Southern Europe and the Financial Earthquake: Coping With the First Phase of the International Crisis by unknow

Author:unknow
Language: eng
Format: epub
Tags: Political Science, General
ISBN: 9781138803107
Google: 5z85oAEACAAJ
Goodreads: 21925068
Publisher: Routledge
Published: 2014-10-15T13:57:45+00:00

Unpleasant Sovereign Debt Developments in the Eurozone

In January 2009, following the downgrades of Greece and Spain, Portugal became the third eurozone economy to undergo a long-term credit rating reduction (to AA minus) by Standard & Poor’s because of ‘its failure to tackle deteriorating public finances’. These downgrades follow the increase of spreads on sovereign debt (ten-year government debt) within the eurozone (especially for Greece and Ireland, well above 200 basis points relative to Germany, but also for Italy, Portugal, Spain and Belgium, all above 100 basis points, and more recently very sharply for Austria), mainly as a result of the financial crisis. These developments show that even though EMU participation shelters its members from currency risk it does not do so from credit risk. With their credit ratings lowered and forced to borrow at higher interest rates, which reflect the risk that their respective governments default on their debt, those countries may enter a vicious circle: the costs of borrowing more expensively increase their deficit and debt and the cost of the rescue of their banks, lowering their creditworthiness (as evaluated by the rating agencies) and driving interest rates even higher.

Thus far, with interest rates going down, the cost of issuing government bonds does not necessarily go up in absolute terms. Still, credit risk drives a wedge between different eurozone members regarding their capacity to address the crisis and will tend to make governments’ tasks to roll over their debts and finance their recovery programmes more difficult.9 In terms of market-perceived default risk (as evaluated by credit-default swap prices), Portugal seems less constrained than several other eurozone countries. However, market perceptions depend very much on each country’s capacity to signal control over the sustainability of its public finances.

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