These are stories Report on Business is following Friday, Dec. 20, 2013.
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EU triple-A rating cut
Credit agency Standard & Poor’s cut its long-term rating of the European Union by one notch to AA+ on Friday, saying it had concerns about how the bloc’s budget was financed, a view EU leaders and other officials dismissed as misguided.
“In our opinion, the overall creditworthiness of the now 28 European Union member states has declined,” S&P said in a statement that came 11 months after it announced it had a ‘negative’ outlook on the bloc.
“EU budgetary negotiations have become more contentious, signalling what we consider to be rising risks to the support of the EU from some member states.”
European officials said they were not surprised by the move since S&P recently downgraded the Netherlands and has lowered its view on six other member states – France, Italy, Spain, Malta, Slovenia and Cyprus – in the past year.
But they pointed out that the EU has no debt or deficit to speak of and its budget is a stand-alone entity financed by 28 countries, making it one of the most stable institutions and most reliable borrowers in the world.
“We must put it in perspective,” Belgian Prime Minister Elio di Rupo told reporters as he arrived for an EU summit in Brussels. “It’s just an opinion.”
Others were more withering in their reaction, questioning the expertise of S&P and other ratings agencies, which have been critical of the EU throughout a four-year debt crisis.
“I’ve met some of the so-called experts from the ratings agencies and really you have to wonder. What have they got right?” asked one senior official with knowledge of the EU budgetary process, speaking on condition of anonymity.
“Two years ago they were saying Greece would end up leaving the euro zone. They were completely wrong. Shouldn’t they have to acknowledge their mistakes?”
Others questioned whether S&P understood how the financial underpinnings of the EU budget, which is administered by the European Commission, saying it needed to be assessed independently, not as the average of 28 countries’ ratings.
Olli Rehn, the commissioner for economic and monetary affairs, pointed out that all EU member states had always provided their contributions to the budget, even during the financial crisis.
In its statement, S&P said cohesion among EU member states had weakened and that some countries might baulk at funding their contributions to the budget in the years ahead.
The budget is financed by contributions from all member states based on gross domestic product. It is set for seven-year periods, although there is also an annual negotiation to decide on the precise spending for the next year.
The most recent seven-year budget, which runs from 2014-2020, was agreed in December and sets a spending ceiling of around €1-trillion, equivalent to slightly less than one per cent of total EU output.
S&P said it was concerned about the commitment of some member states to continue funding their portion of the budget on a ‘pro-rata’ basis. Later in the statement it mentioned Britain, which has fought to keep the EU budget down, although it has never suggested it may not pay its portion.
“We believe... that the willingness of the remaining ‘AAA’ rated sovereigns to fulfill this joint and several pledge might be tested should some other members be unwilling to provide the funds on a pro-rata basis,” S&P said.
The EU is not a sovereign but it can borrow in its own name, with member states’ contributions to the budget effectively acting as collateral. As of this month, it had outstanding loans of €56-billion ($76.5-billion), according to S&P.
Gold heads for biggest annual loss in 32 years
Gold hit a six-month low on Friday, on course for its largest annual loss in 32 years, as the U.S. Federal Reserve’s first step away from ultra-loose monetary policy further undermined the investor case for holding bullion.
The Fed said this week that the U.S. economy was strong enough for its massive bond-buying scheme to be scaled back, winding down an era of easy money that saw gold rally to an all-time high of $1,920.30 an ounce in 2011.
“If you look at the global economy and the outlook for monetary policy ... we are in an environment where we are going to need a much bigger problem in the world than we foresee for gold to recapture any of its lustre,” Baring Asset Management investment manager Andrew Cole said.
He said the fund had dissolved its exposure to bullion around six weeks ago.
“Our fear would be that investors will want to keep cutting their exposure to gold in 2014 because there are other assets like equities that pay them to be involved and you don’t earn anything owning gold.”
The metal lost 2.3 per cent in the previous session, making it the major financial benchmark hardest hit by the U.S. central bank’s taper, which will raise the opportunity cost of holding non-yielding gold.
Spot gold hit its lowest since June on Friday at $1,185.10 an ounce, closing in on a 3-1/2-year low touched earlier that month, after the Fed first cast doubt on the scope of its stimulus as the economy started healing.
The market clawed back some ground, up 0.6 percent at $1,196.30 by 1038 GMT on pockets of physical buying, but remained vulnerable to further losses. U.S. gold futures for February delivery rose $1.50 an ounce to $1,195.10.
Prices are down around 3 per cent this week, and some 29 per cent year-to-date, halting a 12-year run of gains.
With an improving economy and stubbornly low inflation in the United States, gold’s appeal as a hedge against inflationary pressures has subsided, analysts said.
“Investor sentiment is overwhelmingly bearish going into 2014 now that QE3 tapering is the new reality and inflation clearly remains subdued,” VTB Capital analyst Andrey Kryuchenkov said.
As a gauge of investor sentiment, holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell 3.90 tonnes to 808.72 tonnes on Thursday, the lowest in nearly five years.
Outflows from the top eight gold ETFs have totalled about 720 tonnes as investors channel more money to equities.
Trading volumes on the Shanghai Gold Exchange, the world’s biggest physical gold platform, rose to a two-month high this week as global bullion prices fell.
However, trading volumes in Shanghai are still well below the year’s peak of 43.27 tonnes, which was reached on April 22 after global prices plunged by a whopping $208 over two sessions and unleashed pent-up demand.
Silver rose 0.5 per cent to $19.38 an ounce. Spot platinum was up 0.7 per cent at $1,323.75 an ounce, while spot palladium rose 0.6 percent to $697.75 an ounce.
More from Friday’s The Globe and Mail