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Eurozone backlash will not phase investors as Asia shines

7 Dec

The debt crisis in Europe provoked fears of contagion, as Asian companies prepared to face the backlash of the economic downfall in the eurozone.

But despite the turmoil, investors are not phased by the possibility of contagion. In fact, they are expecting credit-rating upgrades in Asian countries.

As fifteen eurozone countries face the threat of a downgrade by rating agency Standard and Poor’s, Indonesia and the Philippine’s are being seen as desirable economies for investors, with a possibility for an upgrade from the Philippine’s Ba2 status.

It’s not the first time Asian countries have withstood during times of economic instability; China was upgraded by Moody’s to Aa3 in 2008, after the collapse of the Lehman Brothers which caused a global economic crisis.

Agnes Belaisch at Threadneedle Asset Management in London said: “Further rating upgrades will reward those emerging countries that manage this new stress test successfully, as they did just a couple of years back.”

To put things into perspective, here are some comparisons between European and Asian countries:
When Greece’s debt problems were in full swing, the ratio of debt to gross domestic product was 143 at the back of 2010. France, an economy which is seen as one of Europe’s six triple A’s, was at 82 per cent. A far cry from 16 per cent, 26 per cent and 52 per cent seen in China, Indonesia and the Philippines.

There were also significant differences in the average basis point gains on credit-default swaps, with Asian countries seeing an average rise of 65 basis points to 163 points for 2011, as eurozone countries lifted to 305 from 122.

The graph shows how the credit-default swaps in some of the strongest Asian countries are continuing to fall, which suggests investors are not phased by the possibility of European backlash.

Whilst countries in the eurozone gained a mere 1.4per cent rate on average in the third quarter, Asia’s ten biggest economies excelled, tripling Europe’s rate, reaching an average of 5.2per cent.

Thomas Byrne, senior vice president at Moody’s Investors Service said: “If there’s continued good policy performance, macroeconomic stability in these countries and they weather this distress coming from the euro zone, in general that would be a credit-positive development.”

Whilst it is evident Asian countries are excelling in comparison with Europe, the eurozone continues to hinder other economies from becoming stronger. Andrew Coloqhoun from Fitch Ratings fears Asian countries could be at risk if Europe announce further cuts to global growth forecasts. However, the Financial Times reports he is confident there could be upgrades for both Indonesia and South Korea in the foreseeable future.

Threat of downgrade for six strongest European Economies

7 Dec

Ratings agency Standard and Poor’s has warned six of Europe’s biggest economies they may lose their cherished high credit ratings.

Standard and Poor’s outlined the reasons for its move: “by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole”.

France and Germany are amongst the fifteen eurozone countries which have been put on negative watch. They currently hold triple A credit ratings. The immaculate rating shows the borrower’s debts pose a minimal threat of defaulting. The implications of a downgrade can be unattractive to investors, who may wish to stay clear of countries at risk.

The move came just days before Friday’s EU summit, where it has been speculated there could be discussions on almost doubling the size of the euro’s rescue fund. This would mean the eurozone’s current bailout fund of 440 billion euro’s will still be in force when a further 550 billion euro’s become available in the middle of next year.

Standard and Poor’s warning had an impact on financial markets today, with a fall on the euro, trading 0.1 per cent at 1.34 dollars today. Government bond yields rocked today, with yields on French 10-year-bond yields a rising ten basis points to 3.21 per cent.

US Treasury bond yields stood out with a session high, rising four basis points, whilst German bunds saw a 2bp fall to 2.18 per cent.

Meanwhile, Italy benefits from an increase in trade, following a slide from an unaffordable 7 per cent that it was recently forced to pay, to 5.81 per cent on Rome’s 10-year-yields.

Investors eagerly await the outcome of Friday’s summit.