- After a brief seasonal break, the euro crisis is back in full force!
By Damian Reece, http://www.telegraph.co.uk/
There’s no such thing as a good downgrade. No matter how brave a face the French put on Standard & Poor’s cut to its credit worthiness, they cannot brush off the loss of their AAA rating.
It may now be on the same rating as the US, but its outlook is completely different. America was able to ignore its downgrade last year because, as the world’s reserve currency, investors kept buying its bonds sure that if necessary, the Federal Reserve would always print money to pay the bills. The same is true of the UK, although when our AAA rating was under threat in May 2009, we took credible action to retain it after the 2010 election.
France, however, borrows in a foreign currency and dances to the tune of a foreign central bank, so its risk of default is more than just theoretical. The downgrade will make any eurozone bail-out using the European Financial Stability Facility, whose own credit rating is related to that of France among others, yet more expensive. The whole eurozone edifice is that little bit more risky as a result.
Losing its gold-plated rating also gives French socialist leader Francois Hollande more ammunition and makes his victory in this year’s presidential election more likely.
Clearly creditors will take a view on how serious a socialist government will be about UK-style, triple A austerity and quite possibly push France’s cost of borrowing up even more. Equally likely under Hollande is a rift between Paris and Berlin, rocking the Franco-German axis that has so far kept the eurozone together making it even harder to attract buyers for eurozone debt. The downgrade may also exert further downward pressure on the euro, making the dollar denominated debt of eurzone companies more burdensome.
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