Friday 13th Nightmare For The Eurozone
Quote:
Originally Posted by SKYNEWS
You can say a lot of things about Standard & Poor's, but the one thing you cannot 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 - if various agency sources are to be believed - chosen Friday the 13th to confirm that the majority of those 15 nations put on negative watch have now been downgraded.
And, as if to twist the knife, it also emerged on Friday that talks between Athens and private sector investors aimed at voluntarily reducing the total amount of Greek debt had fallen through.
And, 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 is not just the date that is 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.
Although it clearly has more of the wow factor, there is good reason to suspect that the rumoured S&P downgrade (which is expected to include France, Austria and others, but not Germany, the Netherlands, Finland and Luxembourg, which get to keep their AAA) 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 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 was supposed to bolster the currency.
Moreover, it represents a serious political blow for Nicolas Sarkozyas he fights for re-election this year.
But it may well be the breakdown of the Greek talks that prove the more serious of the two 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 Friday, 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?
http://news.sky.com/home/business/article/16148743
