- Egan-Jones cut rating on U.S. debt from AA to AA-
- But European stock markets rose as U.S. announced it will pump $40bn into economy a month
- FTSE soared to 5915.55 following news of QE
- Greece and Spain given stay of execution on meeting financial targets
- Eurogroup finance ministers meet in Cyprus to discuss measures to end eurozone debt
PUBLISHED: 11:16 EST, 14 September 2012 | UPDATED: 21:00 EST, 14 September 2012
The Fed announced it would buy $40 billion of mortgage bonds a month to help the recovery, but it will likely hurt the economy more than help it, Egan-Jones said.
The plan will weaken the value of the dollar and push up prices for oil and other commodities leaving less for customers to spend on others things, the credit rating agency said.
At the same time, Egan-Jones, which lowered its rating on the U.S. from AA+ in April, warned that the federal government’s borrowing costs are likely to slowly rise as the global economy recovers.
It comes as European stock markets rose after the U.S. Federal Reserve attempted to initiate economic recovery through its quantitative easing.
The Fed’s decision to inject $40bn (£25bn) a month in the U.S. economy saw UK, French and German stocks rise 2% in afternoon trading.
And as European markets rose, financially-troubled Greece and Spain were given a stay of execution after being given more time to reach financial targets.
The launch of a third round of quantitative easing – dubbed QE3 – prompted the FTSE 100 to jump 95.63 points to 5915.55 on a bumper day for investors and pensioners – adding £24 billion to the value of Britain’s leading companies.
Fears for the world economy remain, as Eurogroup finance ministers met in Cyprus to discuss measures to end the current eurozone debt crisis.
Greece may get more time to reach targets under its 130 billion euro rescue package but is unlikely to receive more money, with a decision needed by the end of October.
Spain, under pressure to spell out whether it needs more financial support, told euro zone finance ministers on Friday it will present a new set of structural economic reforms with firm deadlines by the end of the month.
Greek Prime Minister Antonis Samaras, leading a country in its fifth year of recession at a time of rising discontent at home, wants two more years to implement economic reforms tied to the bailout to soften their impact.
International Monetary Fund Managing Director Christine Lagarde said lenders may now agree to some sort of extension.
She said: ‘There are various ways to adjust: time is one and that needs to be considered as an option.’
Greece’s second bailout envisages Athens returning to international markets by 2015, but with two consecutive parliamentary elections in May and June after political parties struggled to form a coalition, the country has lost ground on its reform agenda. Deepening recession has also made the debt targets less attainable.
In Spain, Madrid’s borrowing costs have fallen sharply since the European Central Bank said it was ready to buy its bonds, but the scale of debt repayments it faces before the year-end and a deepening recession mean most analysts and policymakers believe it only a matter of time before it requires help.
But at the Cyprus meeting, there was no talk of a third bailout. Austrian Finance Minister Maria Fekter said: ‘There will probably be no more money (for Greece).’
It was not immediately clear how ministers will reconcile the issue, but, having made strenuous efforts to shore up Spain and Italy, it would make no sense to tip Greece into default now and plunge the currency bloc back into chaos.
Athens, where Europe’s debt crisis began nearly three years ago, has been boosted by a decision to give bailed-out Portugal more time to meet its fiscal targets as economic recession saps Lisbon’s ability to deliver.
Economy Minister Luis de Guindos told journalists after meeting his peers in Cyprus: ‘We will adopt a new set of reforms to boost growth… It will be in line with the recommendations of the European Commission.’
Although the extent of the shortfall will not be known until a report by lenders in October, Greece is unlikely to win back investor confidence quickly and meet its targets, which include a primary surplus of 4.5 percent of economic output in 2014.
EU officials said Athens is way behind on its debt-cutting programme, suggesting Greece will need funding support past 2014 until it can return to market.
Spain’s 2013 budget and a detailed audit of the capital needs of its banking sector are both due on Sept. 28.
For the first time in months, ministers met at a moment when market pressure for immediate action to solve the sovereign debt crisis is easing, rather than mounting.
The ECB’s announcement that it could buy unlimited amounts of Spanish bonds, should it agree a programme with the euro zone bailout fund, brought Spanish 10-year bond yields down from 7.64 percent on July 24 to 5.62 percent on Thursday.
Italian yields have fallen to around 5 percent and the euro rose above $1.30 after the U.S. Federal Reserve announced a new programme of asset purchases to support the economy.
That increases the temptation for Spain, and EU paymaster Germany, to try to get by without an assistance programme that would be politically unpopular in both Madrid and Berlin.
Each time market stress has eased in the nearly three-year crisis, German leaders have said they see no urgent need to act.
‘There is no more room for complacency than there was six months ago, but we are moving in the right direction,’ European Economic and Monetary Affairs Commssioner Olli Rehn cautioned.
Spain is reluctant to ask for help because Prime Minister Mariano Rajoy fears a political backlash at home, but he may eventually have no choice given Madrid’s borrowing needs.
A German official said privately that Berlin did not want to see Spain pushed into an unnecessary rescue application at a time when its funding conditions were improving, adding a Spanish bailout was not inevitable.