Since S&P put the rating of 16 EMU countries on CreditWatch Negative (5 Dec), markets were on the lookout for downgrades of several EMU countries. It was clear that S&P considered the ratings of these countries, not from a standalone perspective, but from an EMU wide prospective. Being in one monetary union, this approach certainly has its merits. Of course, S&P EMU considerations were supplemented by country-specific items.
• S&P cuts the ratings of 9 EMU countries and
• ....puts/keeps the rating outlook of 14 EMU countries negative...
• ....as it considers the EU initiatives insufficiently to address EMU stresses
• ... EU focusses too exclusively on fiscal profligacy as source of crisis....
• ....and ignores rising external imbalances and divergences in competitiveness between core and periphery
• Only Germany retains stable AAA rating
• France and Austria lose their cherissed AAA rating
• Italy gets a two notch downgrade to BBB+, Spain drops to A (AA-)
• Portugal becomes junk (BB)
• Market reaction might be muted
S&P criticizes the EMU crisis approach
S&P clearly says that the analysis of the problems, which is at the basis of the EMU strategy, is flawed. Therefore, it considers the initiatives that have been taken in December as insufficient to fully address ongoing systemic stresses in the eurozone. These stresses include, according to S&P , tightening credit conditions, an increase in risk premiums for ever more sovereigns, a simultaneous attempt to delever by governments and households, weakening growth prospects and an open and prolonged dispute among policymakers over the proper approach to adress challenges.
Full version of KBC report is available in section ECONOMICS/ANALYSES.