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Two European Countries Debt Downgraded

Posted by Steve Markowitz on November 26, 2012

Two additional European countries have had their credit ratings downgraded recently.  Early in the month Moody’s stripped France of its triple-A rating.  Last week Standard & Poor’s downgraded Hungary’s debt to junk status, double-B.

The downgraded ratings for France and Hungary are not surprising and will likely not disrupt worldwide markets.  These markets have become numb to the ongoing spiral of downward credit ratings for European countries.

The ongoing sovereign debt downgrades will have little impact until they start having impact, which will then be significant.  That reaction will be perpetrated by some player in the debt market running for the exits.  When that occurs, others bondholders will follow the Exodus, which would likely cause a liquidity crunch in bond markets and appreciate their values.  That would increase the cost of borrowing for the affected countries, destabilizing world trade and pressuring those countries’ social programs.

Like any bubble, the bond bubble will likely continue much longer then logic would dictate that it should.  However, anyone holding the affected bonds when the bubble pops will not be able to liquidate them quickly enough before sustaining significant losses.  Then look for a cry for yet another governmental bailout, which at some point in the future will not be available.

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