In what is really a dog-bites-man story, Moody's cut the French sovereign rating to AA1 from AAA, matching what S&P did at the start of the year. The market reaction--taking the euro down from around $1.2820 to about $1.2765--can be largely explained by the thinness of the markets--after New York closed, but before Asian markets opened and the technical implication of the failure of the euro to hold above the $1.28 level. This area, as we have noted has important technical significance in terms of retracement objectives, moving averages and traditional chart patterns.
Moody's did not say anything we have not already written or that one cannot read about in the current issue of the Economist. Yes, the long-term outlook of France is being clouded by the need for structural challenges. Yes, the fiscal outlook is uncertain. Hardly news.
Rating agencies may have access to private information when they evaluate the credit worthiness of corporations. Sovereign ratings rely exclusively on public information. Maybe there is a role in some emerging markets where information may be more difficult to acquire. However, with high income countries, the value that the sovereign ratings offer is of a dubious nature.
Following the sovereign downgrade, large national corporations and financial institutions are often downgraded, as are state-owned entities. In terms of the euro, support is seen in the $1.2740-50 area. The meeting of euro area finance ministers to provide Greece aid is likely more important. Expectations here have been scaled back to expecting a two-year deal rather than a longer-term one that the IMF is pushing for, but does not appear to have the leverage to demand.