Friday the 13th, 9 countries of the troubled single currency Euro-zone were downgraded by Standard & Poor Credit Ratings Agency on grounds that “policy initiatives that had been undertaken by European policy makers may be insufficient” to be able fully solve the debt crisis within the euro-zone.
France, Austria, Malta, Slovakia and Slovenia had their ratings reduced by one notch, while Italy, Cyprus, Portugal and Spain had their ratings cut by two notches. This move, effectively, places highly indebted Italy on BBB+, with Portugal slipping into junk status.
Germany, the paymaster for the Euro-zone, had been spared the downgrade — at least for now — which also has large and unfunded liabilities.
News of the downgrade caused the single currency to slip from its day high of US$1.2878 to US$1.2623 before closing at US$1.2668, signalling Europe’s economic woes are far from over, and would increase the cost of borrowings for the affected countries.
French and Austrian banks’ exposure to euro-zone debts had placed them at a higher risk. However, the cut in France’s rating could seriously weaken the euro-zone’s rescue fund (European Financial Stability Facility) for which France is the second largest contributor after Germany, which could also lose its own AAA+ rating, and effectively reducing firepower and its ability to help countries in difficulty. Thus, forcing euro-zone nations to increase their contributions again.
Increase Chance of A Greek Default
Simultaneously, Greece talks with its creditors over a debt swap that was seen as important to avoid a default, also broke down. The inability of the banks and insurers to accept a voluntary losses on their Greek’s bond holdings would raise the prospect of Greece’s bankruptcy on March 20th when it has to redeem €14.5 billion in maturing debts, and would be disastrous for Europe (and the world) if Greece is forced to default. If Greece defaults, it could set off the activation of credit default swaps — a type of financial insurance. If the issuers of that insurance have to start paying up, many analysts fear the same sort of falling dominoes of i.o.u.’s that cascaded through the financial industry after the subprime mortgage market collapsed in the United States in 2007 and 2008 will happen, once again and more seriously.
The tense negotiations over Greece’s debt come as the Greek government struggles to find a consensus to pass the budget reforms demanded by its so-called troika of lenders — the European Central Bank, European Union and International Monetary Fund — in exchange for releasing the next installment of bailout money, a €30 billion payout scheduled to be released in March.
The Greek uncertainties only add to the regional doubt that helped set off the S.& P. downgrades. Europe’s economy, having barely clawed its way out of a recession three years ago, is again tipping into a new one. France, Spain, Greece and Portugal are already in recessions, and Italy is expected to head into one as a result of belt-tightening measures being pushed by its new prime minister, Mario Monti.
More Troubles Brewing
Austria, whose AAA+ rating was cut by a notch, could be in for trouble if the political turmoil in neighboring Hungary affects Austrian banks.
Even mighty Germany, with most of its neighbors in a downturn, is also expected to slip into a shallow recession this year. Although S.& P. kept Germany’s ratings untouched, citing its continued competitiveness and financial rigor, it said it could lower Germany’s rating if its debt, now at 80%of gross domestic product, reached 100%.
While other Credit Ratings Agencies, such as Fitch and Moody’s, may have yet to reduce their ratings for the affected euro-zone countries, all agencies maintain negative outlook for the euro-zone countries. This could spell more troubles for the euro-zone, and the rest of the world, should the rest of the ratings agencies decided to follow-suit and downgrade Europe by end of January 2012. And if that happens, we could see Europe falling into a turmoil that could trigger the worse crisis in global financial system.
Andrew Michael Teo 