Another downgrade, but does it really matter?

Late last week, the news came that several ratings agencies were planning to, or would downgrade a handful of European countries. This was not terribly surprising in that it merely confirmed what most economists, political analysts, and the markets knew. So, do the downgrades really matter?

Yes, says Time columnist Michael Livy.

“Corporate bond downgrades tend to affect only the company whose rating is  reduced. But in the Eurozone, financial relationships are so convoluted and  complex that the potential damage of downgrades is multiplied enormously.  Indeed, there are three important ways in which bad ratings can make the euro  crisis much worse,” writes Sivy.

The markets are certain to react negatively to the news – and will be exacerbated by a dip in Asian markets on the news of the death of North Korean dictator Kim Jong-Il – creating a self-fulfilling prohecy.

“They are actually part of a self-reinforcing matrix that is making the Eurozone crisis worse,” adds Sivy.

 

 

 

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