Editorial: Massive downgrade Sunday, 15 January 2012 04:48

The mass downgrade of nine eurozone countries by the ratings agency Standard & Poor’s has brought to a sudden end the uneasy calm that existed in the global markets since the beginning of the year. S&P has surprised both the markets and the eurozone with the sweep of its action. France was stripped of its coveted AAA status. The ratings of Cyprus,Italy,  Portugal and Spain were cut by two notches and Austria, France, Malta, Slovakia and Slovenia were all cut by one notch. A financial expert summed up the mood of the market when he said the downgrade “places a wedge in the centre of the eurozone, making a solution much more difficult”.

The agency said its action was “primarily driven by insufficient policy measures by EU leaders to fully address systemic stresses” and added that fiscal austerity alone “risks becoming self-defeating”. Even though the sincerrity of its action can’t be suspected, it is at odds with the general mood. A recent, unprecedented action by the European Central Bank had reassured investors that policymakers were finally able to defang the crisis. The ECB has lent more than €400bn to eurozone banks to bolster their reserves. The European banks now face a downgrade as their national governments are considered riskier.

All these indicate that the road to European recovery will continue to remain rought and bumpy.

Moreover, the S&P action has consequences which stretch beyond the economic realm. For French President Nicolas Sarkozy, the downgrade of his country’s coveted rating comes as a personal humiliation and poses a serious challenge as it comes just three months ahead of the right-wing leader’s re-election bid. He will have a tough job convincing his voters that France is still economically robust and trusted by investors. And despite his assurances, he will have to share the blame for what has happened especially because he has staked his reputation on keeping the coveted rating.

Secondly, the downgrade deepens the divide between Europe’s north and south. France’s loss of its top status leaves Germany as the only other major economy inside the eurozone with an AAA credit rating, leaving Paris politically and economically weaker and Berlin stronger. Germany has already been criticised by crisis-hit countries for acting ‘tougher than required’ and Berlin’s elevated status after the French downgrade will invest it with more power to dictate terms much to the chagrin of weaker nations. The German-French equation too is likely to be affected. Sarkozy was seen as a counterweight to German Chancellor Angela Merkel’s hard line and the former will now have to listen more when Merkel talks.