Following Moody's downgrade of France's rating to AA1 from AAA on Monday, market attention shifted on Tuesday to the Eurogroup meeting, during which Greek bailout will be discussed.
Hopes for an aid deal are rising as EU finance ministers are gathering for talks in Brussels. In the European morning Luxembourg PM and Finance Minister Jean-Claude Juncker expressed belief that “good chances” exist for a substantive decision on the bailout today, as the Greek government managed to implement almost all of the reforms required by the Troika in exchange for aid
The Eurogroup will discuss ways of to tackling Greece's 15 billion euro financing gap, the size of the next aid tranche and the timing of its release. It will also try to reach consensus with the IMF on the deficit targets for Greece.
The BBH Global Currency Strategy Team expect that the Eurogroup will “approve new funds and overrule the IMF’s desire for a longer term solution now.”
It is also possible that EU finance ministers will not reach a formal decision on aid for Greece today, but will just agree on the key parameters of the rescue deal. As soon as the Eurogroup gives the Greek bailout the go-ahead it will have to be approved by national parliaments by November 30 and, according to Reuters, the final decision on the disbursement of funds should be made on December 3.
In the opinion of Nick Bennenbroek, Head of Currency Strategy for Wells Fargo Bank, the Eurozone finance ministers meeting will be "a market-positive rather than market-negative event, with some potential for the euro and other foreign currencies to move higher today."
Spain raises €5 billion in decent debt sale
During the debt auction held by the Spanish Treasury on Tuesday the country managed to sell 4.938 billion euros worth of bonds out of a targeted Eur 3.5-4.5 billion euros,
12-month letra were auctioned at an average yield of 2.797%, in comparison with 2.823% seen at the October sale. 18-month bills maturing in April 2014 yielded 3.034% versus the previous 3.022%.
The decent result of the debt auction suggests that Spain in not under immediate pressure to request a bailout.
Moody's cuts France rating
Moody's has downgraded France's government bond rating to Aa1 from Aaa, maintaining a negative outlook. EUR/USD nosedived after the negative news, losing over 30 pips in the blink of an eye to set a low at 1.2775 from levels above 1.28. Moody's decision to downgrade France and maintain the negative outlook reflects the following:
1.) France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.
2.) France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
3.) The predictability of France's resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France's exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.