Who's afraid of S&P?

S&P downgraded several European governments today. If anyone out there thought these governments were triple-A and bullet proof, they were surprised by the action. But for the vast majority of investors in the world, S&P was just playing catch-up. Anyone with money to manage and a brain has known for a long time that the risk of defaults in the Eurozone was rising, and they almost certainly took the appropriate measures to reduce their risk if they thought that was necessary. U.S. money market funds took their money out of French bank CP many months ago, for example.

Eurozone 2-yr swap spreads today fell to their lowest level in 2 months on the news, in a sign that S&P's decision was not only fully discounted but lagging, as usual, the facts on the ground. Swap spreads and euro basis swap spreads have been telling us for the past week or so that there has been some fundamental improvement in Eurozone liquidity conditions, and this is much more important than anything S&P might have to say.

If anything, the S&P announcement might be considered a positive, since it is equivalent to a public rebuke of governments that are reluctant to take the necessary steps to rein in spending.