The big question: What would a downgrade of 15 countries mean for the Eurozone?

We ask five eminent economists

Credit rating agency S&P announced last night that 15 eurozone countries might be downgraded after this weekend’s euro summit. France and Germany are among those threatened.

We ask five eminent economists: what does this mean for Europe, and ultimately, London?

Eamonn Butler, MA PhD, director of the Adam Smith Institute

“Everyone will be amazed at how quickly things will recover”

“S&P’s threat to downgrade eurozone countries should have come months ago. The eurozone has been in deep trouble for months. Rounds of crisis meetings have not tackled the fundamental problem, that many eurozone countries are living beyond their means – and have no real intention to change.

“This weekend’s summit won’t change things because countries will carry on overspending, and Brussels won’t be able to stop them. The markets will turn quickly, and the euro will start to disintegrate. That will be very damaging for everyone, including London, in the immediate term. But with common sense restored to European currencies, everyone will be amazed at how quickly things will recover.

“Within a year, we will all wonder why anyone wanted the euro in the first place.”

Caxton FX’s analyst, Richard Driver

“We remain bearish on the euro and safer currencies, such as the dollar and sterling, look far more attractive in this climate”

“This has been made evident as appetite for riskier assets has declined and the euro took a significant hit against the US dollar. In addition, the warning ramps up the pressure on EU leaders to produce something concrete.

“S&P’s issued a similar warning to the US in the summer and duly downgraded their debt when they failed to agree adequate budget cuts. As a result, it shouldn’t be ruled out that the ratings agency will act firmly on the eurozone-15 as well.

“There have been signs of progress following Merkel and Sarkozy agreeing on fiscal restrictions and the markets will certainly be hoping for the best, while preparing for the worst. We may well see some progress at Friday’s EU Summit. In the medium and long-term, however, there are still too many issues surrounding the euro to solve the current crisis of confidence.

“We remain bearish on the euro and safer currencies, such as the dollar and sterling, look far more attractive in this climate.”

Jonathan Chia Croft Head of Capital Markets AdviCorp

“A downgrade would cause a lot of pain in the European sovereign bond markets.”

“The warning has already been an indication of the kind of things that we will see if there is a downgrade. Everyone has to remember, when you implement the downgrade, it changes things on the ground. Certain portfolios are told they can’t hold below a certain grade. This means that the act of downgrading triggers forced selling and that is why it is so devastating. Masses of bonds issued by countries can’t be held post-downgrade.

“This depresses prices the moment that it happens and why you see a certain amount of price weakening even now, managers don’t want to wait around until it happens before selling.

“If you take the situation that we are seeing today with certain countries paying higher costs to attract investors, (Italy paying 7.5 per cent). A downgrade would cause a lot of pain in the European sovereign bond markets.

“It couldn’t have come at a worse time. The world is waiting for the European countries to find a credible solution to their problems and to begin the process of putting Europe back together. A downgrade will cause a lot of interim pain if it happens.”

Terry Smith, CEO of Tullet Prebon, speaking on the BBC 4 Today Programme in response to S&P’s announcement

“The idea that the ECB will be able to buy bonds and that’s a solution, I’m afraid, is farcical”

“It’s not terribly important in itself. It’s a statement of the blindingly obvious in many respects. The idea that many of the eurozone countries, possibly all of them, might be less able to service their debts than people had thought historically strikes me as fairly obvious.

“I don’t think the timing is particularly bad. If you remember during the credit crisis one of the great things levelled against the ratings agencies was that they weren’t independent enough. So I think that when they start behaving independently it’s a bit remiss to start complaining about them.

“And I think they’re absolutely right in what they’re saying.

“Germany is the one that actually in the end will end up risking its credit for the remainder of the zone, if it goes down the path that is currently being outlined. Germany doesn’t have the resources to support all of us.  

“We’ve seen countless summits, and we’ve seen announcements and agreements, and it’s true we’ve not had all the details but even if it all came to pass - and I must say that the odds, looking at history, are against it - the idea that the ECB will be able to buy bonds and that’s a solution, I’m afraid, is farcical because what you’re talking about is the central bank for these countries buying bonds that the countries are issuing.”

Stephen Archer, economist and founding partner of UK business strategy and leadership consultancy, Spring Partnerships

“There is a wider issue here: the questionable conduct of credit rating agencies and their US bias”

“In theory and in practise the cost of borrowing for each country will rise, and the ability to service their debts will be stressed - in some cases to breaking point as it has for Greece.

“The issue will be solved in large part when the unified Europe is able to use the European Central Bank to pump money in and save the Euro and members. Europe will then be rated rather more like the US. Credit rating agencies may treat the EU as such. There is a wider issue here: the questionable conduct of credit rating agencies and their US bias.”

 

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