Thread: Euro in Trouble as Big Economies Falter

Euro in Trouble as Big Economies Falter

Tuesday, 22 Dec 2009 12:27 PM
By: Forrest Jones

The euro's credibility will suffer if fiscal woes that are pounding Greece spread to bigger economies like Spain, says Goldman Sachs Chief Economist Jim O’Neill.

“If you start having serious problems credit wise with the likes of Spain, then the issue for the euro’s credibility and its pricing against other currencies becomes a much bigger issue,â€

Moody's Cuts Greece Ratings, Warns of Further Downgrade

Tuesday, 22 Dec 2009 07:07 AM

Moody's cut Greece's debt to A2 from A1 on Tuesday over soaring deficits, becoming the third major rating agency to downgrade the highly-indebted country's rating this month.

Moody's kept Greece on a negative outlook. Its rating is still two notches above that of Fitch and S&P, which earlier this month cut their rating on the indebted country to BBB+, the euro area's lowest level.

The one-notch downgrade was less than many investors had expected. The spread between 10-year Greek and German benchmark Bunds tightened over the news, and Greek shares opened slightly higher, although the euro trimmed gains.

"Greece's repositioned rating of A2 balances the Greek government's very limited short-term liquidity risks on the one hand, and its medium- to long-term solvency risks on the other," said Sarah Carlson, Moody's lead sovereign analyst for Greece.

"Moody's notes that the country's longer-term risks have only partly been offset by the government's announced policy response," Moody's Investors Service said in a statement.

The euro trimmed gains against the dollar in response, dipping to around $1.4302 from around $1.4323 before the announcement. It was last at $1.4309, up 0.2 percent on the day.

Moody's A2 rating does not threaten Greece's access to European Central Bank funds at the end of next year when the ECB plans to tighten its collateral rules.

But should Moody's downgrade Greece by a further two notches into 'B' territory, as Fitch and S&P have already done, come the end of next year, banks would no longer be able to exchange Greek government debt for cash in ECB refinancing operations.

"Moody's believes that Greece is extremely unlikely to face short-term liquidity/refinancing problems unless the European Central Bank decides to take the unusual step of making the sovereign debt of a member state ineligible as collateral for bank repurchase operations — a risk that we consider very remote," says Arnaud Mares, Senior Vice President in Moody's Sovereign Risk Group.

"Moody's also does not believe that the Greek government's difficulties represent a vital test for the future of the euro zone, but rather a repricing of relative risks that had been concealed by years of abundant global liquidity and somewhat above-potential growth," the statement said.

The Athens bourse's benchmark stock index, which has shed 11.9 percent in the last 30 days, was 2.42 percent higher in early trading.

"It was a relatively positive surprise, given the rumors circulating in the market for a 2-notch downgrade. Markets may bounce on the news," said economist Platon Monokroussos at EFG Eurobank.

Greece is set to become the euro zone's most indebted nation in terms of GDP next year, with public debt seen at 121 percent of GDP. The budget deficit widened to 12.7 percent of GDP in 2009. The government plans to cut it to 8.7 percent next year.

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German Consumer Confidence Slips Again

Tuesday, 22 Dec 2009 11:02 AM

A survey released Tuesday showed that consumer confidence in Germany, Europe's biggest economy, continued to decline amid fears of job losses.

The survey from the GfK research group found a third consecutive monthly slip in consumer confidence in the country, even though German business confidence has been rising for months.

The Nuremberg-based group's forward-looking consumer climate index for January stood at 3.3 points — down from a revised 3.6 points in December and 4 points in November.

Besides fears of job losses in the new year, the "expectation of rising prices in the energy sector is currently having a dampening effect," GfK said in its monthly report.

"Looming uncertainty as a result of worsening conditions on the labor market is leading to a perceptible increase in the propensity to save. This is also weighing on the consumer climate," it added.

The concern comes even though the jobless rate in November unexpectedly narrowed by 0.1 percentage points to 7.6 percent, with some 3.2 million Germans out of work in a population of approximately 82 million.

Despite the decline in consumer confidence, business confidence in Germany is decidedly on the upswing.

Last week, the Ifo business climate index rose to 94.7 points — its highest level since July 2008 — from 93.9 points in November. The increase was modestly higher than market expectations and stoked hopes that the recovery is on track.

Germany's economy returned to modest growth in this year's second quarter. The government has forecast it will grow by 1.2 percent next year after contracting by 5 percent in 2009.

Last week, in an effort to boost spending, Germany's upper house of parliament approved tax cuts for companies and families -- the final legislative hurdle for the plan, which is to go into effect in January.

The so-called "growth acceleration law" is supposed to bring tax relief of around 8.5 billion euros ($12.1 billion) a year.

http://moneynews.com/Economy/German-Con ... /id/344313