Then there were four AAAs left in the Euro, 3 on negative watch


          The downgrade of Euroland bonds has been like the green bottles song. Now there is just Germany with a stable AAA rating from S and P. The Netherlands, Finland and  Luxembourg are on AAA with negative watch. (apologies for leaving out the two small ones earlier, based on a radio report which I have now properly checked out)  I pointed out a long time ago on this site that the famous big bazooka EFSF, the fund they said would rescue Euro countries in trouble, always rested on their ability to borrow on the strength of their collective credit rating. So far they have borrowed very little for this fund. That has just got more difficult, as the EFSF’s own credit rating must be weakened by the downgrades of Euro country bonds.

          As S and P say,  they do not just have a problem of spending and borrowing too much. They also have a problem of earning and growing too little. They need to tackle both those problems . The Euro makes solving the second one far more difficult.

          Outside the Euro in Europe Switzerland, Norway, Sweden and the UK are on a stable AAA rating. The Agency has taken into account the problems of governance and the inflexibility of the single currency in  its latest downgrades.


  1. Nick
    January 13, 2012

    It’s a bit of a strange solution.

    We can keep buggering the value of money to pay for government’s mistakes.

    Nothing like shafting your own citizens.

    The flip side of this is when you look at gold as a currency. You can’t devalue, so you end up like Greece and truly up the proverbial creek.

    Coming soon to the UK. We aren’t in Germany’s league after all.

  2. Peter van Leeuwen
    January 13, 2012

    I listened to Mr Dragi’s (ECB) comments yesterday, answering the press: Growth has to come from structural reform. That is what happened in Germany, that is what is beginning to take place in Italy and what should increasingly take place in France. It may not be easy, but certainly not impossible. The UK has similar problems.

    1. lojolondon
      January 14, 2012

      NO. Growth in Germany came from their manufacturing productivity, coupled with the fact that they were in the EURO, which prevented their currency appreciating against countries they export to. So they had turbocharged growth in exports, as their currency stayed low because they are shackled to so many deal-loss economies.
      Now we have achieved all (the old-ed) aims – a united Europe under German rule. I guess you are happy, but I am going to call you a collaborator all the same.

      1. Disaffected
        January 14, 2012

        Spot on. Germany benefitted from the Euro to help it integrate with East Germany. Then it continued to soar at the cost of the southern countries. Germany should dig deep into its pockets to help those it profited from and who effectively helped them get out of their mess. Selfishly it looks to other nations to pay equal amounts. Germany and France created the mess, Germany profited from it, let them sort it out.

        It is mooted that Osborne will help the EU via the IMF. I hope all MPs will oppose it.

        1. zorro
          January 14, 2012

          Germany has also benefited from debt forgiveness on a huge scale from other European countries who were victims of its aggression. It has paid very little since the end of WW11 when their debt payments/reparations were put on hold until potential reunification. When reunification came in 1990, Helmut Kohl refused at the time to implement changes to the London Agreement on German External Debts of 1953. With the exception of compensation paid out to forced laborers, there were no reparations paid after 1990 – Germany also did not pay off the loans and occupation costs it pressed out of the countries it had occupied during World War II.
          Germany has benefited most from the Euro…a cursory look at the trade surpluses between Germany and the rest of Europe shows that…..
          Yes, Germany has done well with its general economic reforms but it has only been with the adavantage of not having to pay back its debts.


      2. Peter van Leeuwen
        January 14, 2012

        @lojolondon: If you derive such satisfaction from name-calling I’m afraid I cannot help you there (no cure at hand). Maybe I can be of a little assistance if you’re curious about structural reform in Germany, as there is a wealth of information about it on internet. Halfway the structural reforms the German government produced (in 2003) its Agenda 2010, with its intended measures, among which:
        Health care reform, Labor market reform, Labor Office reorganization, Merging Unemployment and Welfare, Tax cuts, Communal financing, Reform of master craftsmen law, Social Insurance Reforms, Jobless benefits limited to one year, Job protection relaxed, Self-employment subsidized, Tax-free income limit raised to €400, Unemployment benefit restructured.
        You might google for A Quick Guide To ‘Agenda 2010’ Germany.
        There is also an interesting, critical article in the Economist in 2004 (when Germany was still referred to a the sick man of europe. Google for: Structural reform in Germany: How to pep up Germany’s economy. Have fun!

