(Corrects fourth paragraph to specify Germany’s outlook as stable. See TOP CRIS for more news on the European debt crisis.)
Finland and Luxembourg no longer face the threat of a downgrade from Standard & Poor’s, helping to preserve a core of AAA nations whose top ratings bolster the euro region’s rescue funds.
Luxembourg and Finland both had the outlook on their rating raised to stable from negative at S&P yesterday. The company kept the Netherlands, which also has the top rating, on an outlook for a possible downgrade.
“The risks to Finland’s financial, economic, and policy- making environment emanating from the euro zone crisis have remained contained and we expect that this will continue to be the case throughout 2013,” S&P yesterday said in a statement in London. “Luxembourg’s strong government balance sheet, wealthy population, and stable political environment are sufficient to outweigh risks to its economy,” it said.
The announcements follow a lull in the region’s sovereign debt crisis and leave Germany as the other country in the euro area rated AAA by S&P, also with a stable outlook, after France and Austria were downgraded a year ago. Investors often ignore such actions, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.
The negative outlook on the Netherlands “reflects our view that there could be a more negative macroeconomic scenario, connected to possible pressures on the Dutch financial sector and the broader Dutch economy caused by the potential for a sharper than currently projected decline in domestic demand and a weakening external environment,” S&P said.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published on Dec. 17. Investors ignored 56 percent of Moody’s Investors Service rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
Finnish Prime Minister Jyrki Katainen has said that retaining the country’s AAA credit rating and stopping debt growth by 2015 are the government’s overarching fiscal policy goals even as a recession started in the second quarter of last year. The premier, who heads the National Coalition Party, favors stimulus and spending cuts over higher taxes, while Social Democratic Finance Minister Jutta Urpilainen is pushing to avoid reducing expenses.
“It’s positive news for the Finnish economy,” Urpilainen said on her blog. “Sovereign ratings have an impact the cost of credit and thus on borrowing costs. It also has an impact on our international standing.”
The economy of 5.4 million people will grow 0.5 percent this year after an estimated contraction of 0.1 percent in 2012, the Finance Ministry said Dec. 20. The budget will be 1.5 percent in deficit in 2013 and 0.9 percent in 2014.
“The stable outlook reflects our view of the low likelihood of a rating change in light of Finland’s high level of prosperity, strong government and external balance sheets, and broad-based commitment to prudent fiscal and structural policies,” S&P said.
The top-rated euro region countries have helped to bolster the creditworthiness of its bailout funds, the Luxembourg-based European Stability Mechanism and European Financial Stability Facility. The EFSF was formed in 2010 to provide loans to cash- strapped European Union countries. The ESM will replace the temporary EFSF. The two funds will run in parallel until the EFSF is phased out in mid-2013.
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