S&P ignored by investors paying finns to borrow
By Bloomberg
Investors are still paying Finland for the privilege of holding its two-year debt after Standard & Poor's stripped the northernmost euro member of its AAA rating, signaling creditor indifference to the downgrade.
Finland's benchmark note due April 2016 yielded minus 0.03 percent on Friday, with the spread to similar-maturity German debt little changed since before the Oct. 10 downgrade, according to data compiled by Bloomberg. Its negative two-year yield puts Finland in the same club as Germany, Switzerland and the Netherlands. AAA-rated Sweden has positive two-year yields.
"Having three AAA ratings is such a rare treat that investors have become more flexible over the years," according to Jan von Gerich, fixed income analyst at Nordea Bank AB in Helsinki. "Finland didn't fall out of that category yet."
S&P's decision to cut Finland's rating to AA+ from AAA leaves only Germany and Luxembourg carrying the top credit grade in the euro area. While Prime Minister Alexander Stubb has vowed to design fiscal policy with a view to regaining Finland's AAA in the next four years, bond investors are signaling the downgrade will do little to raise the government's borrowing costs.
ECB Support
According to Nordea, the Finnish spread to Germany is now driven more by unprecedented monetary stimulus than by government finances. Signs of renewed bond-market turmoil in the euro area's most indebted members and the specter of deflation are fueling bets that the European Central Bank may have to step in with further support measures. With its benchmark interest rate at a record low of 0.05 percent, the Frankfurt-based bank is now preparing to buy private-sector assets.
"Finland's spread to Germany is driven by the ECB," von Gerich said. The rating cut "wasn't a great surprise to the markets -- it was priced in.
"
The largest rating companies have been flagging the disconnect between their views and market yields. Last month Michele Napolitano, a director at Fitch Ratings, said he is seeing a "breakdown" in the correlation between bonds and ratings, while Standard and Poor's head of sovereign ratings Moritz Kraemer said low rates are making governments complacent.
Finnish Auction
Finland will seek to raise 1 billion euros ($1.3 billion) tomorrow by tapping its 2.75 percent bond due 4 July 2028. Since the debt is sold to primary dealers, it's likely the auction will be successful, von Gerich said.
"The Finnish Treasury was encouraged by the smallness of the market move after the rating downgrade and dared announce the auction," he said. "New syndicated loans will be a better test of the market sentiment."
The Treasury has said it plans at most two auctions this quarter, signaling a new benchmark bond sale earliest next year. It has 4 billion euros of the 2028 bonds outstanding before the sale. The nation has stable AAA credit grates at Fitch Ratings and Moody's Investors Service. S&P said its outlook on the debt is stable.
Finland, which was held up as a model of fiscal prudence just three years ago at the height of Europe's debt crisis, has emerged as one of northern Europe's weakest economies. The economy will probably fail to grow for a third year in 2014, according to the Finance Ministry.
'Lost Decade'
Stubb said in August Finland is trapped in a "lost decade" as he faces opposition calls for a snap election. The premier said he plans to serve out the rest of his term, due to end in April, arguing an early vote would lead to political instability and delay much needed measures to fix the economy.
Though the market response to Finland's credit downgrade has been muted, the government says it can't ignore rating companies. Economy Minister Jan Vapaavuori said in an interview last month that Finland can't afford to lose its top rating. While large economies including the U.S. have weathered ratings downgrades without seeing their bond markets suffer, smaller economies like Finland's wouldn't fare as well, Vapaavuori said then.
Finland should treat the downgrade "as a warning," von Gerich said. "As a small country with a not-so-liquid bond market, it can offer diversification benefits to those seeking credit quality. The rates could increase more if questions arise over its reputation and trustworthiness."