The Credit Rating company Standard & Poor's on Jan 13, 2012 lowered its ratings on nine euro-zone nations, citing insufficient policy initiatives taken by European leaders to address ongoing systemic stresses in the euro zone.
Essentially, S&P found that the Eurozone policymakers have not
done enough to resolve the region's broadening and deepening financial
crisis. It criticised the latest talks as failing to come up with a
breakthrough of sufficient size and scope to fully address the
Eurozone's financial problems.
The most high-profile
casualties were France and Austria, which lost their prized AAA ratings –
the top grade, held by only 14 countries worldwide.
Sharp downgrades were applied to Cyprus and Portugal leaving them
with "junk" ratings on their debt – ranking them as very risky
investments.
S&P has given nearly
all the countries it downgraded a negative outlook, meaning there is a
one in three chance of a further cut in 2012 or 2013. It says refinancing costs for some countries will stay high, credit will be hard to come by and growth will slow.
A handful of countries escaped the downgrading, notably Germany, which has a track record of prudent fiscal policies and expenditure discipline.
What are the possible outcomes of this downgrade?
The downgrades will increase
borrowing costs for the affected countries when they try to raise
hundreds of billions of dollars on international bond markets in 2012. France alone needs to borrow about $240 billion to finance its existing debts and annual deficit.
Italy and Spain, two large nations that are facing escalating debt problems, were also among the countries downgraded.
This development is also likely make bailouts harder to fund.
The Eurozone's rescue fund, the European Financial Stability Facility
(EFSF), uses guarantees from its member countries to raise funds in
financial markets. If those backer countries are seen as less
creditworthy, so is the fund – and it could well be downgraded too. That
will make it more difficult and more expensive to raise money from
financial markets and other countries outside the Eurozone.
The rising borrowing costs
that many countries will face in the wake of these downgrades will have
repercussions across the Eurozone. There are worries, for
example, that rising borrowing costs for Italy mean it will sooner or
later need to apply for help from the EFSF. If it does – and drops out
of the fund as a backer – there are serious implications for key
guarantors Germany and France. Their obligations to the rescue fund
would rise – and put fresh pressure on their credit ratings.
Conclusion
While the downgrades did not come as much of a surprise they served as a sharp reminder that Europe's ongoing sovereign-debt crisis is far from being resolved and raised questions over the sustainability of triple-A status of the European Financial Stability Facility.
