Downgrade of France's credit rating dashes uplifting week for eurozone
Unexpectedly successful bond auctions for Spain and Italy and additional lending from the European Central Bank generated speculation about a turnaround – until S&P announced it had downgraded France.
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Also salutary was the holiday break from constant eurozone crisis meetings throughout 2011 – held as Ireland and Portugal, and then Greece and Italy, sank, and malaise and debt servicing rates rose across the Continent. Each of those meetings promised to solve the debt crisis, but within 24 hours the markets typically realized they did not and responded accordingly.
After the sale this week of some $28 billion in Spanish and Italian bonds – nearly twice the catch that financial fishers expected – the Financial Times quoted Peter Schaffrick of the Royal Bank of Scotland saying that the eurozone “could be entering a more positive feedback loop.”
It's far from over
At the outset of 2012, economists warned of a tough road ahead, noting slowing growth in Europe’s economic engine, Germany, and a startlingly steep need in the EU to raise roughly $2.4 trillion in loan paybacks in coming months.
Beyond the numbers, there’s a deeper concern that under the “German doctrine” of austerity, eurozone countries are drifting further apart, rather than becoming more fiscally united.
There’s a lack of what the eminent Paris economist Jean Paul Fitoussi calls “team spirit” – a sense that “we are in this boat together,” as Mr. Fitoussi put it to EU prime ministers and finance ministers at a conference in Paris last week.
In a brief interview, he cited the lack of a serious growth policy under the “German doctrine” that requires states to “raise taxes and decrease spending.” European banks are not buying public bonds, he notes, “and are saying they are not buying them,” as the French bank Société Générale announced this week. Nor is the $632 billion lent last month by the ECB to European banks being re-lent.
“Banks are not lending to the private economy, or to states, and there is a rampant credit crunch in Europe," he said. “I don’t see an instrument of growth. The one thing that could promote growth, eurobonds, Germany doesn’t want to contemplate. Today, if a bank buys public bonds they are exposed. What has now happened is that public bonds are no longer risk-free. That was their allure. But there is no protection in the market for public bonds any longer and no state has a central bank to rely on.”
Fitoussi said the "fiscal unity" pact that EU leaders agreed on in December, which tightened the rules of behavior for members. Fitoussi finds it unrelated to the immediate problems facing the eurozone.
“The specific decisions in December had nothing to do with banking crisis, financial crisis, or the sovereign debt crisis. They don’t actually encourage fiscal unity, but fiscal separation. Making each member states follow rules that keep them separate at a time they are already in trouble … there is no analytical reason why this is an answer to the present problem.”