EU DOWNGRADES - NOT TO BE UNDERESTIMATED
By Ruma Dubey
The weekend helped dull the pain or else, it could have been debilitating. On Friday, the rating agencies did it once again – removed the rosy glasses. With the New Year spirits still in the air, though we knew that the Euro crisis was lurking somewhere there in the corner, it was pushed to the background with hopes that all problems had simply vanished into thin air. Well, Standard & Poor’s helped bring back that reality check and yes, the problems which we had tucked under the newly laid out carpets for ushering in 2012 are once again back on the top.
S&P downgraded over half of the 17 members of the Euro zone - it became the first credit-rating firm to strip France and Austria of their triple-A ratings, and cut Portugal and Cyprus to junk status. Italy, Spain, Malta, Slovakia and Slovenia were also downgraded.
But those in Europe are not too taken aback as they had expected the downgrade to be more severe. The sharp edge of S&P’s stance could have been dulled by the fact that there were a few hopeful sings which came in from Europe – the better than expected bond sales by Italy and the European Central Bank also offering cheaper loans to boost demand.
The downgrade might not be as severe but the news per se is bad. Any downgrade at this juncture is bad and France losing its triple A rating does not bode well. With S&P making the first move, do not be surprised to see other rating agencies also following suit and announcing downgrades. The downgrades are like an alert, indicating that all is far from being well.
A few things come forth starkly in this move. First and foremost is that Germany retains its position as the uncrowned super power of the Euro zone as it has neither been downgraded nor has it been put on the watch. Its strength at the negotiating table has now gone up a few more notches than France. The second obvious fact is that Sarkozy is going to have a tough time with France expected to go to polls in May. And the third truth – these countries can now unabashedly impose austerity measures which otherwise would have met with stiff opposition from the people.
What does all this mean for India? Being globally interlinked, any downgrade or any negative news in Europe will affect sentiments and business. If the EU Govt’s get into an austerity mode, demand is sure to get stifled and growth rates could slowdown. Thus Indian companies looking to expand their business in Europe will have to hope and pray for sustainability, forget growth! More than anything else, the feeling of unease, a sense of pessimism could spread its tentacles all over. And markets are all about moods thus an all pervasive dull mood could persist. Only savior could be USA, which could help boost sentiments and business if it continues with positive data and reiterates that recovery is well on its way. Yes, China could change it all and that is the country, more than any that we need to watch out for.
The good news is that with such uncertainty in Europe, emerging markets could see more FII money coming in and hopefully, despite the burgeoning fiscal deficit, the lure of India will not diminish.