By: Dr. Mike Campbell

The market week started with a degree of optimism which sent stocks higher on the hope that political leaders within the EU would get together on Sunday and announce concrete measures to support the banking sector and shore up nations with sovereign debt problems: a line drawn in the sand, if you will. Whilst this may still happen (as it must do, sooner or later) at the weekend, German remarks that a deal may not be ready for the weekend sent them back into the red.

To add to the general air of gloom, ratings agency Moody’s has warned that it may have to change its outlook statement for the French economy from stable to negative over the coming months. If this happened, it could eventually place France’s coveted AAA credit rating in jeopardy (a similar course of events saw the US lose its AAA ranking when Standard and Poor’s downgraded it earlier in the year).

Moody’s have rationalised their warning by saying that the French government’s economic position had weakened. If France were to lose its AAA rating, it would be likely to push the cost of borrowing money through the issuance of government bonds higher. However, this would not be catastrophic because the rating would be likely to stay close to the highest level, implying that a sovereign default is only a remote possibility. Again, at a time when market nervousness and uncertainty within the financial sector is a source of major concern since it stymies growth, Moody’s warning could not have come at a worse time.

Moody’s has also acted to downgrade the rating on Spanish credit this week from Aa2 to A1 and has stated that the outlook remains negative. It cited the lack of resolution to the Eurozone crisis as one of the reasons underlying this latest downgrade.