European stocks plunge after Moody’s cut Spain’s credit rating; the red wave hits BSE as well

European stocks plunged yesterday after the international rating agency Moody’s downgraded Spain’s credit rating from Aa1 to Aa2 and the red wave hit the Bulgarian Stock Exchange (BSE) as well. Stock exchange indices reacted instantly to the news which once again ignited the fuse that the debt crisis might spread in the Eurozone.

Moody’s justified its decision by saying that Spain’s plans for rehabilitation of its banking sector will cost more than its Government’s current projections and will burden its budget with additional debt. According to the rating agency, the restructuring of banks will cost €40-50 bn. Moody’s even warned that a further downgrade is possible.

Madrid was surprised by this downgrading. According to the Finance Ministry, Moody’s decision was surprising since it came before Bank of Spain announced the official figures for the recapitalisation of Spanish banks. The agency has taken into consideration neither the reduction of Spain’s deficit in 2010, nor the social package of the pension reform in the country which guarantees the stability of public finances, read a statement of the Finance Ministry.

The other bad news which dragged down indices came from two leading global economies. Germany, which is the main source of capital for financing the stabilisation funds in the single monetary union, reported a serious decline in its trade surplus at the beginning of 2011. Its trade surplus stood at €10.1 bn in January, down from €11.9 bn in December 2010.

London's FTSE 100 declined during the day by nearly 1% to 5878 points, in Paris the CAC 40 reported a drop from 0.5% to 3975 points and the blue chip index DAX in Germany lost 0.7% down to 7081 points.

The Euro also weakened against the US dollar but at the end of the day managed to limit the drop from 1.5% to 0.6% and the exchange rate was 1:1.3833. Indices on BSE remained in the red. The blue chip index SOFIX slumped by 0.24% to 445.78 points, BG40 lost 0.27% and fell to 131.26 points, BGREIT fell by 0.77% to 50.55 points and the decline in BGTR30 was 0.75% to 357.71 points.

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