(Updated below 15th January) The general agreement is that events in the financial world today (13th January 2012) have brought the euro closer to crisis. It is being openly said tonight that unless the Eurozone achieves fiscal consolidation soon, the break up of the euro could come in 12-18 months time.
Talks were mothballed today between the Greek government and the private investors of the Institute of International Finance, designed to write down the value of Greek bonds by 50%, taking €100 billion off the Greek debt burden and bringing its debt to 120% of GDP by 2020. With no restart date for the talks and Greece in need of money, the possibility of Greece defaulting on its debt is now mush closer.
At the same time, credit agency Standard and Poor’s did what it had warned it might. It reduced the credit ratings of 9 EU countries – France, Austria, Italy, Spain, Portugal, Slovakia, Malta, Slovenia and Cyprus – because the eurozone leaders have not been seen to introduce policies to address adequately its financial crisis.
Austria and France were dropped a point from their AAA rating – with France shocked by the loss of a valued rating it has held since 1975.
The loss of France’s triple A will shortly cause a loss of the same rating for the EU bail out fund, the European Financial Stability Facility (EFSF). This has held a triple A on the back of the triple A of its two main contributors, France and Germany (which holds its triple A). But with one of the two losing its triple A, the EFSF will not retain its own. This will make it harder for the EFSF to borrow – which it will be looking to do. Before today’s downgradings, the EFSF was said to have no more than €250bn in hand to build a firewall to protect Italy and Spain.
Four EU countries have had their ratings dropped by two points – Italy, Spain, Portugal, Cyprus – indicating the seriousness of the doubts about their investability. Italy is now a BBB+.
The overall situation is cause for concern. Currency markets saw the euro fall to a 17-month low as early reports of the news filtered through. Worldwide stock market values also fell.
The UK and Germany may benefit from the ratings drop in the other EU states. With each retaining their triple rating they may be seen as safe houses by investors looking for shelter.
However, if the EU falls back into recession and if the euro fails, the UK economy will not escape the fall out.
Update 15th January:
France may face a second drop in its credit rating within the year. Standard and Poor’s, in dropping it form its triple A status, gave it a ‘negative outlook’ prognostication – indicating a 30%+likelihood of a further downgrade in the next 12 months..