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Eurozone Rating Cuts Unlikely to Take Toll on Turkish Economy |
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Monday, 16 January 2012As Turks watched Standard & Poor's (S&P) cut its sovereign ratings of more than half the eurozone member states late Friday and discussed the matter in length over the weekend, few were worried this act would have a significant impact on the national economy; the mood remained rather optimistic and defiant, Today's Zaman reported.
Most observers agree now that there may only be a temporary downward pressure on the Turkish lira against the US dollar, which hit a 16-month high against the euro. They believe the impact on Turkish capital markets will not be a concern either because the rating cuts, as striking as they may be, are not too surprising and have already been at least partly priced in by the markets.
S&P downgraded the credit ratings of nine countries in the 17-member single currency area, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday the 13th for the troubled single currency area. "Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," the US-based rating agency said in its statement.
S&P cut the ratings of Italy, Spain, Portugal and Greek Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.
The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status. It put 14 eurozone states on negative outlook for a possible further downgrade, including France, Austria and still triple-A-rated Finland, the Netherlands and Luxembourg. S&P warned 15 European nations in December they were at risk of a downgrade, and Moody's has France and other European governments on review. "This development was an expected one. I do not think there will be a heavy move in the markets," says Denizbank General Manager Hakan Ates. He believes, however, that Turkish banks may have to pay higher interest rates when borrowing from Europe. Ates sees no quick solution for Europe's problems, which he thinks are not being properly addressed by the continent's politicians. "You can get out of the crises with economic growth, yet the [austerity] measures being taken in Europe will only make things worse as they rather lead the economies into contraction," he said. His detailed comments were published in the Zaman daily on Sunday. Restoring market confidence in the struggling euro countries and getting their economies working again seem like contradictory goals at this point because most observers agree the markets cannot be cheated by only implementing expansionary fiscal policies to boost demand in countries with low growth. "The markets will simply not accept such a strategy," Deutsche Bank said in a confidential note on the crisis prepared for the German government late last year.
European sentiment upside down
In an interview with Zaman, Turkish participation bank Türkiye Finans' Deputy General Manager Ali Guney pointed to the timing of the S&P move which, according to him, made it more shocking for European policymakers. Only days before the rating agency slashed its ratings for the nine eurozone members, the borrowing costs for both Italy and Spain -- two of the largest economies in the single currency area struggling to convince markets of their economic health -- sharply dropped from levels seen as unsustainable. Yet the rating agency's latest punishment totally destroyed that optimism, which had started to emerge just weeks after a long period of market distrust towards those two economies and the eurozone at large. "The rating cuts came at an otherwise optimistic time. We had already started to see a downward move in [some] stock markets on Friday. This may continue for a while in our stock market, too. But because such a scenario was expected, it was already priced in," he said in comments also published in Zaman on Sunday.
Voices spoke out Saturday against the power that credit rating agencies wield. Critics of S&P have questioned its credibility and relevance before because it had failed to foresee the collapse in the US subprime mortgage market, which helped trigger the financial meltdown of 2008. The latest downgrade brought a downbeat end to a mildly encouraging week for Europe's most indebted nations. It also served as a reminder that the 17-country eurozone faces what German Chancellor Angela Merkel called a "long road" ahead to win back investors' confidence. The move Friday night may make it more expensive for struggling countries to borrow money, reduce debts and sustain growth. It also came just as crucial negotiations between the Greek government and its private creditors appeared close to collapse.
S&P, on the other hand, defended its decision to downgrade the nine European countries, insisting Saturday that the region's leaders are not doing enough to solve their debt crises.
The prime minister of France, responsible for the biggest economy hit by the downgrade, vowed to press ahead with cost-cutting measures. The loss of its coveted AAA status wounded France's image and market credibility just as it faces a new recession this year and two-stage presidential elections in April and May.
S&P spokesman Martin Winn dismissed suggestions that the agency's decisions were political and could further hurt indebted countries. "The track record of our sovereign ratings as indicators of default risk worldwide is very strong," he told the Associated Press. S&P analyst Moritz Kraemer said during a conference call Saturday that current European government measures will not be sufficient to restore confidence. "They have not achieved a solution that is sufficient in size or scope," he said. He added that austerity measures require "huge sacrifices" on the part of the public that might prompt a backlash. In Romania on Saturday, residents staged the third day of protests against the government over austerity measures and falling living standards. In Paris, demonstrators chanted in front of the French S&P offices and castigated the government for paying too much attention to rating agencies. Merkel and French Prime Minister Francois Fillon told the press at separate conferences on Saturday that the downgrades should push European countries to quickly implement a planned pact to strengthen budget discipline. Germany and France have piloted rescue efforts for other eurozone countries as the continent has been swept up in crisis after crisis over the past two years. The downgrade, by pushing up France's borrowing costs, could make it harder for France to help others. Merkel sought to allay concerns that the downgrade of France would complicate the work of the bloc's temporary rescue fund, the 440-billion-euro ($560-billion) European Financial Stability Facility. However, she underlined the urgency of putting its permanent successor, the European Stability Mechanism, into place quickly. |
Monday, 16 January 2012
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