Sunday, January 15, 2012

Friday the 13th: Eurozone downgrades and a potential default

On Friday, Standard & Poor’s downgraded the credit rating of France and Austria by one notch, Italy and Spain by two notches and Portugal and Cyprus now join Greece with a junk bond rating.  Germany was unaffected and maintains its AAA rating.  Also on Friday, talks between Greek government official and bankers about how to restructure its sovereign debt were suspended - but a follow-up meeting is planned for Wednesday.

MY TAKE: These events are not new news (there have been months of speculation).  Market sentiment has improved in recent weeks, as Eurozone leaders continue their multi-year struggle to manage the region’s financial challenges that include 1) a recession, 2) the potential for more credit downgrades, 3) weakness across its banking sector and 4) a near-term Greece default.   Friday’s events suggest that the region’s political landscape remains fluid, and its economic framework remains fragile.  Sustaining market confidence, while managing several moving parts, is needed to support a “muddle along” recovery.   The margin for error seems small and mistakes would be felt beyond the Eurozone.

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