Over Half the Eurozone Is Downgraded – Italy as Creditworthy as Kazakhstan? (also a few words on what private sector “involvement” will really mean with respect to Greece
The members of the European Monetary Union, as a fundamental structural solution to the Eurozone crisis, have sought to leverage their blended credit in the capital markets (via the EFSF and ultimately the ESM) to push the present lack of peripheral sovereign creditworthiness (and, by extension, the creditworthiness of the core nations’ banks) far into the future.
Today’s downgrade is a decided negative to the extent that such creditworthiness comes further into question (as it certainly has, long before today’s downgrade), or makes the financing of the liquidity necessary to straddle until overall macroeconomic improvement occurs, more in doubt or more dear. This is the principal difference between the downgrade of the U.S. (which, at any time of its choosing could monetize its own debts) and the downgrade of Europe.
The S&P downgrade puts more pressure on Germany to support EFSF and ESM, as the credit of its fellows in the EMU is diminished.
The creditworthiness of longer-term EFSF debt issuance has, from the announcement of the EFSF initiative, always been in doubt because of the perceived lack of credit support from those nations that were effectively guaranteeing their own debt. The downgrade memorializes that concern.
The credit issues leading to the downgrade derive from excessive peripheral sovereign debt and a more widespread excess of private sector debt in Europe (extending even into certain core economies) together with an unwillingness to resolve it and re-capitalize the core holders of that debt.
Creditworthiness is ultimately derived from a combination of wealth (worth) and relative competitiveness. The periphery fails on both those measures and lenders to the periphery are challenged as a result.
Nevertheless, the problem in the Eurozone ultimately rests in the unwillingness of the core, especially Germany, to monetize the problem debt and start over with greater fiscal integration (and the corresponding restrictions on sovereignty) and a better capitalized banking system. Until that changes – more of the same.
On the subject of “more of the same,” there is a reason why there is no deal between Greece and its creditors: What is on the table does not work for the other side. It is fantasy of politicians and bureaucrats in the core, whose banks have now dumped what they could of Greek indebtedness to holders who owe no duty or allegiance to core governments (which are now about to see what true private sector “involvement” really means).
2 Responses to “Over Half the Eurozone Is Downgraded – Italy as Creditworthy as Kazakhstan? (also a few words on what private sector “involvement” will really mean with respect to Greece”
bleichroeder • January 15th, 2012 at 5:53 pm
Agreed on the implications for a potential EFSF leveraging- the time has come and gone for the EFSF as a credible solution. However, undeniable lthough the need for fiscal integration is, debt monetization is just another way to avoid dealing with the real problems at hand and is not a workable, long-term solution. Its just another of the Chinese-esque back-door 'liquidity' cum insolvency-denying schemes embraced by Europe. The fact that the ECB will effectively accept IOUs written on napkins from banks as acceptable collateral (http://ftalphaville.ft.com/blog/2012/01/10/825031/unlisted-in-euroland/ ) seems to have escaped most commentators but speaks volumes to just how far things have slipped. We are dangerously close to a pan-European banking event and the time for half-way solutions has come and gone.
Aegean1972 • January 16th, 2012 at 1:42 pm
Europe (Germany mostly) is enforcing a recipe to the periphery, so in the years to come the debt issues can get under control and some of these countries (Greece, Italy, Portugal, etc) can get more organised in general. Its not a "perfect" recipe, but its a big step towards the right direction (along with growth incentives). And it has severe political cost. A political cost that across the pond the leaders in America arent taking and their debt is growing out of control (while their rating is still AAA). The irony…
But they re quick to judge europe for "not doing anything".
The rating houses (as well as the markets) across the pond, instead of giving a pat on the back of Merkel for doing-something about the debt-problem, they do everything they can to sabotage the efforts so the plan fails.
S&P couldnt pick a worse moment to downgrade France and Austria.
They are starting a "war". And a war is a very bad idea at the moment. No one will benefit.
I see alot of protectionism in the years to come.
Who ever survives from the deleveraging era with the least wounds…
