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Downgrades Season?

Monday, November 28, 2011
By Deepak Sahijwala

The world’s woes don’t seem to be ending. And as each day goes by, a new negative arises at every turn, which directly affects equities markets across the globe, our own included. Just recall what the S&P’s downgrade of the US did to the world markets. It simply crashed with most markets in tow.  Then again when Moody’s called a rating cut on India’s banking system, our banking stocks as also our markets fell sharply and are far from recovering.

The message is clear: Rating downgrades have a direct and negative influence on stock markets as a whole. And now more such downgrades on the international front seem to be in the coming… Is it downgrades season again? Well. So it seems.

On Friday, citing a slowing economy and protracted political uncertainty, Standard & Poor's has cut Belgium's long-term sovereign-credit rating by one notch, to double-A from double-A-plus. The outlook is negative. And with this ratings cut, Belgium becomes the latest euro-zone nation to be hit by a sovereign-debt downgrade.

S&P projects Belgium will end 2011 with general government debt at around 93% of gross domestic product in net terms, and at about 97% of GDP in gross terms. It says the budget deficit will be 3.6% of GDP this year. With exports of more than 80% of GDP, Belgium is one of the most open economies in the euro zone and, therefore, highly susceptible to any weakening of external demand, S&P said. Elsewhere Moody’s has issued a warning about France's credit outlook. Then again Fitch has said European banks may be forced to cut funding to emerging financial institutions if the crisis worsens. The bottom-line is that as of now leaders of Europe’s three biggest economies have no near-term solutions to the worsening debt crisis.

And worst of it is the fact that the US economy grew at a 2% annual rate in the third quarter -- a half-percentage point slower than originally reported, according to the US government's second estimate of third-quarter GDP growth. That is bad news. And now investors are growing increasingly concerned that Congress's failure to act could cause Moody's and Fitch to consider downgrading U.S. debt. This after S&P's decision in August to take away its AAA rating would cause further panic on world markets.

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