A couple of weeks ago, I attended the NABE conference in DC and had the chance to hear the ECB’s Juergen Stark speak. His topic was, “Is the Global Economy Headed for a Lost Decade?" At that time, there was considerable uncertainty over whether there would be any help forthcoming to assist Greece with the debt and austerity program. On that morning, there appeared to be some agreement between France and Germany for assistance and this was seen as a breakthrough for discussions on a backstop lending program. At the luncheon for Stark, he specifically made clear how he felt about it: "No global safety nets for governments or individual corporations."
How refreshing it is to find that the ECB has decided to pitch in and do their part to assist Greece and all of the PIIGS. Today, ECB President Jean-Claude Trichet said they will leave emergency collateral rules in place into 2011. Previously, the ECB had targeted the end of 2010 to bring back pre-crisis rules. "It is the intention of the ECB’s Governing Council to keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010," according to Bloomberg. The barring of Greek debt from ECB refinancing operations this had been suggested if Greece had not made serious efforts at austerity and been downgraded further.
The European Union is meeting today and is discussing aid for Greece. However, Germany’s Merkel retained a tough tone towards its southern neighbor by saying that no aid decision would be made today. “A good European is not necessarily one who rushed to assist. A good European is one who abides by the European treaties and national law and thus sees to it that the euro zone’s stability isn’t harmed.” It’s fascinating that Germany has shifted their stance from not allowing the IMF to step in to now allowing them to come in as a last resort. If that should happen, the United States would then be drawn into the process and ultimately be on the hook for supporting Greece.
While Spain has been suggested as the next to follow, Moody’s recently stated that Spain’s use of fiscal space to support activity has not put its AAA rating into question. A major positive for Spain (and something I’ve been writing about) is that they are already actively engaged in an “exit strategy” development. However, there are 27 member countries in the European Union and others may shortly take the lead if growth doesn’t quickly return to the region.
In case you are wondering why this has not led to a Euro rally, the fact is that Portugal was downgraded yesterday and points towards further potential downgrades within the euro zone. Once a country loses its AAA rating, this triggers a dumping of that country’s debt by bondholders who are restricted to only holding AAA paper. In turn, this leads to a dumping of the currency as well as their portfolios adjust.
It’s the threat of additional downgrades and this selling process that is keeping pressure on the Euro. Expect this to continue throughout the year as the market assesses who’s next.
Andrew B. BuschDirector,