S&P strikes again! A few hours ago credit ratings agency Standard & Poors (S&P) downgraded the European Union (EU)’s long-term rating from AAA to AA+ and issued a stable outlook.
What’s up with the downgrade?
The S&P believes that the EU’s overall creditworthiness has deteriorated and that cohesion among the 28 member states, especially during budget negotiations, is getting trickier.
The downgrade came just weeks after the EU leaders met in Brussels for the region’s budget negotiations. Take note that richer member states who are struggling to reign in their budget deficits are opposed to shelling out more moolah to support the poorer member states. In fact, the U.K. is even planning on a referendum to decide if it wants to stay as a member of the bloc!
It also doesn’t help that credit ratings of members like Spain, France, and Italy have taken a hit over the last years. After the recent downgrades, only six member states have retained their AAA rating while the average rating of the net contributors to the EU’s budget has fallen from AA+ to AA. Yikes!
How did the euro react?
The euro’s reaction was pretty muted considering that we received news around the European session open. EUR/USD had slipped from 1.3640 to the 1.3625 area before it went back up to its Asian session prices. Even EUR/GBP and EUR/JPY showed minimal reaction to the report.
What does this mean for the EU’s future?
Although immediate price reaction was muted, the downgrade will probably serve as reminder to EU member states that a lot more needs to be done to recover from the region’s debt crisis.
They’re gonna have to step up their game in issues like banking union and budget contributions if they want to show investors that they’re serious in turning their economic prospects around. For forex traders, this means that the euro’s upside move could be limited until we see cooperation among member states.