No wonder the markets got a dose of the runs yesterday and overnight.

Gold fell sharply, as did oil as the US dollar rose, US government debt yields eased, as did German government debt yields as investors sought safety from the perceived lift in risk.

Sovereign debt worries jumped back into the focus of markets close to the end of a year when they had eased as markets rebounded and the crunch relaxed its grip on the financial system.

With about three weeks to go until year’s end, investors are naturally more nervous; many have profit to protect, or rediscovered financial strength to maintain.

Greece was downgraded overnight, Dubai rattled nerves by all but telling the world renegotiation of its debt problems will take longer than six months and Moody’s issued a quaint ratings update that leaves the strong suggestion that it’s not exactly convinced of the Triple A credentials of the UK and US.

As well McDonald’s updated the US market on monthly sales: down again in the US on unemployment and falling sales of breakfasts; down in China, but solid in Europe. Investors swooned and the shares fell, aided by a less than convincing profit update from 3M, the huge consumer and business products group. In addition, Kroger, the second biggest food retailer in the US reported poor quarterly profit figures and the shares fell 10%, taking other retailers with them. The upshot of these reports was to leave investors a little perplexed about the real health of the US economy.

Consumers are not spending as much on food, on products such as  post-it notes or eating as often in Maccas. With an estimated 49 million people unable to feed themselves regularly, more than 36 million people on the food stamps aid program and upwards of 25 million people unemployed or under-employed, its no wonder consumer facing companies are doing it tougher than investors think.

President Obama talked about job creation in a speech in Washington. No mention of cost, but the betting is the government will use the money the banks are repaying from the Tarp fund and pitch the plan as “Bailing out Main Street USA”.

In Japan, the government was forced to more than double its planned new spending stimulus to $US81 billion from $US31 billion last week by a recalcitrant political ally. That left the Japanese market down, ending a six-day rally that had boosted shares by 10%, the biggest rise for a decade or more.

Greece’s downgrade by the Fitch ratings group might have seemed inevitable given that Standard & Poor’s had warned of the same action the day before, but it nevertheless shocked markets, especially in Europe.

The country already had the lowest credit rating in the eurozone after Fitch cut the country’s rating in October. Now it has moved again amid fears that Greece’s newly-elected Socialist government may try to avoid slashing spending and other public spending the way it has promised.

Fitch cut Greece’s credit ratings to BBB-plus with a negative outlook (suggesting another cut could happen). That was a day after rival ratings agency Standard & Poor’s warned it may cut the country’s A minus rating.

It is the first time in 10 years that one of the three leading ratings agencies has cut Greece’s rating to below the A grade category. More worrying is that under eurozone rules, if Standard & Poor’s follows with its downgrade to below A, then Greek sovereign bonds cannot be used as collateral for borrowing from the European Central Bank. Home loan mortgages can be used, so long as they have two credit ratings.

Could Greece become the first eurozone country to be rescued in the crunch? There’s no sign of default, but the markets could force the ECB and the European Commission to some sort of collective action, or to get the IMF involved and make sure the new Socialist government sticks its promise to cut the deficit from 12.7% of GDP last year to 9.1% next year.

Greece saw two days of at times violent protests this week to mark the first anniversary of the police killing of a 15-year-old student in December 2008. Deep spending cuts could re-ignite those protests.

Greek bonds on Tuesday saw their biggest one-day fall since November last year and the main Athens stock exchange tumbled, shedding 6% in value.

To add to the nervousness, S&P also revised its outlook on Portugal’s sovereign-credit rating to “negative” from “stable”, blaming a deterioration in public finances.

In Dubai, the markets again fell as Moody’s cut the rating of DP World and the country’s power and water authorities to junk status.

DP World was originally outside the collapse, which was focused on Dubai World, which controls property group Nakheel. According to a Bloomberg report,  it lost $US3.5 billion in the six months to June 30, after revenues plunged 78%.

DP World controls ports (such as P&O’s old operations in Australia) Moody’s downgrades means that all six Dubai-government related entities, including Emaar, another major real estate developer, are now rated as sub-investment grade.

And there were reports that renegotiating the debt problems in Dubai could take longer than the six-month standstill demanded last month. The December 14 repayment deadline (there’s a two-week period of grace,  which runs out on December 28) for Nakheel’s $US4 billion Islamic bond draws closer and will almost certainly be breached. Only government aid can stop that, according to reports from bankers to Dubai World and Nakheeel, and that’s not forthcoming at the moment.

And while all this was happening, Moody’s snuck out a discussion paper on Triple A borrowers, the highest-rating. There are 17 worldwide, including Australia as is the US, UK, France, Germany, New Zealand, Canada and others.

Greece’s downgrade gave the Moody’s document more credence, especially with its suggestion that there different groups of Triple A rated borrowers.

“Despite the challenges, the 17 AAA-rated countries retain the characteristics necessary for a AAA-rating, despite having “lost altitude” in the AAA space. Chief among those characteristics is government financial strength, or the future trajectory of a government’s debt and its affordability. Ireland was the only nation to have lost its AAA rating this year.

“In addition to the aforementioned four largest AAA-rated countries, the report also contains somewhat more brief analyses of four others: Austria, Luxembourg, Switzerland, and New Zealand. The remaining AAA-rated nations are Australia, Canada, Denmark, Finland, Netherlands, Norway, Singapore, Spain, and Sweden,” Moody’s statement said.

Moody’s said there were there were the resistant and the resilient. Resistant borrowers were the likes of Australia, Germany and France with strong public finances and debt profiles and with solid fiscal policies.

Moody’s said, however, that the UK and US had “resilient” AAA ratings, because their public finances were  “deteriorating considerably and may therefore test the AAA boundaries”. But Moody’s said none of the top-rated countries were vulnerable, or had public finances that were stretched beyond the point of no return.

Moody’s said all AAA-rated governments were affected by the global financial crisis, with differences in their impact and ability to respond. Resistant countries, which also include New Zealand and Switzerland, started from a more robust position and won’t see debt exceed levels consistent with their AAA status.

While Moody’s emphasised that the US’ AAA rating was not under immediate threat, it did say the rating could be downgraded in 2013 if the fiscal position does not improve.

Peter Fray

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