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Saturday 14 January 2012

Downgrade Of The Downgraded

[Update at end of post]

And so the collected wisdom of Standard and Poor’s (S&P) was brought to bear once more on the member states of the EU, and in particular the Eurozone. Germany retained its triple-A rating – as did the UK – but France did not. Several other countries had their credit status downgraded. Much has been read into S&P’s actions, but what matters is little changed.

S&P is in no position to call anyone out: their being absent while worthless mortgages were being sold on as triple-A rated sprayed their credibility up the wall, and few will trust their judgment – as an absolute measure of accuracy – for many years to come. The significance of their announcement is merely that it reminded the markets not of action, but inaction.

Because, following the Brussels summit where Young Dave wielded his jolly good veto, there has been no agreement on the agreement. So the remaining member states have not even agreed to continue kicking the can down the road, let alone actually do what needs doing about the continuing unease over Eurozone economies, and of course the Euro itself.

A downgrade from S&P should not mean that economies cease to function effectively: after all, the USA lost its triple-A rating recently, but economic indicators have since shown some improvement. But the US not only has its own single currency, but also has, in the Federal Reserve, a lender of last resort prepared to stand behind the US Dollar.

And we have been here before: as I pointed out at the time, it is not impossible for the Euro to continue in being without an equivalent of the Bank Of England or Federal Reserve, but the bank runs and market panics – yesterday’s was relatively mild – will keep on coming. The markets need confidence, and without confidence, they will remain depressed and economies will suffer.

Moreover, the need for further restructuring – which will involve more of those “haircuts”, and not just in Greece – has to be addressed, as does the Eurozone equivalent of what the UK calls “regional policy”. Whether that will mean further integration of the various economies is not really the issue: that this, or something like it, needs to be done most certainly is.

Are there alternatives? None that many pro-EU politicians and pundits would like to face up to – this post from J Clive Matthews at Nosemonkey’s EUTopia has some stark choices and informed comments – which takes us back to the here and now. The Germans have to make the leap of faith and let the European Central Bank (ECB) become the Eurozone’s lender of last resort.

Or they can wave the Eurozone goodbye. No pressure, then.

[UPDATE 16 January: Moody's, like S&P another ratings agency that shredded its credibility over those worthless US mortgage securities, has not downgraded France's credit rating, and so for them the country still enjoys triple-A status. Presumably they are working with the same data as S&P, so how they come to a different conclusion is mystifying.

Meanwhile, the real problem, that of the Euro and Eurozone, remains unaddressed]

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