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16-01-2012, 06:02 PM
Business Times - 16 Jan 2012
Eurozone woes back to haunt global markets
Risks rise of Greek default as talks fail; rating cuts weigh on France, eight others
By NEIL BEHRMANN
IN LONDON
GLOBAL market fears have returned following a brief respite.
Once again the eurozone is at the centre of uncertainty after talks with Greece broke down on Friday and Standard & Poor's downgraded France and Austria, leaving only four triple A nations in the currency bloc.
Ratings on Italy, Spain and several other nations were cut. There are now growing fears that Greece may default on its debts in ten weeks as it does not have enough funds to repay a 14.4 billion euros (S$24.8 billion) bond that has to be repaid on March 20.
Bankers involved said that unless a deal could be salvaged at a meeting on Wednesday that default was 'inevitable'. Greece could then be forced out of the eurozone and its former currency, the drachma could be reinstated. The markets would then turn their attention on to Portugal, Ireland and Spain as possible devaluation candidates.
Another scenario mentioned is that German political parties may force Chancellor Angela Merkel to reintroduce the Deutsche mark. The euro, which was trading at 1.42 against the US dollar in November, experienced a further downward lurch last week to 1.2670 and a large number of forecasters are predicting 1.20 in the first half of this year.
On Friday, S&P issued downgrades for Italy, Spain, Portugal, Slovakia, Slovenia, Malta and Cyprus as well as France and Austria, which lost their AAA ratings. S&P officials said that European politicians hadn't done enough to contain the debt crisis. The ratings agency said it had also been disappointed by the results of December's EU summit.
In a conference call on Saturday, S&P defended its decision to cut ratings on the nine European countries. S&P analyst Moritz Kraemer said that European government measures were not sufficient to restore confidence.
'They have not achieved a solution that is sufficient in size or scope,' he said.
In Paris, demonstrators chanted in front of the S&P French offices. 'The French people know what their value is and we don't need ratings agencies to tell us what we are worth,' said Raquel Garrigo, spokesman for the Left Front political party.
Germany's Ms Merkel said on Saturday that the downgrades would force Europe to accelerate plans to enforce tighter budget rules on the 17 members of the euro.
'We are now challenged to implement the fiscal compact even quicker and to do it resolutely, not to try to soften it,' she said.
In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but Der Spiegel reported that politicians and economists fear that Berlin's contributions to the euro bailout will have to be much greater than initially planned.
Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Ms Merkel's junior coalition partner, said that his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P.
The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that 'Germany would no longer just have to carry 40 per cent, but close to 75 per cent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating.'
He added that the current German guarantee of 211 billion euros would no longer be sufficient in order to achieve the volume of aid that had been originally planned.
A spokesperson of the German Finance Ministry maintained that the austerity measures that had already been passed would stabilise the finances of the eurozone in the longer term.
'Our recent experience has shown that the markets have already taken positive notice,' the spokesperson said.
Nevertheless the downgrades have caused market worries that the 440 billion euros EFSF will not have a Triple A rating, so that China, Japan and others could be reluctant to invest money in its bonds. To be sure, Japanese bankers report that the country's investors have been steady sellers of European sovereign and other bonds and have converted euros into yen.
Eurozone woes back to haunt global markets
Risks rise of Greek default as talks fail; rating cuts weigh on France, eight others
By NEIL BEHRMANN
IN LONDON
GLOBAL market fears have returned following a brief respite.
Once again the eurozone is at the centre of uncertainty after talks with Greece broke down on Friday and Standard & Poor's downgraded France and Austria, leaving only four triple A nations in the currency bloc.
Ratings on Italy, Spain and several other nations were cut. There are now growing fears that Greece may default on its debts in ten weeks as it does not have enough funds to repay a 14.4 billion euros (S$24.8 billion) bond that has to be repaid on March 20.
Bankers involved said that unless a deal could be salvaged at a meeting on Wednesday that default was 'inevitable'. Greece could then be forced out of the eurozone and its former currency, the drachma could be reinstated. The markets would then turn their attention on to Portugal, Ireland and Spain as possible devaluation candidates.
Another scenario mentioned is that German political parties may force Chancellor Angela Merkel to reintroduce the Deutsche mark. The euro, which was trading at 1.42 against the US dollar in November, experienced a further downward lurch last week to 1.2670 and a large number of forecasters are predicting 1.20 in the first half of this year.
On Friday, S&P issued downgrades for Italy, Spain, Portugal, Slovakia, Slovenia, Malta and Cyprus as well as France and Austria, which lost their AAA ratings. S&P officials said that European politicians hadn't done enough to contain the debt crisis. The ratings agency said it had also been disappointed by the results of December's EU summit.
In a conference call on Saturday, S&P defended its decision to cut ratings on the nine European countries. S&P analyst Moritz Kraemer said that European government measures were not sufficient to restore confidence.
'They have not achieved a solution that is sufficient in size or scope,' he said.
In Paris, demonstrators chanted in front of the S&P French offices. 'The French people know what their value is and we don't need ratings agencies to tell us what we are worth,' said Raquel Garrigo, spokesman for the Left Front political party.
Germany's Ms Merkel said on Saturday that the downgrades would force Europe to accelerate plans to enforce tighter budget rules on the 17 members of the euro.
'We are now challenged to implement the fiscal compact even quicker and to do it resolutely, not to try to soften it,' she said.
In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but Der Spiegel reported that politicians and economists fear that Berlin's contributions to the euro bailout will have to be much greater than initially planned.
Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Ms Merkel's junior coalition partner, said that his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P.
The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that 'Germany would no longer just have to carry 40 per cent, but close to 75 per cent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating.'
He added that the current German guarantee of 211 billion euros would no longer be sufficient in order to achieve the volume of aid that had been originally planned.
A spokesperson of the German Finance Ministry maintained that the austerity measures that had already been passed would stabilise the finances of the eurozone in the longer term.
'Our recent experience has shown that the markets have already taken positive notice,' the spokesperson said.
Nevertheless the downgrades have caused market worries that the 440 billion euros EFSF will not have a Triple A rating, so that China, Japan and others could be reluctant to invest money in its bonds. To be sure, Japanese bankers report that the country's investors have been steady sellers of European sovereign and other bonds and have converted euros into yen.
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