    2. Antisthenes
      January 14, 2012

      The EU particularly and euro are two of the biggest barriers to structural reform.

  3. Caterpillar
    January 13, 2012

    Well hopefully with the knock-on effect to further cheapen UK borrowing costs the MPC/BoE won’t be stubborn enough to continue with more QE.

    The MPC/BoE/Govt gamble for the UK to recover by destroying domestic consumer demand via price increases and have European export growth was dubious from day one. With the possibility of a weakening Euro and EZ with a strengthening US dollar and oil prices sticking above 100$, it seems silly to stay with the ZIRP/QE policy.

    Perhaps the BoE/MPC will take an opportunity to unwind the policy a little?

  4. Max Dunbar
    January 14, 2012

    Now that its unsurprisingly just Germany and Holland standing, and assuming that the Euro is toast, what will the new German currency be called? Can’t imagine that they would want to revert to the Deutchmark. Too dull and predictable. Perhaps something a little more historic and evocative?
    Up here in Scotland we hear about the new “bawbee” as a possibility. I think we had Groats at one time as well. Its all so exciting.

  5. zorro
    January 14, 2012

    If they were going to use the EFSF/covert QE arrangement route, they should have done it a long time ago when an effective ‘Panzerfaust’ might have helped quell the storm and give them enough time to formulate a credible response…..

    Now that they need a very ‘big Bazooka’, they are going to find that they are not going to be able to light the fuse, and even if they manage to do so, the missile will likely backfire and blow up in their faces….


  6. James Reade
    January 14, 2012

    “They also have a problem of earning and growing too little…The Euro makes solving the second one far more difficult.”

    I’m sorry, I must have missed the empirical analysis of growth rates in the eurozone since 1999, compared to, say, the UK which stayed out. Were the OECD website actually working, I’d provide you with the statistics on average GDP growth since 1999. I doubt you’d find that European countries had grown less than the UK in that time, on average – at least, if you found a difference it would be negligible and statistically insignificant.

    But of course, that’s all looking into the past. Looking into the future, we need economic theory to guide us in thinking about what impact a currency union might have. So I must have also missed the theoretical economic analysis of why a common currency inhibits growth?

    Things like how an absence of exchange rate risk, an absence of transactions costs, inhibit trade and thus economic growth. How the stronger members of the eurozone benefitted from a weak currency because the weaker members kept the currency weak, meaning they could carry on exporting as their goods remained cheap.

    Now of course, you can also argue there are factors that will inhibit growth – particularly for those weaker members. But explain to me why they will matter more than the positive influences on growth?

    Reply: Do try to understand why most economists think the south is now locked into an austerity machine, and ask yourself why S and P are very critical of this aspect of the Euro.

    1. Gary
      January 14, 2012

      Correct James. Somehow in this Alice in Wonderland world the tories think the ability to print your way to oblivion is a virtue. The discipline of of a single currency forcing weaker countries to restructure and become productive is lost on them. Time will show what Correct James. Somehow in this Alice in Wonderland world the tories think the ability to print your way to oblivion is a virtue. The discipline of of a single currency forcing weaker countries to restructure and become productive is lost on them. Time will show what money printing does to us. We are already in far worse shape than the EU. The ratings agencies don’t know what they are doing, remember they gave Enron AAA a week before it collapsed, they gave the banks AAA right up to their collapse in printing does to us. We are already in far worse shape than the EU. The ratings agencies don’t know what they are doing, remember they

    2. Mark
      January 14, 2012

      Given the degree of dubious accounting that has transpired from some of the Eurozone countries in their supposed adherence to Maastricht criteria, I’m not sure just how real the growth they reported really was. Of course, a similar criticism could be made of the “growth” under Brown’s stewardship of the UK, which seems in fact to have been a disguised asset liquidation as we borrowed to spend while pretending our houses were worth more and that pensions were overfunded enough to mean they could be raided.

      In the mean time, the “common” currency in the Eurozone is effectively disintegrating. The acceptability of paper notes in many ordinary shops depends on the letter identifying their country of issue. International payments are no longer accepted on a bank to bank basis, but instead go via the ECB as guarantor. Security for payment requirements are increasing, increasing the costs of doing business. Where do you get “a letter of credit from a first class international bank” when your domestic banks are all zombies? Perhaps if you had practical experience of international trade, rather than theoretical study, you might understand more of how the real world works.

