UPDATED: 22:45 Friday 13th January
You can say a lot of things about Standard & Poor’s, but the one thing you can’t question is their sense of timing. Last month, they could have chosen almost any day to warn that they were placing the entire eurozone on watch for a possible downgrade; but they elected to make the announcement just hours after Nicolas Sarkozy and Angela Merkel used an emergency summit to promise to safeguard the euro.
And now they have chosen Friday the 13th to confirm that nine of those 15 nations put on negative watch have now been downgraded. And as if to twist the knife, it also emerged this afternoon that talks between Athens and private sector investors aimed at voluntarily reducing the total amount of Greek debt had fallen through. And then, to top it all off, clearing house LCH Clearnet raised its margin requirement for those using it to buy Italian debt from 8.15% to 8.3%.
It’s not just the date that’s ironic. Against all expectations, the eurozone had been looking tentatively more healthy in the past few weeks. The past seven days have seen successful debt auctions by two of the most troubled euro members – Spain and Italy. The European Central Bank’s emergency lending operations seemed to have calmed nerves significantly.
Now, it looks quite conceivable that eurozone policymakers will spend the rest of the month firefighting the next round in the single currency’s crisis, until they gather at the end of January for their latest Brussels summit.
I understand that senior European financial officials were deep in a key Brussels set of negotiations when they learnt – on their blackberries – about the impending downgrades, and had to scramble to come up with a strategy for downplaying the news.
Although it clearly has the wow factor, there is good reason to suspect that the S&P downgrade (which most notably sees France and Austria lose their credit ratings) will not be a hammer blow for the euro. As I wrote when S&P first announced that they were putting the euro area on creditwatch negative, there are growing signs that investors are choosing to ignore official credit ratings. To put it another way, the fact that France might be AA-plus- rather than AAA is unlikely to change investors’ minds when it comes to buying (or selling) French debt.
Nonetheless, a French downgrade (and for that matter a downgrade of other major euro members) will trigger a downgrade of the EFSF – the continent-wide rescue fund which had been supposed to bolster the currency. Moreover, it represents a serious political blow for Nicolas Sarkozy, as he fights for re-election this year.
Italy suffers a downgrade of two notches, as do Portugal and Spain, implying that S&P is particularly worried about their capacity to withstand the crisis.
And when you read the statement accompanying the decisions, the explanation of why the downgrades have happened is damning, saying: “policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone”.
It’s equally intriguing to examine the countries which were spared a downgrade. Germany hangs onto its AAA crown, and has its outlook put back on a stable footing – implying it is nowhere near being downgraded. Berlin might reasonably ask why it was lumped in with the rest of the currency zone when its circumstances (which haven’t really changed over the past month) don’t merit it.
Thanks to its part as the poster boy of austerity, Ireland keeps its rating unchanged, but, at BBB-plus- it was close to junk status as it was. Finland, which historically has one of the world’s best debt-payment records, almost alone in not having defaulted in any way during or after WWII, retains its AAA rating, but is put on “outlook negative”, which means it still has the sword of damocles hanging over it.
And as of tonight there are three euro members which are junk bond issuers, which in technical terms means they have ratings of below BBB and in normal-person terms means their debt is regarded as highly at risk of default. Greece (CC) is joined in that club by Portugal (BB) and Cyprus (BB-plus-) – home to many UK nationals.
But it may well be the breakdown of the Greek talks that prove the more serious of today’s stories. If, as the statement from the Institute for International Finance suggests, it will be impossible for the investors and the Greeks to reduce the country’s debt voluntarily, it means the country will have to go through a messy default. That implies a wave of stress spreading through the financial system – precisely the eventuality European policymakers were trying desperately to avoid through these negotiations.
Over the course of the afternoon, the cost of borrowing for the affected euro members rose sharply, although it dropped for Germany, as well as the UK – both of which will be among the few AAA countries remaining.
Either way, both of these pieces of news are deeply worrying for the single currency – and bring forward its moment of truth. Can its leaders unite and create a proper political and fiscal union, or does this mean the beginning of the end for the world’s biggest ever economic project?
PS sorry about the “plus” – it turns out the plus symbol doesn’t like appearing here.
Categories: News mix