As EU politicians fell over each other to rubbish or downplay S&P’s latest reduction in its member credit ratings this weekend, there was nevertheless a very clear double-dynamite message in the credit agency’s rationale behind its downgrades. S&P’s sensational conclusion is that the austerity strategy is wrong, and the idea of a European common currency flawed. German bankers, meanwhile, are increasingly dismayed by Germany’s emergence as the unwilling paymaster for euro collapse.
Friday’s walkout by Greek bondholders at the ‘haircut talks’ was long predicted by The Slog, but still came as a serious jolt in European political and banking circles. However, now that many major players have had time to give the disastrous downgrade and stand-off events the 24-hour test, every which way kind of spin bluster is on offer. In a desperate bid to maintain the high ground, Frau Merkel insisted yesterday, after a crisis meeting with CDU bigwigs, “We are now challenged to implement the fiscal compact even quicker … and to do it resolutely, not to try to soften it.” The move by S&P, she said, had not come as a surprise. “We have taken note of this decision,” she said, “but S&P is just one of three ratings agencies.”
When contacted by the Slog, an official at Commerzbank woffled on about Triple A “not really meaning what it did”. But the truth is that the German Chancellor is losing her grip on the powerful. The center-left opposition SPD called the downgrades “a warning shot for Germany that cannot go unheard.” Senior SPD MP Thomas Oppermann added, “It also threatens to create additional burdens for Germany in the scope of the euro bailout fund”. Merkel’s resident FDP thorn Frank Schaffler was considerably more blunt: “The downgraded rating for Austria alone means Germany will no longer just have to carry 40 percent, but close to 75 percent for the euro bailout fund EFSF to keep its AAA rating.” Merkel’s rejoinder that “I myself never saw a Triple-A fund as that important” came as a shock to most.
Among business and banking opinion formers, the writing on the wall of Chancellor Merkel’s dash-for-FiskalUnion just got much bigger. The Slog’s Bankfurt Maulwurf commented briefly to say, “The [European] Central Bank is now hugely exposed, and here is Germany, the only actor in the Triple-A spotlight. It is exactly where we didn’t want to be.”
Typically, France displayed zero culpability yesterday. An unintentionally funny young French economist on the BBCNews channel petulantly told the anchor, “You [the UK] only kept your triple-A because you are not in the eurozone, that was just luck. This is not a criticism of France, but of the eurozone”. You really can’t beat the French in a crisis: nothing is ever their fault, and those who do better are just lucky.
But Sarkozy’s Presidential opponent Francois Holland was more pointed: “Nicolas Sarkozy declared the triple-A rating to be the goal of his politics and also a condition for his government,” he observed – and there’s no arguing with that. S&P certainly agreed, correctly fingering specific French policies as a key determinant: the ratings agency told a press conference that the French risk a further downgrade of its sovereign credit rating if its public debt and budget deficit deteriorate further: “The deficits could increase from the relatively high levels where they are already and reach certain thresholds in the general government debt and deficit ratios, which might lead to another lowering of the rating,” S&P credit analyst Moritz Kraemer said. Christine Lagarde, Managing Director of the IMF, and Wonderwoman in charge of French finances until last Autumn, was unavailable for comment.
Thus the political denialism and ECB/banking/business/market doubts remain in stark contrast to each other. What the MSM seem to have missed, however, is just how near the jugular of eurozone policy S&P came in its detailed rationale for the downgrades. It represents, in part, a damning indictment of political policy. I’d urge you all to pay a brief visit to the McGraw Hill/S&P website, where many of the special pleas being offered by Brussels, Berlin and Paris are scotched specifically. This is, I think, a particularly telling excerpt: (my emphasis)
‘….we believe that the proposed measures do not directly address the core underlying factors that have contributed to the market stress. It is our view that the currently experienced financial stress does not in the first instance result from fiscal mismanagement. This to us is supported by the examples of Spain and Ireland, which ran an average fiscal deficit of 0.4% of GDP and a surplus of 1.6% of GDP, respectively, during the period 1999-2007 (versus a deficit of 2.3% of GDP in the case of Germany), while reducing significantly their public debt ratio during that period…’
Or put another way, “Chancellor Merkel, you are wrong”. The S&P verdict goes on to argue this case cogently:
‘…we believe that the key underlying issue for the eurozone as a whole is one of a growing divergence in competitiveness between the core and the so-called “periphery.” Exacerbated by the rapid expansion of European banks’ balance sheets, this has led to large and growing external imbalances, evident in the size of financial sector claims of net capital-exporting banking systems on net importing countries.’
In short, the flaw is a structural one: the idea of a European common currency is not only daft – it is a fundamental cause of the crisis.
Even the detail of the flawed Merkozy strategy is now challenged. A key consequence of the French Triple-A loss is that the EFSF (Europe’s ammo-free rescue bazooka)loses the rating as well: Germany is the only potential bailer-out left as AAA.
“Hopes of saving Greece dwindling” headlined Der Spiegel, quantifying the Maulwurf’s dire warnings about the ECB. It wrote: (my italics)
‘Creditors have already written off the lion’s share of the losses from their balance sheets….but much larger risks are facing the European Central Bank (ECB). Since May 2010, the ECB has purchased sovereign bonds from crisis-stricken euro-zone member states worth €213 billion. An estimated €55 billion of those are Greek bonds. In December, the ECB flooded European banks with additional capital with unusually long loan periods of three years – an influx of fully €500 billion. In a worst-case scenario, euro-zone countries would have to inject fresh capital into the ECB to stabilize it. Treaties require Germany to pay a 27 percent share of such capital injections.‘
In short, for a growing number of senior bankers in Frankfurt, all the problems come down to one nightmare scenario: Germany being bled dry. Chancellor Merkel can bluster all she likes: the Draghi/Frankfurt view is in the ascendancy. She is becoming increasingly isolated.
Footnote: the FT ‘how did that happen?’ virus spread to the Daily Telegraph yesterday, its Greek insolvency piece saying that ‘The unexpected breakdown in talks between Greece and its private-sector creditors has taken the country a step closer to bankruptcy.’ Dear oh dear oh dear.