later while European Commission President Jose Manuel Barroso holds talks with Spanish Prime Minister Mariano Rajoy in Madrid.

French employers and unions kick off talks on the generous state jobless benefits system, which has seen its deficit swell as unemployment has risen to a near record.
The state-backed unemployment insurance scheme’s debt is expected to reach 22 billion euros this year, more than 1 percent of GDP. French corporate margins are among the lowest in Europe, partly due to the high labour charges needed to fund its welfare state.

This follows French President Francois Hollande’s announcement about hefty future public spending cuts and a 30 billion euros tax cut for companies if they commit to hire more workers and improve training, which already looks to be fraying at the edges.

His announcement of an Franco-German energy company didn’t quite stack up, the spending cuts appear to be largely based on existing plans and are somewhat smaller than the headline figure he gave and French companies could lose some of the tax dividend by relinquishing some tax credits.

To be fair, the details are still being worked out and the European Commission and Berlin have welcome the thrust of Hollande’s new policy but French business chiefs have expressed doubts (not to mention the unions) with the head of Medef, the main employers federation, calling for clarification of just what is proposed.

After a string of UK Christmas retail trading statements, which started off mixed and have turned increasingly positive, official nationwide sales data for December will provide a more sweeping verdict of the British consumer’s willingness to spend now the economy is picking up.

UK opposition Labour leader Ed Miliband will deliver a speech in which he will warn Britain’s banks they will have to shrink and sell off branches in order to improve competition if Labour wins the next election. Bank of England Governor Mark Carney has already cast doubt on the wisdom such a plan. You can tell elections aren’t far off. Conservative finance minister George Osborne has moved in on Labour’s ground, calling for a higher minimum wage (which isn’t actually a decision for him to make).

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