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EDITORIAL: Europe: Bye, bye, AAA

Unhappy new year promises downgrades across the indebted eurozone

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Credit-rating agencies are taking a hard look at European Union countries and don't like what they see. Many of those nations won't enjoy a happy new year after their credit is downgraded. This will throw all of Europe into a financial tailspin.

Fitch Ratings issued warnings for possible downgrades for Italy and Spain, the third- and fourth-largest economies in the EU, as well as Ireland, Belgium, Cyprus and Slovenia, explaining ominously that a "comprehensive solution to the eurozone crisis is technically and politically beyond reach." For the time being, it has maintained France's nominal rating at AAA but views its outlook as negative, so France's grasp on that important AAA status remains uncertain. In Hungary, talks with the International Monetary Fund broke off, and Greece's negotiations with private bondholders are at a standstill.

Standard & Poor's has put 15 of the 17 eurozone countries on a downgrade watch, citing the worsening of the debt crisis. Moody's is reviewing all 17 and already cut Belgium's rating by two notches to Aa3. This downgrade was accompanied by a negative outlook rating because the Brussels government had the region's fifth-highest debt load as well as slow growth and rising borrowing costs.

The biggest blow for the Continent would be if France lost its AAA rating. That's because Paris is a major contributor to the European Financial Stability Fund (EFSF), and the excellent credit rating of its two largest contributors - Germany and France - enables the debt-management institution to borrow at a lower rate. If France loses its AAA rating, borrowing costs for the EFSF, the European Investment Bank (which makes long-term loans) and all other financial institutions to which France contributes will rise.

The EFSF has been a critical player in trying to put out the numerous fires during Europe's debt crisis. It already is severely underfunded relative to the amounts needed. A significant increase in borrowing costs will further hamstring its ability to act, which is likely to intensify the crisis.

The downgrades are the effect, not the cause, of Europe's mounting problems. The debt crisis is two years old, yet EU leaders are still looking for short-term fixes and options that further centralize power and raise taxes. The smart alternatives that largely are being ignored are spending cuts and general government downsizing. Lavish welfare states simply are not affordable, especially with graying populations.

Some movement in the right direction was taken in Italy, where Prime Minister Mario Monti won a vote of confidence on a $39 billion austerity package. However, that is a small step, given that Rome's $2.5 trillion debt is 120 percent of the nation's gross domestic product - and the reform measures proposed for Europe's third-largest economy are still a long way from implementation.

Unless Europe gets serious about addressing its spending problem, the whole world will be caught in the backwash of the looming downgrades.

The Washington Times

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