Monday, January 16, 2012

16/1/2012: Summary of S&P move and more

In the wake of the S&P action it is a good idea to put side-by-side some ratings on euro area countries. here are S&P ratings before and after downgrade along with CMA ratings and CDS data for Q1 2009 beginning of the crisis) and Q4 2011.


Per S&P: "...the agreement [between euro zone member states in December 2011 attempting to address the crisis] is predicated on only a partial recognition  of the source of the crisis: that the current financial turmoil stems  primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness  between the eurozone's core and the so-called "periphery". As such, we believe  that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national  tax revenues."

In other words, it's growth, stupid. And herein lies the main problem for Europe. While EU might - if forced hard enough - jump onto a more sustainable fiscal spending path (cut deficits and structural deficits) - the EU has absolutely no record of creating pro-growth conditions or environments. In fact, in a bizarre response to the S&P moves:

  • France is discussing an increase in VAT as the means for stimulating productivity growth, while
  • Austria is planning wealth taxes and increase in retirement age as its response to economic growth challenge.
Now, where do you start in dealing with this lunatic asylum? 
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