Euro ends week with strong gains despite Fitch downgrade of five euro zone nations

On Friday, Fitch Ratings cut the credit ratings of five euro zone nations Belgium, Cyprus, Italy, Slovenia and Spain, while affirming Ireland's credit rating as it concluded the review of the six euro zone sovereigns it placed on Rating Watch Negative (RWN) on 16 December 2011.

Fitch downgraded Italy to A minus from A+, while Spain was cut to A from AA-, both nations by 2 notches. Belgium was cut to AA from AA+, Cyprus was downgraded to BBB- from BBB and Slovenia was cut to A from AA-. Ireland's BBB+ rating was affirmed.

Even though the six countries have been removed from RWN, they hold negative outlook, indicating a slightly greater than 50% chance of a downgrade over a two-year time horizon, said Fitch. The rating agency also maintains negative outlook on the 'AAA'-rated France and 'BB+'-rated Portugal.

In its statement, Fitch said these countries have near-term vulnerability to monetary and financial shocks. "Consequently, these sovereigns do not, in Fitch's view, accrue the full benefits of the euro's reserve currency status".

"In Fitch's opinion, the euro-zone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the euro zone will be required to secure economic and financial stability, including greater fiscal integration", the ratings agency said.

Greece and IIF debt swap talks continue

After meeting with Institute of International Finance (IIF) head Charles Dallara, Greece's Prime Minister Lucas Papademos said on Friday that he expects to finish talks with private creditors within days, and negotiations with the European Union and the International Monetary Fund on a new bailout deal by the middle of next week, Reuters reported.

"Greece will not default", Reuters cited Papademos saying. "We made significant progress over the last few weeks and in the last few days in particular," he added. "We are trying to conclude the discussions as quickly as possible. I am quite optimistic an agreement will be reached in the coming days."

Meanwhile IIF Bank Group said important understandings were reached in Greece debt swap and that talks will continue on Saturday.

Earlier, EU Monetary Affairs Commissioner Olli Rehn said that an agreement could be reached within the next three days: "We are just about to close a deal on the private sector involvement between the Greek government and the private creditor community, if not today maybe over the weekend, but in any case preferably still in January rather than in February." He also added that the outcome of the talks will be crucial for the nearest future of the Eurozone.

Private bond holders agreed last year to accept a 50% haircut in the value of their Greek debt holdings through a bond swap, but talks have stalled last week amid disagreement over the interest rate they would received on the new bonds as private creditors had demanded a pay above 4% that was rejected earlier this week by the EU finance ministers, pushing instead for a rate nearer 3.5%.

No reaction in the market

The Euro hold to gains even after the downgrade of 5 Eurozone countries by Fitch and actually reach fresh highs versus the US Dollar and the Pound. The EUR/USD finished the week above 1.3200, posting the highest weekly gains since October. Since January 16 the pair has risen more than 600 pips. Downgrades and ongoing Greek debt negotiations did not stop the Euro from rallying.

Stocks finished mix on Friday in the US, weakened after a weaker-than-expected GDP report. In Europe stocks ended in negative on Friday and mixed for the week. Fed’s statement triggered a rally in stocks and weakened the US Dollar across the board. Greenback was among the worst performers while Gold jumped, ending the week above $1,700 an ounce, at 2-month highs.

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