By Catarina Saraiva and John Detrixhe - Nov 11, 2011 5:27 AM GMT+0700
Nov. 11 (Bloomberg) -- Jenny Tian, managing director at Springs Capital Ltd., talks about the potential for intervention by the Chinese government in the European sovereign-debt crisis, and investment strategy. Tian speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Nov. 11 (Bloomberg) -- Michael Cuggino, president of Pacific Heights Asset Management LLC, talks about global financial markets and investment strategy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Standard & Poor’s roiled global equity, bond, currency and commodity markets when it sent and then corrected an erroneous message to subscribers suggesting France’s top credit rating had been downgraded.
The benchmark Stoxx Europe 600 Index extended its decline to 1.5 percent to 234.11 and French 10-year bond yields surged as much as 28 basis points to 3.48 percent, the highest level since July, after the mistaken announcement. The euro pared gains and U.S. equities briefly dropped. Commodities erased gains before resuming increases after S&P affirmed France’s AAA rating in a later statement.
A downgrade of France’s credit rating would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.
“It was a mess,” said Lane Newman, the New York-based director of foreign exchange at ING Groep NV, the biggest financial-services company in the Netherlands. “It calls into question the credibility of people who can have that sort of impact not really being careful.”
France also has the top rating from Moody’s Investors Service and Fitch Ratings. S&P’s error came after Sean Egan, president and founding principal of Egan-Jones Ratings Co., said earlier today that his namesake firm may lower France’s credit rating. Egan-Jones currently rates France AA-.
Euro Recovers
The euro rose 0.5 percent to $1.3606 at 5 p.m. in New York after paring its gain to $1.355. The S&P 500 Index (SPX) dropped as much as 0.1 percent after the erroneous announcement, before closing up 0.9 percent. The S&P GSCI Total Return Index of 24 commodities weakened 0.4 percent before gaining 0.6 percent.
The additional yield investors receive for holding French 10-year bonds instead of benchmark German bunds jumped to a euro-era record 170 basis points and was at 169 basis points when the market closed at 5 p.m. London time. Yield spreads between the German debt and Austrian and Belgian bonds also reached records today.
S&P’s erroneous message was put out at 3:57 p.m. Paris time. The company sent a release at 5:40 p.m. Paris time saying the message was incorrect and affirming France’s rating.
Technical Error
“As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed,” S&P said in the release. “This is not the case: the ratings on Republic of France remain ‘AAA/A-1+’ with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error.”
Martin Winn, an S&P spokesman in London, didn’t immediately reply to a request for additional comment after forwarding the rating notes.
French Finance Minister Francois Baroin asked market regulators in France and Europe to investigate the “causes and potential consequences” of S&P’s erroneous message.
“S&P denied the rumor and confirmed the French rating, but this had consequences,” he said at a conference in Lyon.
France’s stock-market regulator subsequently opened an investigation into S&P’s dissemination of the erroneous message.
‘It’s Troubling’
“It clearly raises issues about internal systems and controls,” said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based bank- rating firm. “The onus is on them to be careful and it’s troubling. Whether you’re a broker dealer or a rating agency, everything you say has to be very carefully considered because of the weight that they carry.”
S&P downgraded the U.S.’s AAA credit rating by one level to AA+ for the first time Aug. 6, citing the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.
The New York-based rating company’s decision was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury’s assertions and said using the department’s preferred spending measures in its analysis didn’t affect its credit grade.
So far, the EFSF has sold two five-year bonds and one 10- year security, all in the first half of this year, and it may have to finance more than 70 billion euros ($95 billion) of a planned second aid package for Greece. European leaders last month agreed to boost the rescue fund to 1 trillion euros from 440 billion euros.
Vix Index
Volatility in financial markets has increased since July on speculation Europe’s debt crisis will spread to larger countries such as Italy. The Mediterranean nation, the world’s eighth- biggest economy, saw the yield on its 10-year bond jump above 7 percent yesterday as leaders rush to approve debt-reduction measures. Greece, Portugal and Ireland each sought bailouts after their bond yields traded above 7 percent.
The Chicago Board Options Exchange Volatility Index, or Vix, as the benchmark measure of U.S. equity derivatives is known, jumped 32 percent yesterday to 36.16, the highest since Nov. 1.
Implied volatility for the currencies of the Group of Seven nations rose to as high as 13.68 today, the most since Oct. 6, according to a JPMorgan Chase & Co. index.
To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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