Having started in banking in NYC in 1975 when we were “recycling petrodollars” from Saudi Arabia to oil-importing Brazil after the first “OPEC oil shock”, the role of the bank intermediators was very clear, especially when the banks overdid it and then had to work out the Latin American debt a few years later.
These balance of payments crises are the best example for the current Eurozone problems, and there is a good book about it, by Bill Rhodes, “Banker to the World”.
In Europe we have both the Single Currency and the Single Market. There’s no point leaving the Euro and devaluing if you cannot impose import tariffs and capital controls. The equivalent balance of payments shock took place over more than a decade in the Eurozone.
Because of the “lack of FX risk” in the context of the Single Currency, many analysts were misled into believing that the Current Account imbalances don’t matter anymore, when the opposite is true, they matter more than ever. Credit repayment risk is a problem when you lend too much, whatever the currency, unless the borrower has full control of the money printing presses and is willing to use them, and even then we should say “caveat creditor”.
This essential but counter-intuitive truth is simply not understood by the decision makers, from Chancellor Merkel down to the junior analysts at a local commercial bank. That’s why we are seeing so many fundamental policy errors being made, and why we are wasting time on “constitutional fiscal rules” focused on the fiscal imbalances, when the real and immediate problems are in the external imbalances.
The rating agencies may be staring to “get it”, finally, and may soon downgrade the biggest creditor of them all, the Bundesbank and Germany.
Mariana Abrantes de Sousa
Sources: razia de ratings , Público
On Friday last, S&P took the somewhat expected step of downgrading nine Eurozone countries including France and Austria both losing their AAA ratings.
-Italy was downgraded two more levels from A to BBB+
-Spain was downgraded two more levels-Portugal was downgraded two more levels from BBB- to BB, below investment grade in all three major rating agencies
-Cyprus was downgraded two more levels
-Malta was downgraded one level
-Slovakia was downgraded one level