With an intention to avoid default, the private bondholders interrupt the talking which was getting held in between the reporters and Mr. Evangelos Venizelos (Finance Minister of Greece). It was a good-for-naught day for the Europeans, Friday the 13th, as per the Senior Producer, John W. Schoen. Because of the demonstrated financial problems in Europe, the rumors started to flow as per the expectations that France, Italy, Spain, and other eurozone states will be demoted by the credit agency Standard and Poor’s, in the middle of the European trading day.
But the collapse was not really expected by the investors and traders with respect to the talking which was getting held in between the bondholders and Greek officials regarding default head off. As per the statement of the UBS trading head at the New York Stock Exchange, Art Cashin, S&P cuts are in real concentration, till next week Greece could be in a better position to take off.
It was clearly stated by the Greek officials that the situation could go worse and the consequences could be ruinous, if a mutual decision will not be taken in near future regarding the swapping of bonds. There was still an uncertainty regarding the payment by the government of Greece and strike to the banks.
The rating of S&P fell from AAA, which was granted to it in August by the U.S government securities, to AA+, after implementing the same procedure with respect to France Friday. Mr. Francois Baroin (Finance Minister of France) said that no more self-denial steps will be taken by the government, while talking to a French TV channel. With respect to the rating, he said it an excellent one, but the news was not good according to him.
Austria, Slovakia, and other six countries were demoted by single notch, while Italy, Spain, and Portugal were demoted by a double notch. Other demoted countries included Cyprus, Malta, and Slovenia. As per the demotion of 14 countries which fall in eurozone, there are 33percent chances that they will again be demoted in 2012 or 2013. The countries which demonstrated steady outlooks were Germany and Slovakia.
As per the statement of S&P, there is gap exists between the problems which took place in eurozone in recent times and the policy made by the European policymakers in order to cope-up with the situation, which clearly resembles the inadequacy of the policies. It has a great role in deriving current ratings of us. Moreover, there are some other factors beside the lack in proper-policy-making, which also influenced our ratings in the current manner. They include weakening growth prospects and tightening credit.
We have not got any proper solution to cope-up with the current financial issues of eurozone in the meeting of us held in last month, said by S&P. A laconic statement was released by the International Monetary Fund in an attempt to stable the market after the break down of talking between Greek officials and bondholders.
Our basic objective is to make things normal between the Greek officials and bondholders, so that their talk can be resumed, which will ultimately result in both the sectors (official and private) working together for mutual benefits, as per a spokesperson.
It is required by the government of Greece to have an agreement with banks to head-off default of 14.5 billion euros which equals to $18.4 billion before its due date, which is 20th March. It is having a high priority especially after the break down of talks. Moreover, there is also a threat hurting the economy because of high borrowing costs and deep budget cuts. Even if there is an agreement, time is still an important factor to consider, as it will take approximately six weeks to swap the debt.
Initially it was expected that the banks will face the loss of 50 percent, but afterwards it ended up in the loss of 70 percent for the bankers. Presently, the financial lifeline of Greece is primarily dependent upon the debt deal which is expected to finalize shortly. The executives of three big international organizations are present in Athens since Tuesday. They are strongly in the favor of finalizing debt agreement in participation with bondholders so that it can be enforced as a pre-defined condition for bailout. These organizations include European Union, its key financial institution called as European Central Bank and International Monetary Fund.
The probability of default is high, as perceived by many investors. They are also foreseeing drastic consequences of default upon many European Countries which are already debt-burdened. At Shelter Harbor Capital, the idea of buying bonds of other European countries was openly criticized by an investment manager. He highlighted the attitude of investors in terms of their concerns for frequency of occurrence of such events. He strongly rejected the idea of buying bonds of other countries on the grounds that its applicable rules are subject to change as soon as some other investor buys the bonds from the same market of other country. It may be Italy, France or even Spain. Based on this notion, he explicitly cautioned Greece initiative realizing its small size and limited money available.
The news has negatively influenced the European stock market and the figure of Euro went as low as 16-month. The recorded trading of Dow Jones Industrial average trend showed the decline trend of 54 points. Although, the news about expected downgrades were presented in stride, yet its impact was considerable.
The future plans of flourishing Eurozone were critically highlighted by Richard Batty, a strategist of Standard Life Investments. He stated that the prevailing circumstances are giving a preview about the fiscal mess of Eurozone that is present and may prevail. He further stated that there is no such strong plan for fiscal unionization of Eurozone.
The analysts of European debt crisis, likewise bankers and investors are not optimistic about the consequences of prevailing scenario. One the one hand, US economy to struggling to restore from the unfavorable jerks, on the other hands, European economy is still drowning in recession.
The prevailing negative impact is quite widespread in the circles of US. It is also evident from the recent trade data of US exports gathered last month. In the views of Paul Dales, a senior economist at US Capital Insight, trade deficit recorded in November is the biggest indicator of approaching crisis towards US economy. For the ten months, it has affected Europe and other parts of the world as well, but now the threat is there for US economy as well.
The growth rate of 2011 in US economy is relatively weaker as compared to last years. The only sustaining factor in 2011 was the exports made by US. The first quarter had quiet humble figures, the second quarter improved to touch the growth rate of 1.3 percent, and the third quarter enjoyed the figure of 1.8 percent growth rate. The government has not released the figures of fourth quarter’s growth rate but the report is optimistically awaited.
Despite favorable growth rate observed in 2011, the Economists are not optimistic about growth to take place at the same pattern in future. It is because; the growth in 2011 was mainly triggered by use of credit cards and spending the savings. The basic wages were stalled; however, spendthrift attitude was adopted for savings and credit cards. The trend is not lasting hence further growth is not forecasted.
Talking about the growth rate of fourth quarter of 2011 at Capital Insight, Dales along with his colleagues estimated the figure of 2.2 percent. They also stated that after this peak, the growth will decline and the trend of 2012 will approximate 1.5 percent annual growth rate. This expected growth rate will serve as a sustaining factor to manage the approaching financial shock in case any debt default occurs in any European country.
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