Markets may trip on euro zone downgrade fears

S&P likely to cut credit ratings of Germany, France and 13 other members.

Indian markets are expected to drift lower when they open for trading tomorrow, as more European countries stare at rating downgrades because of the ambiguity over a stimulus package that has, in turn, led to increased default concerns.

On Tuesday, when the Indian bourses remained shut on account of Muharrum, all leading Asian and European indices traded in the red, fearing more negative news from Europe. Japan’s Nikkei and Hong Kong’s Hang Seng lost more than one per cent each, while Taiwan Weighted was down two per cent.

In India, analysts expect a similar downtrend at a time when investor pessimism has already been driving the benchmark indices down. Most foreign institutional investors (FIIs) have already predicted a bleak outlook for the Indian market in 2012.

“S&P’s (rating agency Standard & Poor’s) warning to downgrade euro zone countries is likely to have an adverse impact on Indian markets when they open for trade tomorrow,” said Ambareesh Baliga, chief operating officer, Way2Wealth Securities. “It will be a news-driven market in the short term.”. Nifty futures contracts expiring in December fell 40 points, or 0.80 per cent, to settle at 5,032 on the Singapore Exchange on Tuesday.

The timing of the announcement and the inclusion of Germany in the group facing a possible ratings cut surprised many in the markets, and put pressure on the upcoming gathering of leaders for a solution to the region’s debt crisis.

“It highlights the importance of the weekend,” said Jim O’Neill, the chairman of Goldman Sachs Asset Management. “If they (EU leaders) come up with something along the lines they have been talking about, I doubt they (S&P) will go through with it.”

S&P has said it may cut the credit ratings of Germany, France and 13 other members of the euro zone, amid the worsening debt crisis. The placements are “prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole,” S&P said in its statement.

The euro area’s six AAA-rated countries were among the nations to be placed on a negative outlook, and their credit ratings may be cut, depending on the result of a summit of European Union leaders on December 9, S&P added. Any downgrade of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member-countries that has funded rescue packages for Greece, Ireland and Portugal, partially through bond sales.

Another cause of concern for the Asian economies has emerged out of the Asian Development Bank saying the region is facing “much greater downside risks” now, because of the possibility of a recession in the US and Europe and the threat of destabilising capital flows.

Rupee may fall to 52 levels

The possibility of downgrade of stronger nations like France and Germany may have an amplified impact on the Indian currency, pushing it back to the 52 levels against the dollar.

The rupee closed at 51.41 on Monday, from 51.20 on Friday. It had regained the 51 level after concerted efforts of six central banks improved dollar liquidity in the global financial system. Traders expect fresh triggers from the euro zone would increase the demand for safe haven currencies and the rupee may depreciate when domestic foreign exchange markets open after a day’s gap on Wednesday. The euro was trading around 1.34 on Tuesday. “If the euro falls to $1.33 or lower tomorrow, the rupee may touch 52 again,” said the chief forex dealer of a large public sector bank. The rupee had fallen to its all-time low of 52.73 last month. Last week, Reserve Bank of India deputy governor Subir Gokarn had said the central bank would use all its tools in case the rupee fall escalated.