Moody's Targets Europe in Ratings Cuts, Markets Still Don't Care

European stocks continued their rally for the second straight day despite a ratings cut on six European nations by Moody's. The firm lowered ratings on Italy, Spain, Portugal, Slovakia, Slovenia, and Malta. Again, it is a case of too little, too late. Alistair Wilson, chief credit officer for Europe at Moody's, said that "policy makers have made steps forward but we do not think they have done enough to reassure the market that we are on a stable path." In other words, while northern politicians and banks are being supported by a deal in exchange for austerity measures in Greece, it isn't enough to calm fears of a default or collapse of the euro in the long term. When S&P cut America's rating last year, investors hardly cared. There was a sudden drop in equity markets as the historical event shocked investors, but investors flocked to U.S. treasuries as a safe haven, and equities quickly recovered and even rallied in a post-AAA America. Likewise, when S&P downgraded France and other European nations a month ago, the market didn't care. Again, the markets flaunt the ratings agencies. The Europe STOXX 50 (^SX5E), FTSE 100 (LON: ^FTSE), and DAX (FRA: ^DAX) are up. However, financials are not leading the charge, with some European banks down, such as Deutsche Bank DB and RBS RBS, which has lost over 2 percent in early morning trading in Europe. European mining, oil, and commodities companies are mixed, with Royal Dutch Shell RDSB gaining over a percent and BP BP up over 2 percent as investor confidence drives stocks and oil prices northward. German Steelmaker ThyssenKrupp TKA is down over 2 percent and London-based minerals giant Rio Tinto RIO has fallen 2 percent both in European markets and in early pre-market trading on its ADR stock listed stateside. Looking ahead at the opening bell in New York, signs in Europe point to a strong opening both in stocks and bond markets. However, Portuguese, Spanish, and Italian bonds saw higher yields relative to German debt as the German bond fell slightly on the news of the ratings cut. This higher spread is due to Moody's decision, and points to an interesting difference between PIIGS and German bonds: to the markets, one is a safe haven, and one is not. While some analysts have acknowledged that risks of a European default have continued to fall thanks to ECB action to provide liquidity to indebted Mediterranean economies, Moody's rating fell because of continued uncertainty in the market. "The uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework" drove the downgrade. In other words, analysts at Moody's are more worried about not knowing what will happen than a default itself. One issue at hand, which European bankers have tried hard to ignore, is the large disconnect between Greek citizens and the bankers who hold Greek debt. Essentially, these parties are at opposite sides of an economic agreement, and their interests compete with each other. Hence Greece saw riots as markets rallied. While Americans may bemoan the gap between the 1 percent and 99 percent and the distance between Main Street and Wall Street, the relationship between bankers and citizens in Greece is much more strained. This suggests that the political will to appease European technocrats with budget cuts can only last so long in Greece, and the recent announcement that the country will have snap elections points to the political unsustainability of a nation run by politicians whose primary focus is appeasing foreign creditors. Of course, Europe knows this, which is why German Finance Minister Wolfgang Schaeuble has assured the markets that Europe is prepared for a Greek default. However, details are few and far between. If a new pack of Greek politicians reverse the austerity measures imposed from outside, what can the Germans do besides keep giving Greece more money, so that they can pass that money along to French and German banks?