Implications of EU rating downgrades

Standard and Poor’s downgraded the credit ratings of nine euro-zone countries last week, making big news on a Black Friday the 13th. The rating downgrade hammers the euro-zone politicians’ efforts to win back investor confidence and renews doubts about Europe’s ability to bail itself out of its financial crisis.

Implications of EU rating downgrades - ảnh 1
Photo: Reuters

Standard and Poor’s Ratings Services cut the ratings of Italy, Spain, Portugal, and Cyprus two notches and the standings of France, Austria, Malta, Slovakia, and Slovenia one notch. The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status. It retained the triple-A rating of Europe's No. 1 economy, Germany. The ratings downgrade has given these nine countries a negative outlook. France’s Finance Minister Francois Baroin took the downgrade with a grain of salt. He said his country is not planning any more austerity measures, admitting it is not good news, but not a disaster either. The S&P downgrade will greatly affect markets with European economies working hard to restore market trust for the euro. Immediately on Friday, the Euro/Dollar rate decreased significantly. The European currency depreciated from 1.28 to 1.26 the same day, matching the negative Interbank sentiment projection at nearly -3%, closing the week at 1.26. The Euro is trading quietly.

The worst consequence of France’s downgrade is that the depth of the euro crisis becomes historic. France’s loans will be more expensive with its credit rating reduced from triple-A to AA+, a worrying consideration for the issuance of 178 billion Euro bonds later this year. Consequently, the Fund for European Financial Stability might also face a possible ratings downgrade. European nations and companies are staggering from financial exhaustion. Meanwhile, euro-zone banks are in urgent need of 280 billion euros to pay off loans due in the first quarter of this year.

The downgrades also come just at the moment when Greece, the epicenter of Europe's current crisis, is desperate for support. In Athens, talks broke down Friday between Greece and a group of creditors negotiating to restructure its debt. If no deal can be reached, Greece will need billions of euros in additional aid to help it make a big bond repayment in March. The alternative is a messy default.

France’s downgrade broke the balance of power between France and Germany. As French economist Jacques Delpla said, it won't be “Merkozy” anymore, it will be German Chancellor Angela Merkel and IMF chief Christine Lagarde dictating policy in Europe.

Immediately after S&P announced its euro-zone downgrade, Merkel promised to further reform the euro-zone, saying it is important to implement the financial treaty and put the regular fund for financial stability into operation as soon as possible. She believes that will restore investors’ trust.

All European countries are working hard to slash budgets to cope with the debt crisis. The S&P credit rating downgrade made no surprise but has heightened mistrust.

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