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February 2012
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| ZAR News |
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| Source: www.bluechipjournal.co.za |
| EURO-CRISIS - BACK ON THE BRINK OF COLLAPSE |
Tuesday 17 January 2012 |
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The first of the three Friday the 13th's of 2012 turned out to be a scary movie for the euro zone last week when nine member states saw their credit rating being notched down. Among them was France, which with Germany has to date been leading efforts to steer Europe out of its sovereign debt crisis - and it is much more than just a psychological blow since it will also affect the euro zone bail-out fund, which is at the heart of efforts to ease fears about the currency bloc.
Of the 16 euro zone countries assessed by Standard & Poor's, less than half saw their rating untouched and nine downgraded.
Stock markets and the single currency fell sharply after the news that France for the first time since 1975 has lost its AAA rating and the euro zone crisis entered a dangerous new phase. Italy saw its long-term rating drop by two notches, along with Spain, Portugal and Cyprus. Austria, Malta, Slovakia, and Slovenia had their ratings lowered by one notch.
There was no change for Germany, the Netherlands, Ireland, Belgium, Estonia, Finland or Luxembourg.
The lower rating for France will inevitably mean the country faces higher borrowing costs. It will also affect the euro zone bail-out fund, which is at the heart of efforts to ease fears about the currency bloc, as France is partly responsible for underwriting it.
The move also triggered another round of tension between the rating agencies and European politicians - some of whom made calls for Britain to be downgraded too.
French president Nicolas Sarkozy and his European allies have publicly attacked the international ratings agencies, accusing them of seeking to undermine the eurozone.
In its statement announcing the downgrades, S&P said: "Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone.
"In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to de-lever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges."
The move by S&P represents a further loss of confidence in the single currency and the European Union's ability to rescue indebted eurozone members.
The latest development in the euro zone crisis also has serious implications for the well-being of the global economy. According to news reports from the United Kingdom the British Treasury believes that any collapse of the euro could seriously damage the British economy and banking system, pushing the UK back into a deep recession.
The agency's move also threatens to torpedo the main European bail-out fund set up to support struggling countries such as Greece and Portugal.
There are growing fears that Greece, which was not reassessed, is edging closer to defaulting on its debts and being forced out of the single currency. Talks between the country and its creditors were put on hold.
Those worries pushed the single currency to its lowest value against the US dollar since mid-2010. The euro also fell against the pound to 82.9 pence.
The development can also contribute to a considerable change of the face of European politics during the course of the year. It is seen as a heavy blow to Nicolas Sarkozy, the French president, who faces re-election in May and has been teaming up with Germany's Angela Merkel in efforts to save the euro zone and possibly the European Union itself.
French officials have said that Britain is more deserving of a downgrade than France. A senior German politician joined their calls recently. Michael Fuchs, a member of the governing Christian Democrats, said that Standard & Poor's was "playing politics".
"If the agency downgrades France, it should also downgrade Britain in order to be consistent," he said. Wolfgang Schaeuble, the German finance minister, played down the downgrades. "We should not overestimate the ratings agencies in their assessments", he said.
The difference
France may now be on the same rating as the US, but its outlook is completely different, not having an independent currency of its own available as a policy instrument.
America was able to ignore its downgrade last year because, as the world's reserve currency, investors kept buying its bonds sure that if necessary, the Federal Reserve would always print money to pay the bills.
The same is true of the UK, although when its AAA rating was under threat in May 2009, it took credible action to retain its rating after the 2010 election.
France, however, borrows in a foreign currency and is dependent on a foreign central bank, so its risk of default is more than just theoretical.
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| Key Market Indicators |
| As at 22 February 2012 |
| Indicator |
Close |
Move(%) |
| BRENT |
123.39 |
1.43% |
| GOLD |
1761.30 |
1.51% |
| USDEUR |
0.76 |
0.01% |
| USDZAR |
7.74 |
0.85% |
| EURGBP |
0.84 |
0.36% |
| USDJPY |
0.80 |
0.01% |
| USALB |
2.01 |
-2.43% |
| STEFI |
2.67 |
0.02% |
| BA RATE |
5.52 |
0.00% - |
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