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    January 16, 2012

Markets Calm After European Credit Downgrades

   Al Pessin | London
   Traders look at a stock index board at Madrid's stock exchange, January
   16, 2012
   Photo: REUTERS
   Traders look at a stock index board at Madrid's stock exchange, January
   16, 2012

   European markets reacted nonchalantly Monday after credit rating agency
   Standard & Poor's downgraded nine countries, including France and
   Austria, late Friday. The widely followed agency also reduced the
   ratings of Italy, Spain and Portugal, as well as Cyprus, Malta,
   Slovakia, and Slovenia.
   Far from the sharp drop some had expected, Europe's major market
   indexes stayed close to their Friday closing levels for much of the
   day, finally closing up slightly. The main stock price averages in
   Germany and Britain were both up - the German by more than one percent.
   Even in France, which suffered the small downgrade from its top credit
   rating Friday, the market was up nearly a full percentage point.
   Economist Zsolt Darvas at the Bruegel Institute in Brussels said
   despite Friday's big news from Standard & Poor's, Monday's market calm
   did not shock him.
   'I think this is not that surprising. Basically, what happened is
   something that S&P initially has initially indicated, it has been
   decided. I think markets have anticipated,' said Darvas.
   Darvas noted that bond markets also were relatively calm Monday, even
   though France and the other downgraded countries will have to pay
   higher interest rates on their bonds. France had no trouble selling 8.5
   billion euros worth of short-term bonds. The French president noted his
   country still enjoys the highest rating from the two other major credit
   agencies.
   Currency markets were somewhat more volatile, with the euro losing a
   quarter of a percentage point against the dollar. But Darvis is not
   concerned, saying the euro's value has been unjustifiably high in
   recent months.
   'What happened in the past few days and during last week is that the
   euro became less over-valued than it was before. So I think that
   nothing wrong has happened to the euro so far,' said Darvas.
   Although the credit downgrades did not have a big impact on the markets
   Monday, they do provide further warning signs for the economic state of
   Europe.
   The credit crisis is spreading beyond over-indebted countries like
   Greece, Italy, Spain, Portugal and Ireland to more solid economies like
   France and Austria. Darvas said that means the situation European
   leaders were trying to avoid is now more likely.
   'I think it is increasingly likely that the euro zone will face a
   recession this year. It will be very, very difficult to avoid it,' said
   Darvas.
   Darvas and other experts say European leaders need to do more to
   support the troubled economies and promote economic growth - subjects
   that will be high on the agenda at the next European Union summit at
   the end of this month.