  7. Antisthenes
    January 14, 2012

    Why are today’s leaders so blind to the obvious. Europe’s problems stem from structural problems debt is just a symptom of that so tackling debt without major reform of the economic and social model is doomed to failure. It is not just a matter of cutting back on welfare, healthcare and the public sector it needs more than that. It needs a total change in how these services are provided and funded. Draconian regulations and social engineering and green legislation needs stripping back to points where they have no cost. We cannot afford the luxury of being morally high bound or pursuing bleeding heart and righteous agendas. Unless we find a new formula to enable us to become more competitive then the future is going to be one of continued decline and impoverishment.

  8. lifelogic
    January 14, 2012

    Indeed perhaps Osbourne could update us on his “investments” in Ireland the EU and Greece, how are our profits coming on? How much more tax payer’s money is he planning to throw away not saving the EURO and holding back EU growth?

  9. Mike Stallard
    January 14, 2012

    Do you know what? I love Europe! I get a little tingle when I think about Asturias. I really enjoy teaching Latvians English. I am genuinely proud to see Poles settling here in Eastern England.

    So I am worried (I read History) when I see the idiot politicians in Europe doodling around as they reprise Weimar.

    1. oldtimer
      January 14, 2012

      Your reference to “idiot politicians” is very apt. There is indeed a case to be made that the European project has now reached a stage beyond democracy. That stage might reasonably be called idiocy. Antisthenes, in a post above, has provided several examples – draconian regulations, social engineering, green legislation, in particular the obsession with carbon taxes, and of course the effective suspension of democratic processes in Greece and Italy.

      The worrying aspect is the apparent inability of the current generation of senior politicians and bureaucrats in positions of power to think outside the box of their own making. This applies as much to the UK as it does to the EZ and the EU as a whole. There are dangerous shoals ahead.

  10. Javelin
    January 14, 2012

    The UK is next. Osborne is too soft on the public sector.

    10s of billions of inefficiencies.

    10s of billions of unnecessary projects and spending.

    The British public will not forgive him WHEN (not if) we get downgraded.

  11. Javelin
    January 14, 2012

    This is just world war one all over again.

    Crap Generals leading lions.

    1. Mike Stallard
      January 14, 2012

      Remember that Bomber Harris (remember him?) said that the Germans can be depended on to get every single detail right while getting all their important decisions wrong.

  12. Alan
    January 14, 2012

    When Mr Redwood refers to the euro making it more difficult to solve the problem of low growth I take it he is referring to the impossibility of countries within the eurozone devaluing with respect to others, since they all use the same currency.

    However devaluation does more to cover up a country’s failure than to make it more prosperous. It lowers the value of a country’s output, it lowers the value of peoples’ pay, and it lowers the value of their savings. It does however make its exporting industries more profitable, since its workers and other domestic suppliers are being paid less for doing the same work. The UK has chosen the route of devaluation rather than greater austerity, and so far in this crisis its GDP (measured in dollars) has fallen more than, say, France’s, but France is continuing to decline whereas the UK is beginning to improve. If both countries maintain their current policies it will be interesting to see which one does recover faster. It is not yet obvious that it will be the UK.

    That leaves aside the longer term effect of continually devaluing the currency every time we get into economic difficulty. It diminishes the value of savings, makes it more sensible to over-borrow, and it encourages governments to run deficits for a long period – characteristics that are thought by many to be amongst the causes of our current problems.

    On the other hand the Eurozone countries are learning that false accounting and excessive debts result in unpleasant outcomes. If they learn this lesson their economies could end in a better state than ours.

    1. zorro
      January 14, 2012

      But currencies can appreciate too, and, though I do not necessarily agree with quantitative easing, it is important to have it in your toolkit. It can enable you to enact a plan to be more competitive and give a stimulus to exports. Then, of course, over time if the country is successfully managed and enacts the necessary reforms to stay competitive, the currency will appreciate in the long term.
      The Euro army has gone into battle without cavalry to chase down the enemy’s artillery, and is thus unable to withstand the market attack on a handicapped, sovereign-less currency labouring around like a pregnant hippo.
      This was clear from the early days when the credibility of the stability arrangements was put into question. Once the economy turned, it would be open to attack from speculators because it did not have the tools to dissuade the market from making money out of its weakness.


  13. John Page
    January 14, 2012

    Finland & Luxembourg are also still AAA.

  14. Huw Clayton
    January 14, 2012

    Doesn’t Finland still have a AAA rating?

