What if a rating agency downgraded a country and no one listened?
With all of the news outlets focused on tensions in the Middle East, have we forgotten about the elephant(s) in the room? Ireland’s credit rating was downgraded one level to A- today by Standard & Poor’s – leaving it four levels above “junk” status. To add insult to injury, S&P said that the country remains on “credit watch with negative implications.” Nonetheless, the market barely shrugged. In fact, we remain within points of the post meltdown highs. The real kicker was the fact that Ireland’s 5-yr Credit Default Swaps FELL 4.6% today in the face of the downgrade. Perhaps the market has become numb to the rating agencies.
Or maybe it is because S&P is late to the party. Fitch downgraded Ireland to BBB+ in December and Moody’s quickly followed suit lowering it to Baa1 (with a negative outlook). At that time the Euro slid against the Dollar. In fact the headlines suggested that the market still cared. Reuters, for its part, noted “Europe shares fall after Moody’s Ireland downgrade” as the FTSE slipped 0.4% on the news.
Looking back, when Ireland was downgraded by Standard & Poor’s back in August, there was still concern about the cost of bailing out the country’s banks. At that time, Fox Business proclaimed “Europe stocks fall after Ireland’s downgrade.” Even the S&P 500, trading at 1066 the day before the downgrade, fell to 1055. Today, we are over 20% higher in the US. In fact, there are few headlines tying the downgrade to the market’s lackluster performance. Reuters could only muster “S&P, Dow dip on Ireland downgrade” as a response. Oh downgrade, where is thy sting?
Are we too complacent, have rating agencies lost their relevance, or were investors too busy watching scenes from Cairo’s Tahrir Square? With the action in the CDS market, one could say that the downgrade was already priced in, S&P was just catching up. Will the market refocus on the PIIGS once the dust settles or have we really moved on? Time will tell.