“Like a scene from a horror film”
With credit ratings agency Standard & Poor’s announcing
downgrades for nine European countries, Friday 13th certainly proved unlucky
for the eurozone
France lost its triple-A credit rating on Friday, while
eight other European countries also suffered downgrades.
The reaction has been muted so far, partly because the bad
news was well telegraphed in advance, so that it was already priced into the
euro’s exchange rate. It was widely expected that France would lose its top
rating and it’s been placed on negative watch by the ratings agencies, which
heightens the chance that it could face a further downgrade if it doesn’t
manage to turn the situation around.
“It was the market’s worst-kept secret that France was due a
downgrade," says chief economist Jeremy Cook from World First. “French
debt has been trading like the debt of the periphery for the past couple of
months now, with yields rising over the debt of Germany and the UK and French
default insurance being twice as expensive of that of most AAA-rated
countries.”
Portugal had its credit standing demoted to junk status by
Standard & Poor's (S&P), while Italy was put on the same footing as
Ireland – the latter managed to avoid being downgraded further, showing its
commitment to austerity measures has paid off.
[…]
Greece is in the unenviable position of taking the starring
role with its €14.4 billion bond maturing in March. It can’t afford to pay it
in full and, unsurprisingly, its creditors won't agree to losing 50 per cent on
the country’s government bonds voluntarily.
“The Greek PM is playing this impasse down, but his rhetoric
is not fooling anyone,” says Phil McHugh of Currencies Direct. “Lack of
agreement in this very difficult and technical area could trigger a hard and
fast default in the first half of 2012. The stakes are certainly ramping up
again and this is evident by the fact that Greece has sent senior officials for
meetings with the International Monetary Fund to try to help break the deadlock
on private debt swap talks.”
[…]
Controversially, the slew of bad news actually caused the
euro to rally against both sterling and the US dollar on Tuesday morning, but
we could well see the euro plummet to 12-month lows against the buck if America
comes out with positive earnings figures for the end of 2011 this week. Should
that happen, all those who are keen to avoid risk will flock to the dollar.
The trouble is that no one has confidence that the European
leaders will come up with a quick fix this time to the eurozone crisis. The
set-up is simply not designed to move at anything but a lumbering pace, while
financial markets move like quicksilver.
Nick Ryder, global analyst at Smart Currency Exchange, says:
"One of the major problems with the European debt crisis is that markets
expect an all-singing and dancing solution. The political make-up of the eurozone
makes swift decisions nigh-on impossible, as each solution to the problem takes
several months to implement and ratify.”
The European Financial Stability Facility (EFSF) is also
being dragged down by the shaky status of so many of its members. On Monday
night it lost its gold standard rating as S&P downgraded it to AA+, since
so many of its guarantors have lost their triple-A rating. This could increase
the EFSF's own funding costs and reduce its lending capacity just when more
nations could come knocking at its door. But EFSF chief Klaus Regling denied
that it will impact its ability to lend €440 billion to struggling eurozone
states this year.
Now that France has been knocked down a notch, one country
that has come out of this smiling is Germany.
[…]
Further downgrades could well be on the cards, but not for
Germany, which will continue to reap the benefits of being part of a weak
single currency, thus keeping its exports competitive on the world markets.
Towner believes the Germans are sitting pretty. “This puts
the focus back on Germany, which is quietly sitting there with a low
unemployment rate and watching their currency become more competitive again.
"It’s as though they are controlling the show.”
Report
By Liz Phillips
Original
Source: Telegraph - Forex Focus Please
click here