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| S&P put Eurozone on credit watch |
Stephen Bartholomeusz' summation of the overnight news from Europe is worth reading. He makes the following points (emphasis is ours):-
- The reasons cited by S&P for putting 15 of the 17 core eurozone members on negative credit watch, which means they could be downgraded within 90 days, are very familiar to the markets, which had acted pre-emptively as it became apparent that the eurozone authorities were struggling to respond to the escalating crisis.
- The ratings agency referred to tightening credit conditions across the eurozone. Credit conditions have been tight for months, to the point where European debt markets are effectively shut and bank lending has shrivelled.
- The continuing disagreements between policymakers about how to tackle the crisis and ensure fiscal convergence in the longer-term has been the central factor in the market’s increasing fear and loathing of all things euro, although at least the agreement between Germany and France overnight provides a pathway towards the longer-term objective, with a mechanism for binding members to fiscal discipline and sanctioning those who stray.
- The eurozone, as S&P noted, is awash with debt at both the government and household level, a situation compounded by the near-inevitability of a region-wide recession. It is that combination, and the apparent freezing under pressure of eurozone policymakers unable to respond to the complexity of the crisis, that caused the markets to take fright months ago.
The effect of a S&P downgrade?
- It could...impact intra-eurozone holdings of sovereign debt and the pricing of any new debt issued. There are institutions that can, or will, only hold AAA-rated paper.
- It may also affect the ability of the European Financial Stability Facility – which the eurozone authorities are hoping to leverage to help bail out and support sovereign debt refinancings – to raise funds itself. It would certainly adversely impact the EFSF’s cost of funds.
In summary:
The pact between Germany and France does provide a blueprint for a different and more effective pan-European fiscal regime in future, but doesn’t address the near-term issues and the need to reassure markets that the authorities have a plan to stabilise Italy and Spain, to re-open credit markets, stabilise the eurozone banking system and maintain some level of economic growth to blunt the severity of the austerity policies being imposed on the more indebted nations.
In the absence of a compact that deals directly with the immediate issues, the crisis will only deepen, destabilising not just the eurozone but the global economy and financial system in the process
