Tuesday, May 24, 2011

How the euro crisis end game might look - Telegraph

After the fiasco of Collateralised Debt Obligations, anything the clowns of the credit-rating agencies have to say about Europe's sovereign debt crisis deserves to be taken with a sack full of salt.

Unfortunately, continued use of ratings for regulatory and asset allocation purposes ensures they remain as powerful a force as ever.

Having largely failed to warn about the dangers of eurozone debt, Standard & Poor's has upheld a long tradition of making a bad situation worse by putting Italy on negative credit watch, thereby generating a fresh bout of nerves in already dangerously unsettled markets. There were other contributing factors, obviously, but S&P's missive scarcely helped.

To repeatedly – and ridiculously, given that the horse has long since bolted – downgrade Greece, Ireland and Portugal is one thing, but to target Europe's third-largest economy is another entirely. Spain and Italy had been regarded as relatively stable, but both are now being made to look ever more vulnerable. For either of them to be denied access to markets would surely test European appetite for bail-outs to breaking point.

It's no part of a rating agency's job to support the euro, but actually Italy makes an odd choice to be put on negative watch. True enough, the country already has very high net public indebtedness at some 116pc of GDP. The crisis of the past three years has wiped out all the work Italy achieved in the previous decade in managing down its debt.

Yet if the eurozone periphery crisis is seen as essentially a banking crisis which has transmogrified into a sovereign debt crisis, then Italy has little to worry about. Its banking sector is quite small relative both to others and to the size of the Italian economy.


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