Standard & Poor’s (S&P) decision to downgrade France’s coveted AAA rating on Friday 13 January 2012 was long expected but the recent downgrading of eight other eurozone countries and the stark nature of the negative outlook described by the credit rating agency (CRA) was a clear warning about the stormy waters ahead.
gtnews decided to canvass the views of industry insiders, commentators and most importantly economists to find out what they think the S&P’s downgrades herald for the future of the eurozone and for European economies – both key concerns for global multinational corporate treasurers at the moment as they decide how to hedge currency risk and where to place their money. Is this development:
- A worrying intensification of the eurozone crisis?
- A necessary step on the road back towards recovery?
- The first move in the dissolution of the eurozone?
- A political move that was always going to happen?
- A decisive split between so-called ‘Anglo-Saxon’ capitalism and France’s idea of a more consensual European-based model?
- None of the above?
A selection of opinions and thoughts are included below from some of our readers and contacts. For more views join our online Linkedin discussion group* and watch out for the results of our online poll last week, which attracted 150 votes on the question of whether the recent S&P downgrades made resolving the eurozone crisis more difficult. The full results can be seen here. These online polls will be a regular feature of gtnews from now on, so be sure to check the homepage for this week’s question.
Reactions to S&P’s Downgrades
Reviewing the S&P’s ratings action on the dreaded Friday 13th, Mark Wall, an economist at Deutsche Bank’s global markets research team, pointed out that the credit ratings agency hadn’t just targeted France and had, in fact, “downgraded nine out of the 16 euro area countries that were under review. Four of these were two notch downgrades, including Italy, Spain and Portugal. France and Austria were downgraded one notch and both have lost their AAA S&P rating. Fourteen of the 16 countries reviewed remain on negative outlook” [which means there is a one in three chance of further downgrades over the next two years].
“The ratings action on 13 January had been anticipated, but arguably the outcome was worse than expected. The key reason for the downgrade was ‘political’, that is, the EU’s sub-par management of the crisis. Germany’s Chancellor Merkel has responded to the downgrades with a call for more rapid approval of a strong ‘fiscal compact’.
“Resolution of the crisis lies above all else in the political realm,” believes Wall. “Therefore, progress needs to be made on the intrinsic solutions to the crisis: Italian and Spanish structural reforms, the fiscal compact, the euro area loans to the IMF, and the Greek debt restructuring moves surrounding the Private Sector Initiative [PSI] and second loan programme.”
Michael Burkie, BNY Mellon Treasury Services, Europe, the Middle East and Africa (EMEA) market development, thinks that the current batch of S&P’s downgrading announcements should, if anything, accelerate the urgency and need for focused attention on addressing the underlying reasons that have led to the eurozone crisis. “Have the recent announcements made the crisis more difficult to resolve? No, I don’t think so. Have they put the spotlight on the need for fiscal union to be matched by tangible political action? Most definitely.
“If anywhere, the solution will be found as the result of a fine balance between fiscal trust being re-established between eurozone countries (and their banks) and the implementation of economic austerity measures which do not stifle economic growth.”
Will Britain or Germany be downgraded next? “No. Despite the collateral damage effects to Britain’s economy brought about by this crisis, Britain has in fact benefited as a result of a capital flight to safety by many institutions and companies, so it would be hard to imagine Britain suffering a downgrade as a direct effect of the current crisis. On the face of it, there is no valid economic reason either why Germany should have its rating reduced as it has continued to maintain and grow a very healthy export led economy.
To be honest, the French downgrade did not come as a surprise, says Carsten Brzeski, senior economist at ING’s Economic Research unit in Belgium. “With sluggish growth, a high debt ratio and high fiscal deficit, a lack of austerity and a continuous loss of competitiveness over the past few years, it was not a question of ‘if’ but ‘when’ it would happen.
“The direct impact of the French downgrade on the crisis management will be limited. The most tangible impact is the downgrade of the European Financial Stability Facility. However, this downgrade does not immediately affect the rescue funds’ total lending capacity, only the AAA backed lending capacity. After the S&P downgrades, the EFSF still has a triple-A backed lending capacity of around €260bn. Moreover, up to now, the EFSF has only used €16bn of its total size. Still, the indirect impact from the French downgrade should not be underestimated. Politically, it will weaken France’s position in the eurozone crisis talks and negotiations. President Sarkozy had already lost clout in the second half of 2011, when actually almost always the German position succeeded and not the French.
“Obviously, Germany’s AAA rating is not carved in stone. Further steps towards a real transfer union in which Germany takes more European liabilities on its shoulders would at least temporarily threaten its top rating. For the time being, however, an almost balanced fiscal budget, an economy with sound fundamentals and without any pressing problems or imbalances should safeguard Germany’s safe haven role [and protect its political clout].
The important thing in Brzeski’s view is that the latest S&P downgrades “act as a strong wake-up call for eurozone policymakers that the crisis is far from over”. On the plus side, he does believe that “the experience of the last two years has taught that – if push comes to shove – the ECB [European Central Bank] is able and willing to take bold actions to save the eurozone.”
Laurence Boone, Bank of America Merrill Lynch’s head of developed European economics, points out that “S&P’s blame fiscal austerity and the euro framework for the problems dealing with the present crisis – yet fiscal discipline is also what makes S&P’s very confident about Germany’s rating. The euro framework is also largely inspired by Germany’s view of the economy. Against this backdrop, we expect little dramatic change in the euro framework in the near future, which keeps us worried about further possible rating actions [against other non-German countries] in the future.” There is a possible paradox here, therefore, in Boone’s opinion.
“We are most worried about Italy and Spain moving forward. The S&P downgrade on 13 January was two notches and rates were previously stabilising somewhat before the action. Given the economic outlook and the fiscal austerity in the pipeline, we see risks of further downgrades in the coming months. This has implications for interest and exchange rates, with the former possibly rising in forthcoming months, while the euro could depreciate until it’s worth US$1.25 [a fall of five cents]. In terms of the implications for the ECB, the bond purchasing Securities Market Programme [SMP] could be increased if bond yields spiral up.”
According to Marcus Hughes, director of business development at Bottomline Technologies, “S&P’s decision to downgrade France’s credit rating, along with a number of other eurozone states, exacerbates the environment of uncertainty in which businesses operate today.”
When discussing the implications for corporate treasurers, he says: “This fast-changing and challenging situation underlines the importance of real time visibility into a business’ cash lifecycle – that is to say the cash which an organisation holds today on its multiple bank accounts, the cash it is due to receive in the future and the cash it will need to spend in order to support its business. During such a period of crisis in the eurozone, it is vital to have timely information on all these aspects of the cash lifecycle, including inbound and outbound invoice flows, in order to be able make smart decisions to quickly manage the investment, funding and movement of cash and to manage payments and collections in the most effective manner possible. Optimising visibility and control of the cash lifecycle means a business can chart a safer course through uncertain waters.”
The views expressed above are those of the individual and not necessarily those of their institution.
For more views about the eurozone crisis and S&P’s downgrades – including what Dr Joachim Hensel, CFO and vice president at BMW Financial Services and Paul Stheeman, an independent treasury executive based in Duisburg, Germany, thought – please visit our online Linkedin discussion group.*
*If you are not a corporate treasurer, please join our open discussion group at friends of gtnews.
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