Thursday, November 24, 2011

Fitch downgrades Portugal; Merkozy to met Monti


Fitch Ratings agency has downgraded Portugal to BB+ to from BBB-, widely considered as "junk" status in the light of its large fiscal imbalances and weak macroeconomic outlook. The Outlook for Portugal is "negative" says Fitch in a press release published Thursday. Angela Merkel and Nicolas Sarkozy are meeting with Italian Technocratic Prime Minister Mario Monti today in Strasbourg with discussions over the board about the role that the ECB must have in the crisis solutions. German bonds in focus.
Fitch has decided to downgrade Portugal's Long term foreign and local currency Issuer Default Ratings (IDR) to 'BB+' from 'BBB-' after lowering the country growth forecast "in light of the worsened European outlook", says the agency. Fitch expects now a contraction by 3% in the GDP during for 2012, despite that, "Significant structural reforms expected under the programme should leave Portugal in a more competitive position in the long term."
Meanwhile, French President Nicolas Sarkozy, new Italian Prime Minister Mario Monti and German Chancellor Angela Merkel are meeting Thursday in Strasbourg to show support to the new measures Italy is taking after the overthrow of Silvio Berlusconi. The meeting will discuss the reforms planned by former EU commissioner Monti to restore confidence in Italy.
However, France and Germany are still divided on the ECB role to solve the deb crisis and how will be the best way to cut the spiraling debt crisis, and not only the leaders couple but the European Commission president Jose Manuel Barroso too, who called yesterday for the creation of a new eurobond. Ironically, almost at the same time Germany proved that the biggest economy in the Euro area is not immune from the debt crisis and Berlin is now joining the Paris fears about the contagion from the peripheral countries into their debt.
The German Bunds, until now considered a safe-haven in the Eurozone debt market, fell victim to the increasing mistrust of investors towards the euro project. Due to very low demand, the German government sold merely €3.644 billion of the €6 billion in 10-year bonds on auction, at a much lower yield than usual, of around 1.98%.
"Time is running out for the Germans to act," convinces Kathy Lien, Director of Currency Research for GFT, who believes that the alarming result of the German bond auction should be the last straw: "Auction serves as a reality check for the Germans who cannot turn their backs on the rest of Europe for much longer. The bund auction was the straw that broke the euro's back, erasing any goodwill creating by the IMF's offer of liquidity yesterday. Investors are wary of holding any European assets and if the Germans want to reverse this vicious cycle, they need to dump more money into the EFSF."
France faced more pressure on Wednesday as the Fitch rating agency published a special report on the country's public finances, stressing that the rise in the country's government debt made it more vulnerable to further crisis shocks. Like Moody's on Monday, Fitch suggested that this situation threatens France's current AAA rating.
The problems inside the euro area are coming from different sides, fundamental economic data show yesterday that the evidences of the Eurozone is falling into recession are rising with PMIs from France, Italy and Germany among others countries are falling into contraction levels, and industrial orders in the whole euro zone posting a laconic 1.6% of monthly rise in September but with a 6.4% decline on yearly basis. Dark clouds are over the Eurozone sky.