Friday, January 13, 2012

Eurozone: Dancing Downgrades!

The eurozone has been hit with a number of credit downgrades by Standard & Poor's, France and Austria both lost their AAA credit ratings and were reduced to AA+, and the credit ratings of Italy, Spain and Portugal were cut by two notches each.

Germany, the Netherlands, Finland and Luxembourg have maintained their triple A ratings for now.

In plain English, what the means is that the costs of borrowing for the countries hit with downgrades is headed upwards and they'll have to offer a higher rate on bonds to attract investors.It also means that the eurozone's rescue fund used for bailouts could also very likely have it's rating cut,ultimately meaning that the eurozone countries are going to have to pony up more cash to keep it solvent.

The current downgrade came on the heels of disappointing returns on the recent Italian bonds auction and a failure of the major banks participating in the write down of Greek debt to agree on who gets stuck for how much, thus stalling the negotiations.

On the selfishly plus side,this could spark more of an appetite among investors for non-EU debt in America, Israel, Australia, Canada, and elsewhere, because it's seen as safer.


B.Poster said...


Okay I'm normally the smartest person but I'm not a dumb either. Generally speaking I've come to realize that in most of the areas where we have sparred in the past you are much closer to being right than I was.

Now with this said I'm confused. A credit rating will generally lead to the cost of borrowing increasing for the individual or entity who is affected because there is a greater risk of the investor not getting paid back. As such, it is not surprising that the interest rates for Eurozone nations that they would have to pay for borrowings to go up. I'm with this so far.

When the US credit rating was downgraded, why did the rates that America has to pay for its borrowings not rise also? I can see why investors might want Israeli, Australian, or Canadian debt as these countries are generally well managed and have not been as impacted by the recession as Eurozone countries or America have been. Why would investors want to go to American debt when America's financial situation is as bad, if not worse than that of Eurozone nations?

Rob said...

Hi Poster,
To answer that question for yourself, ask yourself these - how big is America's economy versus the countries that were downgraded? How much more is America's GDP, it's productivity? How stable is its government versus the countries that were downgraded? What's the likelihood of it repudiating its debt or its banks going under versus, say, France, Spain or Italy?

There's your answer - along with the fact that the dollar is still the world's reserve currency.

I don't doubt that we will eventually see a rise in the cost of borrowing, but at this point we're still attracting enough buyers for our sovereign debt as opposed to the countries that got downgraded so we don't have to.

Remember,'s always about buying and selling,ultimately.


B.Poster said...


Thanks for the reply to my post. I think I get it. In regards to the factors you mention in the first paragraph the general perception is that America's position is superior to that of the Eurozone country. At least this is the perception. Is America's government really more stable than these countries? Are its banks in better shape than those of Spain, Italy, or France? While soverigns may not fail to pay the debt per say, paying it may require the printing of so much money that it debases the country to the point that it is worthless. Is America really in better shape than the Eurzone nations in this regard?

The answers that the "mover and shaker" big time investors would give is "yes" America is in a better position in these areas than the Eurozone countries. Perhaps they are right. In any eent, as long as the perception remains that they are then American debt will be seen as more favorable than other soverign debt.

As for GDP, China has a big GDP but it is stil considered to be a "developing country" by many who are paid large sums to analyze these things. The individual Eurozone nations do not have GDPs as large as China but they are not considered "developing" and, as I understand it, their credit ratings are and have been higher than China's even though their GDPs are smaller. Russia has a small GDP in comparison to the Eurozone countries and America yet it is generally considered to be the 2nd or 3rd most influential country in the world behind the US who is generally considered number 1 in every meaningful category. As long as perceptions remain what they are then American debt will be considered favorable relative to these other countries.

The factors you mention are important but respectfully I think at leas three more need to be considered. 1.)How capable is the country's military? The US is likely the single most powerful military force on earth. As such, it is generally believed to be much more capable of defending its interests than the Eurozone countries. 2.)What kind of natural resources does the country have that it can access? The US is EXTREMELY blessed in this regard. 3.)Should one choose to invest in the country, how likely is one to have their assets siezed by the foreign government? How likely are dometic businesses to have their assets siezed by the state? Historially the US has performed quite well in these areas. While America's performance in this area has decreased in this area in recent years, it still likely performs better than the afore mentioned countries.

While buying and selling is important and we do plenty of that here, I would respectfully add to the list perception, as in how do people think things are. As you well know, people don't always behave logically!!

Anonymous said...

And just for laughs, it looks like France will elect a Socialist to replace that miserable creep Sarkozy. How's that for hilarious?
Personally, I look forward to the inevitable collapse of the EUSSR.
Couldn't happen to a nicer bunch of anti-Semites.

Terry, Eilat - Israel

B.Poster said...

"Theres your answer - along with the fact that the dollar is still the world's reserve currency."

Given America's profilgate borrowing and spending policies, the dollar is unlikely to be the world's reserve currency much longer. Unfortunately even if these profilgate policies were stopped and reversed right at this moment it is likely to late to preserve the dollar's position as world's reserve currency. At this point, it is likely only a question of timing. I'd suspect within three years the Russians, the Chinese, and probably some combination of their allies will move to have the dollar replaced as the world's reserve currency.

Whoever the next president is whether it is still Mr. Obama should have plans in place on how they are going to handle this change. Obviously it is going to have a major impact. Unfortunately if Mr. Obama is the next president it seems we may be in alot of trouble. He does not seem to understand the gravity of the situation. Either, 1.)his upbringing and experience makes it impossible for him to grasp this. Since leaders like to surround themselves by "yes" people they are like him. 2.)His ideology blinds him and his advisors to this reality. 3.)He wants to destroy the country. I suspect it is a combination of 1 and 2. Regardless we HAVE GOT TO GET THE CONROLS OUT OF HIS HANDS!! It is viatally important for the survival of this country.

Perhaps Mr. Romney can take the necessary steps to handle this transition as smoothly as possible. Given that the loss of the dollar as world's reserve currency within two years is likely inevitable, there needs to be plans in place to handle this.

If I can figure this out, then the big money investors should be able to figure this out too. As such, I simply don't fathom that money curently invested in EU debt would be invested in US debt. However, the US still does not seem to have much trouble borrowing. Strange as it seems the big money investors may be blinded by their ideologies as well. Generally business people cannot afford to let their ideologies get the better of them.

Sara Noble said...

60% of our exports to the eurozone - we are in big trouble. We are going down with them.