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 Post subject: Eurozone Credit Rating Downgrades PostPosted: 2012-01-13 08:01pm
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France loses AAA rating as euro governments downgraded
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What caused the eurozone crisis?
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France has lost its top AAA credit rating from Standard & Poor's and eight other eurozone governments have also been downgraded by the ratings agency.

Italy, Spain, Cyprus and Portugal were cut two notches, with the latter two given "junk" ratings. Germany kept its AAA rating, and with a stable outlook.

S&P blamed the failure of eurozone leaders to deal with the crisis, or even diagnose its causes correctly.

Rumours of S&P's move prompted stock markets to fall earlier in the day.
Misdiagnosis

Austria, like France has lost its top AAA rating, and been downgraded to AA+. Its economy exports a lot to recession-struck Italy, while its banks are facing losses on subsidiaries they own in financially troubled Hungary.

S&P's rating of Italy - currently at the epicentre of the crisis - has been cut two notches from A to BBB+.

Spain was also cut two notches from AA- to A, as was Portugal, whose rating fell from BBB- to a "junk" rating of BB - indicating a very high level of risk for lenders.
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“Start Quote

The downgrades increase the dependence of the big banks on finance from the ECB - and for the economic recovery of the eurozone, that's a very bad thing”

image of Robert Peston Robert Peston Business editor, BBC News

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Apart from Germany and lower-rated Slovakia, all the other countries being reveiwed were given a "negative outlook", meaning there is a 30% chance of a further downgrade.

"Today's 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 eurozone," said S&P in its statement.

The agency said the plan currently being discussed by eurozone leaders - to limit governments' future borrowing - was based on a misdiagnosis of the cause of the financial crisis.

It said the crisis was more to do with trade deficits and a loss of competitiveness by "periphery" eurozone economies such as Italy and Spain, than excess borrowing by governments.

The agency also praised the ECB for taking action to stop a total collapse in market confidence in the eurozone late last year.
'No catastrophe'

French Finance Minister Francois Baroin confirmed the news about his own country ahead of S&P's announcement on Friday night.
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Analysis
image of Hugh Schofield Hugh Schofield BBC News, Paris

The French downgrade is terrible news for President Sarkozy, who has only 100 days before the elections to claw back his yawning poll deficit behind the Socialist Francois Hollande.

It may be that in the short term the economic effects of the downgrade are quite limited. The markets have long assumed this was coming, so may already have absorbed the impact on France's cost of borrowing.

But the political fall-out could be very disagreeable for the president.

His pitch ahead of the elections has been to tell the voters that - though he acknowledges they may not warm to him personally - he has what it takes to battle through the crisis.

France is in the midst of an economic storm, he is saying, so best to entrust the ship of state to a proven captain.

But this argument looks a little thin when the country has just lost its gold star status, and under his watch. And he can't say it doesn't matter that much - because for most of last year he was telling the French that safeguarding the triple-A was an absolute necessity.

To be fair, the French are not especially impressed either by the prospect of a President Hollande. But that is meagre comfort for Sarkozy.

It's the first rule of politics: if you're in charge, you take the rap.

Peston: Bad day for the euro

"It's not good news, but it's not a catastrophe," Mr Baroin said following emergency talks called by President Nicolas Sarkozy with the prime minister and other key ministers.

He said the French government was not planning any additional spending cuts or tax rises as a result of the downgrade: "It's not ratings agencies that decide French policy."

Meanwhile, European economic affairs commissioner, Olli Rehn, said that he regretted "the inconsistent decision [by S&P]... at a time when the euro area is taking decisive action in all fronts of its crisis response."

France is being downgraded just one notch by S&P, to AA+.

The country still has a top AAA rating from the other two main ratings agencies, Moody's and Fitch.
Spooked

Earlier, the euro hit a new 16-month low against the dollar of $1.263 on rumours of the multiple downgrades, before rebounding.

It also dropped against the pound, hovering at about 82.9 pence.

Markets were also spooked by news that talks between Greece and its private sector lenders over a restructuring of its debts - including a 50% forgiveness - had broken down.

An agreement is a precondition for Greece receiving its next round of bailout money from the European Union and International Monetary Fund, without which it faces the risk of running out of money to repay its debts, and a possible exit from the eurozone, in the coming months.

London's FTSE 100 ended the day down 0.5% and Frankfurt's Dax 0.6%, while the Dow Jones in New York fell 0.4%, although it was widely expected that the ratings cuts were coming.
Borrowing cost

Credit ratings are used by banks and investors to decide how much money to lend to particular borrowers.

The cut in the so-called sovereign ratings of governments is likely to lead to most other borrowers domiciled in the same countries - including banks and companies - being downgraded.
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Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Credit rating
Credit rating
The assessment given to debts and borrowers by a ratings agency according to their safety from an investment standpoint - based on their creditworthiness, or the ability of the company or government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted. Ratings of BBB- or higher are considered "investment grade". Below that level, they are considered "speculative grade" or more colloquially as junk.
Glossary in full

Although the move has been widely expected, it is still likely to make it somewhat more difficult and expensive for borrowers from those countries to raise money, including for the governments themselves.

