In These New Times

A new paradigm for a post-imperial world

Standard & Poor’s decision: Out of proportion and out of line

Posted by seumasach on January 16, 2012

New Europe

14th January, 2012

Strong reactions have followed the decision of rating agency Standard & Poor’s to downgrade the overall creditworthiness of nine Eurozone countries, including France.

Brussels, Berlin and Paris have stated that this is “only an opinion” and it does not change the real financial standing the countries. Despite the fact that S&P’s intentions were known days ahead of the officially announced decision, France, Italy and Spain have placed large amounts of sovereign debt paper on much better terms than in December 2011.

S&P did not touch the credit-worthiness of Eurozone’s surplus countries Holland, Luxembourg and Finland and even said that Germany’s prospects are now stable. France and Austria lost their triple-A rating, while the ratings of Cyprus, Portugal, Spain, Austria, France, Malta, Slovakia and Slovenia were reduced, and it is questionable whether S&P knew exactly where the latter two countries lie on the European map.

In any case, top EU officials have strongly criticised S&P’s decision to massively downgrade nine Eurozone countries. Commissioner Ollie Rehn referred to a recent blunder by the agency, when S&P mistakenly announced that France was being downgraded.

Rehn said that he regretted the S&P decision, adding that it came after many Eurozone countries had applied severe austerity measures, a sentiment echoed by Commissioner Michel Barnier.

However, the French government has stated that the situation is “not a catastrophe”, while the German government said that the weight of the decisions of the rating agencies should not be overestimated – Berlin said that the Eurozone would regain a favourable best market evaluation.

The basic reason provided by S&P for its decision is that Europe was not doing enough to counter its debt problem. It did not say, however, that the macroeconomic fundamentals of Eurozone as one entity are in fact quite stable and in a much better position than Britain, the US and Japan.

Eurozone traditionally operates a positive foreign trade account – its indebtedness is around 80% and the average government deficit is no more than 5% of GNP, whereas the US and Japan are both not only over-indebted but are also suffering chronic fiscal deficits, while Britain and the US are plagued by huge trade deficits.

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