Will Europe walk it off? It is not that simple

You will hear a lot of views about the recent S&P downgrades for a majority of European countries. First, the politicians from those countries will questions the reasons, methodology and credibility of the rating agency. Then you will have those who will tell you that you should not expect anything from this round of downgrades as it is just a rating agency catching up to the reality. Finally, you will have banks assuring you that nothing will change and that they will be funding economic development further. Unfortunately all of those views are biased as they all have something to lose.

The downgrades will have real effects for the economies across Europe and implicitly for Romania. The market implications will be harsh. Furthermore, with these many countries losing the AAA status it is hard to believe that the EFSF will be ever rated AAA.

The real implications will be transmitted to the economies via higher cost of capital for financial institutions. This in turn will mean lower investment but also lower profitability. If you had your hopes up for a great equities run in Europe this year, you might want to think about that strategy again.

But for me the biggest impact for Europe will eventually be due to the downgrade of Austria. This is a country with very big exposure to the CEE region. It cannot afford to stop funding the region because the real losses will be huge but in the same time it will have to increase the cost of funding for those countries. This is a big blow to the regions’ economic prospects and in the end to Austria itself. The irony is that to in order get back the AAA status Austrian institutions will have to “get rid of” the bad investments in the region.

To be honest looking very pragmatically at the whole issue the credit rating story is just a process of updating the labels on a big pile of bad smelling combination of terrible economic policies implemented to push the problem into the future. I am sure that EU politicians knew that pouring good money after bad money will not solve the sovereign debt problem. But they did it anyway to buy time. Sooner or later time will run out and we will have to pay. Unless they face the problem and admit that Europe does not have a liquidity problem but a solvency one. There is only one way to solve a solvency problem: default.

 

My comments to Romanian media mediafax:

Decizia S&P de a reduce ratingul suveran pentru majoritatea ţărilor din zona euro este una foarte greu de digerat. Teoretic, pentru a repara această situaţie, zona euro trebuie să reducă datoria publică şi să arate cum poate credibil să crească veniturile. Pentru ambele este nevoie de timp. O altă soluţie ar fi fost creşterea economică, dar aici probabilitatea este mult mai mică.

Efectul imediat al acestor decizii se va simţi în costul de finanţare. Din păcate pentru noi, faptul că Franţa, Italia, Austria se finanţează mai scump înseamnă că şi preţul capitalului direcţionat către România va fi mai mare.

Pe termen lung, daca UE vrea să rămână competitivă la nivel global, Cîţu consideră că efectul ar trebui să fie o creştere a productivităţii şi înscrierea pe un canal de creştere economică sustenabilă.

Totul depinde de cum vor reacţiona politicile economice. Eu sper să înteleagă că a venit momentul ca taxele şi impozitele pe capital să scadă şi astfel să contracareze efectul acestor decizii. Bineînţeles, scăderea taxelor trebuie facută în acelaşi timp cu reducerea datoriei publice.”

5 thoughts on “Will Europe walk it off? It is not that simple

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s