Sunday, November 27, 2011

At Portugal Debt is Downgraded, the Eurozone Drama Continues

This past week, Fitch Ratings cut Portugal’s debt rating to “junk” status, Standard & Poor’s cut Belgium’s rating to AA from AA+ and Moody’s Investors Service lowered Hungary’s debt rating to junk. Additionally, more European countries have their 10-year bond rate over 7%, a level where the probability of a financial bailout significantly increases. On Friday, 10-year bond rates for notable European countries included: Greece 28%, Portugal 12.3%, Ireland 9.5%, Hungary 9.4%, Italy 7.2%, Spain 6.6%, Belgium 5.8%, France 3.6% and Germany 2.2%. In addition, hopes for a Eurozone bond, which would combine some of the $8 trillion in Eurozone debt, faded when the idea was rejected by Germany.

There are no easy solutions to the Eurozone mess. It is understandable that Germany does not want to become further entangled by participation in a Eurobond offering – driven by a fear of lowering its creditworthiness. However, extracting itself from the Eurozone structure would be a painful process. In the meantime as the Eurozone crisis evolves, France, with its significant financial exposure to several of the weaker players, is increasingly at risk of a credit rating downgrade – such an event would be significantly negative.

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