In the aftermath of the so-called ‘Black Friday’ mass downgrading of eurozone countries, politicians and economists were quick to play down the significance and impact of the move.
Indeed at an auction of short-term French government bonds on Monday the country’s borrowing costs went down.
On Friday, France and Austria lost their AAA credit ratings from Standard & Poor’s – slipping one notch to AA+.
Elsewhere in the eurozone, Spain was bumped from AA – to A, Italy was downgraded by two notches, from A to BBB+, Portugal’s rating was cut two levels to BB.
Many in the financial world believe this should provide fresh impetus for the region’s leaders to take addition steps to resolve its deepening debt crisis.
Angel Gurria, the head of the Organisation for Economic Co-operation and Development was philosophical: “Nothing has changed very much, we just have to keep on with the substance, let us not be distracted by this question of the rating agencies and the triple A or the double A; let’s just do what has to be done.
“One of the problems is that by reacting late, and by trying to please the markets all the time, rather than by taking whatever measures were necessary, we’ve been chasing our tails, in a way,” he added.
ECB Governing Council member Ewald Nowotny — who’s country Austria was one of those downgraded — said the central bank will do all it can to calm the situation.
Eurozone countries have found it easier to find buyers for their government debt recently thanks to a flood of cheap ECB loans to banks in December.
It will do the same in February, hoping to avert a credit crunch and help those struggling euro zone debt issuers.
France ‘doesn’t deserve a triple-A rating’
For more reaction to Standard & Poor’s downgrading of the credit rating of nine eurozone countries, euronews spoke to Marc Touati, chief economist at Assya Compagnie Financiere in Paris, about how much this has widened the gap between the good and bad.
Antoine Juillard, euronews: “Marc, politicians are saying this was not the right time to do this. Do you think this latest series of downgrades is a serious threat to the efforts to end the crisis?”
“France should have been downgraded a long time ago, we have not deserved a triple-A rating for a long time and we have kept it out of “sympathy”, thanks to the fact that the pairing of France and Germany in the eurozone was seen as very credible.
“The problem is that, unfortunately, for many years our spending has increased: now it represent 57 percent of French GDP, public debt has soared: it is over 85 percent of GDP, and above all — and that’s the tragedy — there is no growth.
“Now in the last four years, it’s been the same for almost all countries in the eurozone,with the exception of Germany, the Netherlands, Luxembourg and Finland, so all the others have not had enough growth to even pay back the interest on their public debt. That means that to pay the interest they have to go further into debt.
“This is called the debt “bubble”, and so there was going to be an inevitable deterioration. So was the downgrade too early or too late? Whatever, the real issue right now is not that the bill has come due, it’s that unfortunately the eurozone finds itself in a recession and that’s what’s very dangerous.”
“This downgrade is eventually going to have an effect on the EFSF (European Financial Stabilisation Fund) which is supposed to help countries in trouble. The funds available for the EFSF were already being described as insufficient, and now it’s going be even less effective. How much of a problem is that?” (Shortly after this interview was recorded the EFSF was downgraded by S&P)
“It is clear that we’ll have trouble keeping the triple-A rating for the EFSF, and if it’s downgraded, it will be difficult to find funding for countries that are in trouble. And German Chancellor Angela Merkel has just confirmed that Berlin will not increase its contribution to the stability fund, and that means we’ll have difficulty supporting other countries, so we’ll just have to forget it.
“Unfortunately right now we’re fighting a battle that is already over, as the debt already exists. What we need to do now is stop that public debt getting any bigger and to do that we have to reduce deficits, and to reduce them we have to generate growth.
“That is the eurozone’s most fundamental problem right now, that unfortunately there is no growth; it’s actually even worse than that because the eurozone was back in recession in the fourth quarter, so if there’s no growth, there are more deficits and therefore more debt and we remain in this vicious spiral.”
“Germany has kept its triple-A, France lost her’s. Does that mean Angela Merkel will be happy and can say now ‘I am now alone, in control of the eurozone?’”
“Germany is stronger, and it deserves to be, because over the last 10 years Germany has made drastic reforms, reducing public spending, which is only 46 percent of GDP compared with France’s 57 percent and the Germans are not living any worse than the French.
“However Germany can’t take care of the eurozone on its own and expects France to make an effort as well, particularly through fiscal consolidation.
“That doesn’t mean that we must rashly raise taxes; it means we must reduce public spending, targeting areas where it wouldn’t make much difference — for example the French operating budget, which has increased by 10 billion euros every year for the last 10 years and as long as France doesn’t cut spending, it’s going to be difficult to get out of this crisis.“