quarta-feira, janeiro 18, 2012

Caveat creditor: Rating downgrades cascade through the Eurozone

Caveat creditor may help to understand the recent cascade of ratings downgrades within the Eurozone, which have now spilled from the net debtor countries to the net creditor countries.

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
PPP Lusofonia
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.
-France was downgraded from AAA to AA+
-Austria was downgraded from AAA to AA+
-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

-Slovenia was downgraded one level