Guest Post by Steen Jakobsen of Saxo Bank on the S&P Downgrade.
S&P’s report is the most honest, politically incorrect report on the Eurozone debt crisis I have seen in a long, long time. It could increase the focus on how the policymakers continue to throw liquidity at a solvency issue and also underline how focus on austerity can leave us all worse off, as we can not save ourselves to prosperity.
In practical terms this means the European Financial Stability Facility is 90 percent dead – its leverage is now so small it makes no sense, hence the European Stability Mechanism will be moved further forward on the agenda in the March EU Summit, but it will also mean huge pressure on Germany to pay more, and to increase the EUR 500 bn. limit in place for the combined EFSF/ESM.
This will not go down well in German domestic politics and it will create an even bigger gap in the Franco-German alliance.
The downgrade of France changes the relationship from one of equals to one of older sister to younger brother. The dynamics could mean Sarkozy has to fight harder in the upcoming French election. I could easily imagine Marie Le Pen gaining momentum in the next few months on a strong anti-EU and anti-Sarkozy platform.
EUR/USD should open lower on the uncertainty and everything being equal (the favourite economist speak): it will put upward pressure on yields in Spain and Italy.
The main effect though could be more honest dialogue about the real reasons for the crisis in Europe and hence leave us better off as talk finally centres on reality rather than hope. Effectively S&P did what it was supposed to do: It ignored the “Powerpoint presentations” from the EU and looked only at the accounts. The accounts speaks clearly for temselves – no progress, no real plans and only savings making the board meetings.
The markets and the world could be facing “anything” this year. January 2012 thoughts by Sprott Asset Management;
2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore.
Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.
While majority of European asset managers still enjoyed their Friday drinks, S&P were busy downgrading many of the European countries. Among the downgraded countries are France, Austria and Italy. Italy now has the same credit rating as Ireland, Kazakhstan, Colombia and some other “less” developed countries. Portugal on the other hand is ow at junk status. From S&P;
“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,”
S&P said the euro zone faced stresses, including tightening credit conditions, rising risk premiums for a growing number of sovereigns, simultaneous deleveraging by governments and households, and weakening economic growth prospects.
It also cited political obstacles to a solution to the crisis due to “an open and prolonged dispute among European policymakers over the proper approach to address challenges.”
Austerity and budget discipline alone were not sufficient to fight the debt crisis and risked becoming self-defeating, the ratings agency said.
Hardly surprising the German Finance Minister Wolfgang Schaeuble played down the news, saying: “In the past months, we’ve come to agree that the ratings agencies’ judgments should not be overvalued.” (Full article here).