Economy

News and updates on the Australian economy and world markets that impact on the Australian economy.

Standard & Poors Downgrade Italy's Credit Rating

Mortgage One - Tuesday, September 20, 2011

It never ends; debt concerns flared up again as Europe's third biggest economy, Italy, became the latest credit ratings target. Standard & Poor’s downgraded the Mediterranean nation, one notch from AA to A triggering the predictable sell-off on most markets and it was shades of 2008 amid signs of growing mistrust of Europe's banks.


“What it shows is that the stresses in the European debt crisis are now starting to spread to the larger economies” (Mathew Sherwood - Perpetual Investments).

 “The market is saying Italy's broke and that sentiment can make Italy broke” (Gerard Minack - Morgan Stanley).

The Australian share market lost another 1 per cent today due to fears Europe's mess would trigger a global recession which would be bad news for Australia's resources trade.

“Certainly there is selling of some of the key commodities, which is obviously again putting pressure on the Aussie dollar. So we may well be seeing parity or below in coming days” (Sean Callow - Westpac Currency Strategist).

Falls in commodity prices didn't help shares either, however there is also the view that the sell-off in Australian and International Equities, is also about their value. What we are seeing is that “as leverage is reduced in the global investment system, equities going back to closer to fair value. They may end up being cheap, but to get really cheap levels, you've probably got to see another 20 per cent or 30 per cent downside in my view” (Gerard Minack).

The Australian dollar fluctuated wildly against the US currency, dropping below 102 US cents at one stage. Then it firmed briefly after the Reserve Bank's September board minutes were released. It reinforced the view that the debt crisis is weighing more heavily on interest rate decisions, but the bank says it's well placed to move rates up or down if necessary.

The RBA seems to be hedging its bet. It is concerned about the short-term outlook on the basis of Europe and its flow-on effects around the whole global economy, but in the medium term it's still concerned about the inflation being too high in Australia.

Meanwhile mistrust is also growing, with reports that the Bank of China has stopped doing certain business with some European banks. There has also been talk that overnight of big industrial companies withdrawing deposits from French banks and giving it to the European Central Bank. There are also stories of foreign banks not willing to take on Italian and French banks as counter-parties.

Uncertainty remains the only certainty.





 



 


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