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The financial markets saw a short-lived shock today, when the rating agency S&P announced that it downgraded the outlook of the U.K. economy.
According to the S&P’s statement, the U.K.’s downgrade is a consequence of the huge public deficit, projected to reach a whopping 12% this year, a huge number by any standards. For example, the European Union triggers the excessive deficit procedure if it passes the 3% level, something that the U.K. deficit has broken for a while.
Over the last period, the three major rating agencies have taken a pro-active stance. A large numbers of banks are under review in Asia, while more than 30 Spanish banks will probably see their rating reduced in the following weeks. At the beginning of March, Moody’s put both Bank of America and Wells Fargo on the radar.
The big question now is who may be next on the rating agencies’ list? Because the forex market is influenced in a great way by a country’s downgrade rather than individual stocks, we shall examine the macroeconomic environment to see who may follow.
Following the template set by the U.K.’s downgrade, the first countries that appear under TheLFB-Forex.com’s radar are Italy and Greece. Of the two, Greece already saw its debt rating downgraded in January, so a second one is not likely real soon because of the short timeframe.
However, Italy may very well be the next victim for the rating agencies. Italy, along with Spain has been seen for a long period as the epicenter of the credit crisis in Europe. Spain has already had its debt downgraded (with Greece), so it would not be a surprise if Italy would be next.
To further strengthen the case, Italy is currently running a huge public deficit, reaching up to 105% of the GDP, one of the worst in the world. Currently, forecasts are that the government deficit will reach 5% this year. At the same time Italy’s trade balance, another strong indicator about the country’s finances is $52 billion, again one of the biggest in the world.
If TheLFB-Forex.com’s assumption holds true, and Italy does indeed have its debt rating downgraded, then the euro will see a strong wave of selling orders. Depending on the timing, the market could have an even stronger reaction that the one seen today.
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