It’s as though we could all easily stomach the idea that Greece, Spain and Italy would have poor credit ratings – their economies are in such a parlous state that nothing else would seem normal. But now the great bastion of fiscal responsibility and the monetary foundation of Europe, Germany, has had its credit rating placed on AAA with a negative outlook by ratings agency Moody’s. The agency puts its decision to change the outlook down to Germany’s exposure to a Greek exit from the single currency and the possibility that it will simultaneously have to fork out to keep Spain afloat.
Ah, Spain. Now that’s the problem of the hour. Yesterday the Spanish government banned the short-selling of shares in response to sliding markets all over Europe. The FTSE 100 dropped 2.3% in response to the escalating crisis, the US’s Dow Jones opened down 200 points and Nasdaq fell around 2.5%, too. These are not small fluctuations, and reflect a worsening crisis for Spaniards. Indeed, both Murcia and Valencia have now approached the country’s central government for regional bailout support as their local finances are up the spout. Spain’s 10-year bond yields shot past the ‘high risk’ threshold of 7% yesterday, peaking at 7.5%. Just in case you didn’t know, that’s a euro-era record.
But with its powerhouse of a manufacturing sector, Germany is doing better than the rest of us, right? True, but it is firmly stuck inside the euro having benefitted handsomely from the disparity between its output and that of Mediterranean countries. That’s why – although she wouldn’t admit it – Angela Merkel is so adamant that no country be allowed to exit the currency. Explaining its rationale, Moody’s said: ‘Although Moody's would expect a strong policy response from the euro area in such an event, it would still set off a chain of financial-sector shocks and associated liquidity pressures for sovereigns and banks that policymakers could only contain at a very high cost.’ Good grief.
Whilst Moody’s concentrated heavily on Spain and the Grexit in its explanation, it also touched on Italy, where it emerged yesterday that around 10 major cities are on the verge of regional bankruptcy, meaning schools may not even be able to reopen in September. The money simply ain’t there to pay the teachers and support staff. So Germany may be the engine room of Europe, but money is money and it isn’t inexhaustible. If Greece exits the euro and Spain requires much more bailing out, Germany too will be broke and will have to join the rest of us, scrabbling around in the dirt looking for some economic growth.
The saga continues…