The S&P Said It Was Coming

After the S&P rating's agency stripped several Euro zone countries of their AAa ratings, most notably and predictably, France, they said they'd be focusing on the financial sector; true to their word, they downgraded 34 of 37 Italian banks today. This is not just information for information's sake, but bond holders in corporate debt as well as some equity investment companies have rules they must follow in what grade investment they hold and if that investment sees its credit rating lowered, it is likely to see its corporate bonds and equity shares sold as well.

Furthermore this does nothing to help their liquidity and access to money in the intrabank lending system, not that the system works; the fact the ECB has to provide LTROs to the banking system is evidence that the financial markets are frozen up, just like in 2008 here in the US.

This is just the first round, the S&P will release downgrade after downgrade as they make their way through each country's financial system. The LTRO (one is coming up and huge demand was expected), may very well produce the same stigma that borrowing from the F_E_D's discount window created, which told the shorts which banks to go after. So the next LTRO this month should be interesting as a half a dozen bank in the EU have already made a point to let everyone know that they  DID NOT participate in the LTRO, more or less saying, "it wasn't us, we're ok"

Depending on how many more banks the S&P downgrades and locks out of the liquidity market, the LTRO take up may change dramatically from earlier estimates of over a trillion dollars.