Chancellor Angela Merkel said the downgrades underline the fact that Europe has a “long road” ahead to win back investor confidence.
Rating agency Standard and Poor’s (S&P) has lowered the sovereign ratings of nine euro zone countries, including France and Italy, a move that reignited concerns over fiscal sustainability of the region, CBC News informs. The long-term ratings on Cyprus, Italy, Portugal, and Spain were lowered by two notches. The sovereign ratings on Austria, France, Malta, Slovakia, and Slovenia, were lowered by one notch. France’s sovereign rating has been downgraded to AA+, the level of US long-term debt, which S&P downgraded in August last year. Germany was the only country that retained its coveted AAA tag — the highest investment grade ratings. “Today’s (our note Friday) rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone” S&P said.
Chancellor Angela Merkel said the downgrades underline the fact that Europe has a “long road” ahead to win back investor confidence. She also told reporters the S&P ratings downgrades underscore that euro-zone nations must accelerate efforts to implement a closer fiscal union and to set up a permanent bailout facility, the European Stability Mechanism. The ESM, scheduled to start on July 1, should start “as soon as possible” because this is important for investors’ confidence, the German leader said. European leaders are divided and behind the curve in their response to the sovereign debt crisis while the European Central Bank is playing a “constructive role,” Standard & Poor’s said. The policy response to the crisis “has not kept up” with the risks, Frankfurt-based Moritz Kraemer, S&P’s managing director of European sovereign ratings, said yesterday in a conference call.
Meanwhile, speaking in Kolkata, Union finance minister Pranab Mukherjee said the country required taking lessons from the euro zone crisis and prudent fiscal management was the need of the hour. “We need to learn lessons from the euro zone crisis where sovereign fiscal deficits of some have surpassed 100 pc of the GDP,” he said.
France: “Not a catastrophe”
Meanwhile, French finance minister Francois Baroin reportedly told France-2 Television that the downgrade of France’s AAA sovereign debt rating was not “a catastrophe”. He reiterated that France still had a solid rating. “The US, the world’s largest economy, was downgraded over the summer,” Baroin said. “You have to be relative, you have keep your cool. It’s necessary not to frighten the French people about it.”
In his turn, French Prime Minister Francois Fillon said Saturday, quoted by Wall Street Journal that the government would press on with planned overhauls but wasn’t considering fresh austerity measures. “This decision is an alert which should not be dramatized, but should not be underestimated either,” he said.
German Finance Minister Wolfgang Schaeuble said that despite the downgrade, “France is on the right track.”
European economic affairs commissioner Olli Rehn also criticised S&P’s decision to downgrade nine euro zone nations as “inconsistent” and qualified it as “aberrant”.
The downgrades are likely to be a dampener for financial markets as investors are likely to sell euro, euro zone equities and sovereign bonds. The outlook on all ratings but for two of the 16 euro zone sovereigns are negative, indicating that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013, S&P added. S&P has affirmed also the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands and the outlook on the long-term ratings on Germany and Slovakia are stable. The downgrade, S&P said, reflected its opinion that the fiscal consolidation plan which Congress and the administration recently agreed to “falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics.”
In a statement, Luxembourg Prime Minister Jean-Claude Juncker said the eurozone was determined to maintain the triple-A rating for European Financial Stability Facility. Earlier, amid reports on the impending downgrade, the euro fell to a 17-month low and world stocks also fell.
EU summit to go ahead on Jan 30
In another context, European Council President Herman Van Rompuy confirmed for BBC that the summit of European heads of state will take place as planned on Jan. 30. Van Rompuy had tried to change the date to avoid possible problems with a general strike planned by Belgian trade unions on that day. The summit has been called to discuss the euro crisis and economic growth and it will be an occasion to discuss a new fiscal compact as decided on Dec. 9.
Effects on romanian market
European states have to rapidly restructure their budgets in order to amply reduce deficits, following the S&P decision to downgrade nine Euro Area states, especially since the hike of financing costs will be felt in the real economy by banks and companies, secretary of state within the Finance Ministry Bogdan Dragoi stated for Mediafax.
“Our banks will have a higher financing cost and the financing lines will be more expensive, but all financing lines have shrunk on Romania. Money will have a slightly higher cost,” the secretary of state added. The S&P decision could result in the growth of EUR-denominated financing costs for Romania, through investors’ contagion with risk aversion and through the banking channel, since parent institutions will finance themselves at a higher cost, the Romanian analyst stated.
Analyst Florin Citu believes that on the short term decisions such as that taken by S&P will negatively affect economic growth in Romania through higher capital costs.
Raiffeisen Bank Romania chief economist Ionut Dumitru states that the S&P decision is as dramatic as it is baseless. “EUR-denominated financings will most likely see an upward trend in what concerns costs, something that can also have a positive aspect by stimulating RON-denominated crediting. In what concerns the risk of seeing RON depreciation, with a small inflation on a downward trend there is greater room for maneuver, both in what concerns the interest rate and the exchange rate. I don’t see significant effects of a slightly depreciated exchange rate of up to RON 4.4/EUR. The important thing is for that level to hold,” Dumitru added.
A much more cautious tone was adopted by UniCredit Tiriac Bank chief economist Dan Bucsa, who noted the coincidence between the S&P announcement and Spain’s and Italy’s success in borrowing on the market. In what concerns the effects on the internal market, Bucsa expects the Central and Eastern European assets to be penalized, but does not see a direct bank contagion stemming from the S&P decision. He expressed scepticism that Romania will be able to come out on external markets in the first half of the year because many countries with a higher rating and large debts to finance are borrowing.