- The Washington Times - Wednesday, January 18, 2012


Standard and Poor’s (S&P) downgraded the credit rating of France and eight other eurozone countries on Friday. The ratings agency also stripped the AAA rating from the European Financial Stability Fund (EFSF), which supports indebted countries, leaving Germany as the only large European Union nation boasting a AAA score from all three major credit-rating agencies.

There may be little short-term consequence to the French downgrade. After all, markets barely reacted to the S&P’s downgrade of the United States last year, and the markets haven’t really been treating France as a AAA country. Investors have been demanding bond yields significantly higher for French debt than for German or U.S. debt. Of more importance are the EFSF downgrade and the ongoing Greek crisis.

Talks with private bondholders, in an effort to reduce the face value of Greek debt by 50 percent, have stalled, though they are expected to resume this week. Without an agreement with these creditors, Athens might not be able to pay $18.5 billion in bonds maturing on March 20, requiring yet another bailout from international lenders.

With both France and Austria degraded to AA+ status, if Fitch Ratings and Moody’s follow S&P, the EFSF will lose some $227 billion in AAA guarantees, leaving it with a loan capacity of just $328 billion. Unless Germany sharply increases its contribution to the EFSF, something Germans have refused to do, the lender is either going to have to give out fewer loans or start issuing lower-rated and more expensive bonds.

Immediate reactions to the new credit evaluations have included calls for further austerity measures, angry dismissals of credit-rating agencies as tools of “American financial capitalism,” a push for a tax on financial transactions and an acceleration of the schedule to get the European Stability Mechanism operational as early as July of this year. The incoherence of this response is consistent with the handling of the debt crisis over the last two years. Austerity measures are announced but not carried through in ways that enhance productivity or economic freedom. Spain, for example, continues to increase government spending and just announced a raft of new taxes. If one lending agency, the EFSF, is downgraded, opening another one might provide more funds, but that won’t solve the problem that countries simply have too much debt.

S&P’s downgrade report was critical of the austerity-led approach to tackling the crisis, highlighting instead the issue of “divergences in competitiveness between the [eurozone’s] core and the so-called ‘periphery.’ ” The periphery - Greece, Portugal, Ireland - should exit the eurozone to have more freedom to kickstart their economies by matching their currencies to marketplace values. Revaluing currency to make debt less expensive to pay off is better than default.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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