  15. Barbara Stevens
    January 14, 2012

    The Germans have a lot to blame themselves for, they allowed Greece to join the euro without proper scrutiny, then they allowed them to borrow, and buy German goods, which they had no chance of repaying. They’ve done this with others too. That’s how they have got their billions in reserve and made their citizens rich. Now the bubble is bursting. They don’t want the responsiblity of supporting the bail outs like they should, but everyone else to pay. That’s why they want a Tobin Tax, so we help repay the debts. We’d be fools to allow that. I hope Mr Cameron keeps his word over this and uses his veto again. Like he said, if they wish to go down that route so be it, we don’t have to follow, we are not in the euro. Trade is welcome in the City of London free from this so called tax. We will soon have yet again, another financial meeting of the EU boffins, where they won’t admit they have got it wrong but struggle on and on, dreaming and not seeing what’s happening before their own eyes. However, we will not be immune, and I’m concerned for jobs here, yet, I have faith in Mr Cameron to do the right thing. I hope Mr Redwood Conservatives will show some lead on this and make sure we fight all the way for our own survival, when you fight you take no passengers. Ruthless but true.
    As some have mentioned Mr Salmond as spoken of his wish to join the Euro, he’s mad if he does. He’s pushing his own ideals and dreams,and its the Scottish people who will pay in the long run, I hope they see through this man for what he really is, and those who align themselves to him. His vision of Scotland is insular and nightmareish for all; I hope the people don’t let him destroy a union that as lasted with mutual respect for over 300 years just because of his whims and ideals.

  16. Denis Cooper
    January 14, 2012

    It should be pointed out:

    1. The EFSF is not an EU body; it’s a private company, a special purpose vehicle, incorporated in Luxembourg:

    2. There was and there still is no legal base in the EU treaties for the first May 9th 2010 Decision by the eurozone states that they would establish the EFSF, and there was and there still is no legal base in the EU treaties for the second May 9th 2010 Decision by all EU member states that the eurozone states could “task” the EU Commission in connection with the EFSF.

    3. Not only has the EFSF been established and allowed to involve the EU institutions unlawfully under the EU treaties, the structure of cross-guarantees devised to enhance the credit rating of its bonds is in blatant contravention of Article 125 TFEU in the EU treaties.

    4. It is that illegal structure of cross-guarantees, having already been revised once through amendment of the EFSF Framework Agreement, which is now breaking down again.

    Whereas the joint guarantees of the then six AAA rated eurozone states were enough to cover 103% of payments due to bondholders, with both France and Austria having been downgraded that will not be the case with just the four remaining AAA rated eurozone states – Germany, Netherlands, Finland and Luxembourg.

    The combined quotas of those six countries come to 62% of the total, and as they guarantee 165% of their quotas that comes to 103% of the sums required for repayment of the bondholders.

    As explained here in June 2011:

    “Taking into account the new 165% guarantee ratio, 102.9% of any issue would be guaranteed by AAA countries making any additional credit enhancements unnecessary. The rating agencies will certainly welcome this move. The likes of S&P & Co assume in their models that in the event of a borrowing country default, all non-AAA countries will also fail to honour their guarantee commitments and that the EFSF will have to rely on the AAA countries to ensure the timely payment of its liabilities … ”

    5. Using the amended contribution keys:

    I find that the loss of both France (22%) and Austria (3%) from the list of AAA rated guarantors means that the guarantee ratio would have to be increased from its present 165% to about 270% in order to ensure that the guarantees of the four remaining AAA rated countries would still cover all the liabilities of the EFSF, and there is little prospect of the Framework Agreement being amended again to do that.

    6. Given that the EFSF was created unlawfully and structured illegally under the EU treaties, there would perhaps be a kind of justice in its downfall.

  17. BobE
    January 14, 2012

    BBC: Europe attacks downgrade decision

  18. Derek Emery
    January 14, 2012

    The Eurozone failed from day one but it took around a decade before the resultant problems could not be ignored, just as predicted by top economists. See blog by Dr Mitchell at
    Unfortunately (as they continue to prove) the EU elite are not too hot at economics, markets, and risk analysis so only come up with short term fixes. Apparently international investors have already given up on the EU coming up with a solution and moved their money out to invest elsewhere.

  19. Electro-Kevin
    January 15, 2012

    Four AAAs in the Euro ?

    They’re all ‘A’s in the Euro if you ask me.

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