Italy's 10-year implied cost of borrowing in bond markets jumped by a third of a percentage point after the rumours emerged, but ended the day largely unchanged at just over 6.6%.

France's borrowing cost rose slightly, from 3.03% to 3.07%. Germany - considered the safest borrower in the eurozone - saw its borrowing cost fall from 1.83% to 1.76%.

The downgrades may also have an impact on the eurozone's rescue fund.

The European Financial Stability Facility (EFSF) - which has already been used to rescue Portugal and the Irish Republic - is guaranteed by the eurozone governments.

The fund is supposed to contribute towards future bailouts of Greece.

It was already having trouble borrowing money needed to provide its rescue loans. S&P's announcement may make that task even harder.


So France has lost it's AAA rating. Hardly unsurprising and the markets had already priced the move in, still bad news for Europe though. As far as I can see the main impacts will be a concomitant downgrade of the EFSF and that Sarkozy no longer has any hope whatsoever of re-election.

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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-13 08:15pm
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And the Americans don't?



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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-13 08:56pm
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So what? America also got downgraded lately, and the rates didn't spike, at all. These ratings are not a law but a tool to have better overview and pick the best creditor. Almost NO country has a AAA rating, anymore, so it doesn't matter, much. In fact, AAA was given out like candy in the past. At some time, you had to rate everybody down, or create an AAAA rating to show the ones who did better than the 'bad' AAA's.

Europe /US didn't get downgraded, Germany (still an AAA) was upgraded.



The Greeks are somewhat undependable allies when it comes to keeping promises. I am sure the fleet of 300 galleys they promised will turn out to be 3 guys in an oversized cooking pot. (Thanas, revealing the plans for German world domination)

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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-14 06:08am
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However, now it gets easier for Greeks and Spaniards to say "So, Austria and France, if you guys can't follow your own advice to us about austerity and reining in your budgets, why should we?"

I know that the ratings don't correlate well to budgetary health, but neither do the interest rates.



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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-14 06:26am
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I doubt that you honestly believe anyone can compare the french or austrian budgetary situation with spain. If you think this applies to the greek situation, I'll have what you are smoking. Anyone trying to make that argument will be laughed out of wherever they make it.

The main reason to rate France and Austria down one grade to 'United States of America' level, and rightfully so, is because they are doing worse than Germany. That's why the others were rated down 2 grades. The one they deserved for inaction, and one to correct the picture because Germany does so well. I honestly expect that AA will become the new general level for prospering states, with AAA only reserved for nations that outshine the others.



The Greeks are somewhat undependable allies when it comes to keeping promises. I am sure the fleet of 300 galleys they promised will turn out to be 3 guys in an oversized cooking pot. (Thanas, revealing the plans for German world domination)

I do archery skeet. With a Trebuchet.

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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-14 03:10pm
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Austria has done better than Germany has in terms of Deficit:GDP and Debt:GDP in the last decade. Spain has, too. This is all about balance of trade, and you'll see Spain start complaining soon enough.



Can't keep my eyes from the circling skies,
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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-14 07:58pm
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Spain has 23% reported unemployment and every new Caja that comes into power suddenly finds massive shortfalls in the budget.

Spain is potentially pulling a Greece and will continue to post glowing budgets until the government changes and reality is brought to bear.

Massive real estate bubble and massive unemployment? Yeah, that definitely sounds like a good recipe for good economic growth.



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 Post subject: Re: Eurozone Credit Rating Downgrades PostPosted: 2012-01-14 08:31pm
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KrauserKrauser wrote:
Spain has 23% reported unemployment and every new Caja that comes into power suddenly finds massive shortfalls in the budget.


*looks around*

So far, I haven't seen any building societies (which are perhaps the best analogy for the Spanish cajas) taking power anywhere. You may mean Comunidad Autonoma, the Spanish regional level governments.

Quote:
Spain is potentially pulling a Greece and will continue to post glowing budgets until the government changes and reality is brought to bear.


The national government itself is in decent, if not shining condition, and those are the figures that get thrown around, despite the very recent change of government. The crap is mostly to be found in the regional and local levels, though that's likely to change in very short order.

Certain legal moves would suggest that they are preparing the framework to make the central government take over the burden of the regional debt. Which would be a total riot, maybe even literally.

Quote:
Massive real estate bubble and massive unemployment? Yeah, that definitely sounds like a good recipe for good economic growth.


For reference, our industrial activity sits currently at 1993 levels in terms of total output. In per capita terms, more like 1977 or 1983.

Image
Image

Spain would be the black line in both graphs. Blue, yellow and green are Germany, France and Eurozone Average in the first graph and Italy, United States and UK in the second.

Credit for the graphs goes to Juan Carlos Barba.



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