The markets face a landmark week ahead, and much of that excitement comes from Europe.
A meeting of the European Central Bank on Thursday, we'll have elections in Greece and France that could decide whether there will be ongoing support for the German-led way the crisis is being handled. Not to mention the nagging threat that Moody's will begin a string of bank downgrades, beginning with Italian banks sometime early this month.
The crisis appears to have entered into a new phase recently, where overwhelming amounts of liquidity have diminished the immediate risks of Spain, Italy, and Portugal going illiquid.
Even so, the success of EU leaders to promote growth and impose sustainable reforms could determine whether or not the eurozone as we know it lives or dies.
Sovereign downgrades
Moody's slashed Spain's credit rating from A to BBB+ this past week, meaning sovereign bonds are now on the low-end of what it would consider investment grade securities.
Citi analysts predict that Italy, Portugal, and Ireland could also see another ratings downgrade within the year, and they predict more sweeping downgrades of countries like the U.S. and Japan over the next two to three years.
Downgrades by two of three ratings agencies would result in widespread margin calls, which would increase the collateral financial institutions have to hold against borrowing. This increase in stress on the financial sector would frighten investors, and add to concerns about the increasing scarcity of safe assets.
European bank downgrades
Moody's ratings agency has put the ratings of most euro zone banks on downgrade review, and it announced earlier this month that it will start releasing final decisions on these banks come early May.
The first under fire? Italian banks, shares of which have been tanking in value recently.
Here's the full Moody's timetable:
Italian banks
Spanish banks
Austrian banks
Swedish banks
Norwegian banks
German banks
Danish banks
Finnish banks
Firms with global capital markets operations
French banks
UK banks
Luxembourg banks
Belgian banks
Dutch banks
The feedback loop between European sovereigns and banks
The ECB is just beginning to feel the backlash from two three-year long-term refinancing operations that gave cheap money to banks. Initially, the new wealth of cash increased demand for sovereign bonds, drastically lowering borrowing costs for countries like Italy, Spain, and Portugal.
But investors have become worried that banks in Spain and Italy particularly now hold high quantities of domestic sovereign debt, more closely linking the viability of countries and their financial sectors. Analysts are only beginning to explore the effects of this relationship, but initial commentary about the relationship between the two appears to be worrisome if the financial sector threatens to drag down the sovereign or vice versa.
More worrisome still are recent announcements by two of Spain's biggest banks that they will not increase their purchases of domestic sovereign debt out of concerns about too much exposure to their own government.
See the rest of the story at Business Insider
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