Borrowing costs sink for Greece, Italy, Spain

COMMENTARY Greece, Italy, and Spain have all seen their borrowing costs drop despite yesterday's credit downgrade by Moody's (MCO). With the ratings agency also warning of cuts to AAA-rated Britain, France, and Austria, all three governments must now be looking forward to seeing their borrowing costs fall, as well. What's going on?

Moody's on Monday downgraded the ratings of six European Union members (the other three are Slovakia, Slovenia, and Malta). Today, Greece, Italy, and Spain -- the financially riskiest nations in this group -- all held bond auctions, and the yields (or interest paid) demanded by investors dropped for all three. The yield on the three-year Italian bond fell to 3.41 percent, well below the 4.83 percent rate registered just a few weeks ago and the lowest level since March 2011, before Europe's sovereign-debt crisis had fully spread to Italy. The yield on Spanish 1-year bonds dropped to 1.9 percent, from 2.05 percent, while the rate on the country's 18-month bonds declined to 2.31 percent, from 2.4 percent.

The biggest surprise in the bond markets today -- that Greece still has a credit rating and that at least some investors remain willing to buy its bonds. Greek three-month bonds yielded 4.61 percent, compared with 4.64 percent a month ago. Even Greece's one-year bond is down from its eye-popping high last week of 544 percent (no, that's not a typo) to a mere 498 percent.

As Gary Jenkins, managing director at Swordfish Research said of the relatively minor impact of Moody's latest downgrade in Europe, "Not quite the St. Valentine's Day Massacre, more of a drive-by shooting,"

This market indifference is a result of two things. One, Moody's is late to the party. Fellow credit rating agencies Standard & Poor's and Fitch Ratings both downgraded these nations a month ago, so the markets have already "priced in" the lower ratings. But even that reaction was more muted than many expected. Another factor easing investor angst is the European Central Bank's move in December to shore up the region's shaky banking sector by pledging $659 billion under its "long-term refinancing operation" (LTRO) initiative.

Trouble is, the good feeling is unlikely to last much longer. As Lyn Graham-Taylor, a strategist at Rabobank in London, told The Guardian newspaper, "The glut of liquidity put in by the ECB is trumping fundamentals ... which is why we believe that Spain and Italy are getting away [with] these auctions at the levels they are. We believe it isn't sustainable, and the effects of the LTROs will begin to wane."

-- With reporting from the Associated Press