January 17, 2012
The events of the last couple of days have proved to be very predictable and a little depressing…
For several weeks it has been known that there were possible downgrades coming from the ratings agencies for a number of eurozone member states. In the end, it turned out to be nine that went south. In the current climate, I think it might be a relief in some quarters that it was only nine.
Even less surprising then is the news that the European Financial Stability Facility should be downgraded as well. After all, it relies upon the creditworthiness of member states for it’s backing. As their standing deteriorates, so should it’s.
Considering the importance of this, the behaviour of the French government on this matter has seemed strange. The presidency of Sarkozy has been rather tied to the maintenance of triple A status for some time and an election is just around the corner. There are, of course, very significant financial implications as well…
Why then has all the action been after the event?
Before the downgrading, the French response seemed to be one of rhetoric, pointing a finger across the Channel at the Brits and presuming that they were too big and important for this to happen. Does the name Dick Fuld ring any bells?
Now that the deed has been done, Sarkozy has plans to increase austerity. TOO LATE. The time to announce this kind of thing was before a downgrade, not after.
The reason that the ratings agencies currently have not taken aim at the UK is one of action not words. When the coalition government came to power it was pretty obvious that the UK’s finances were in a right old mess (that is a technical term in financial circles). Rather than talk tough, they acted tough and made many of the difficult decisions that needed to be made.
Did it make them popular with the electorate? No.
Has it been difficult? Yes.
Has it worked? Perhaps a little, but not much.
It has, however, made the financial world realise that Cameron and Osborne have had a good attempt and are willing to stick with it. Whether or not it is working, they are clearly doing their best. Doing, not talking.
In the economic race to the bottom that we are witnessing, it seems as though France might just have edged ahead of the UK.
Perhaps the President could have taken a lesson from a leading French politician in a different era?
Alas, this is not just a French problem. It is a European one.
The statement to accompany the downgrading by S&P was revealing.
“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.”
And it got worse…
“We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery”.”
And it got even worse…
“Accordingly, in line with our published sovereign criteria, we have adjusted downward our political scores (one of the five key factors in our criteria) for those eurozone sovereigns we had previously scored in our two highest categories. This reflects our view that the effectiveness, stability, and predictability of European policymaking and political institutions have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the eurozone.”
In contrast, S&P also said, “On the other hand, we believe that eurozone monetary authorities have been instrumental in averting a collapse of market confidence“.
This makes me wonder aloud, once again, whether politicians should be involved in monetary policy? Since they seem to have such a knack for doing the wrong thing, even worse, at the wrong time, why do we let them continue?financialguy