Euro’s top economies rattled by downgrade threat
By Sarah Collins | Tuesday 24 July 2012
Eurozone finance ministers have hit back at threats by Moody’s credit rating agency to downgrade the eurozone’s remaining ‘triple A’ economies, citing their “strong commitment to ensure the stability of the euro area as a whole”. “We take note of the rating decision of Moody’s, which confirms the very strong rating enjoyed by a number of euro area member states, as supported by the sound fundamentals which these and other euro area countries continue to enjoy,” Eurogroup President Jean-Claude Juncker - who is also Luxembourg’s prime minister and treasury minister - said in a statement, on 24 July.
Germany, the Netherlands and Luxembourg were put on negative watch by the agency in a 23 July note on the back of the increasing risks of a Greek exit from the euro and the likelihood that they will have to provide further bailout cash “of a materially larger order of magnitude” to Spain and Italy. “Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form,” Moody’s said. Finland’s ‘triple A’ rating was affirmed as stable in the note. Austria and France have been on negative watch since February and have already lost their ‘triple A’ score with rival agency Standard & Poor’s.
The possibility of a Greek exit has been increasing since the political paralysis that emerged between double elections in May and June knocked a €174 billion second bailout programme off track. Privately, eurozone officials are fretting that the country will need more time to meet its deficit targets. Greece’s President Karolos Papoulias submitted a request at the June EU summit for two extra years, a request that is unlikely to be granted without major problems as it will require eurozone countries to continue funding Greece beyond 2014.
“While it is not Moody’s base case, the risk of an exit by Greece from the euro area has increased,” the agency said. “Although Moody’s would expect a strong policy response from the euro area in such an event, it would still set off a chain of financial sector shocks and associated liquidity pressures for sovereigns and banks that policy makers could only contain at a very high cost,” it said. A troika of European Central Bank, Commission and IMF officials returned to Athens, on 24 July, to begin their latest progress report on the bailout, which is due to be completed before September.
SPAIN AND ITALY
Meanwhile, Moody’s predicts that Spain and Italy will continue to pose problems for creditor member states even without a Greek exit, and that the current crisis could last “many years” and subject the single currency zone to a “series of shocks”. “The continued deterioration in Spain and Italy’s macroeconomic and funding environment has increased the risk that they will require some kind of external support,” the agency says. Spain’s bond yields (the price investors charge to buy the debt) rose above a red line of 7% on 23 July, while Spanish and Italian governments have appealed to the ECB to step in to calm restive bond markets. The bank began to buy Spanish and Italian debt in August last year but ECB President Mario Draghi now insists that the eurozone’s rescue funds - the current €440 billion rescue fund, which is bailing out Greece, Ireland and Portugal, or the future European Stability Mechanism - step in to fill the breach. The funds have the power to buy bonds on either primary (direct from the issuer) or secondary (from traders on the open market) markets but the move would require the support of a majority of eurozone states. However, the funds’ firepower is capped at €700 billion - less €100 billion after the Spanish bailout - while Spanish and Italian bond markets combined are worth almost €3 trillion.
German Finance Minister Wolfgang Schäuble was to meet Spanish Economy Minister Luis de Guindos in Berlin, on 24 July, to discuss the crisis.
The rating announcement comes the day after Draghi reaffirmed that the euro was “irreversible”.