S&P: Eurozone could start to emerge from debt troubles in 2013

Written by Shalini Kumar of theedgemalaysia.com
Friday, 11 January 2013

KUALA LUMPUR (Jan 11): This could be a decisive year in determining whether the eurozone can emerge from its sovereign debt troubles,
according to a Standard & Poor’s (S&P) report. In its report entitled “The Eurozone Debt Crisis: 2013 Could Be A Watershed Year” released today, the credit rating agency said 2013 could mark the start of the region sustainably overcoming market volatility and fragmentation that had affected it over the past few years.

It could also see the return of some so-called “programme countries”, member states that have borrowed from the European Stability Mechanism or the European Financial Stability Facility multilateral loan programmes, to more substantial primary issuances in the capital
markets. “We believe investor confidence will only return if member states continue to make progress in rebalancing their economies, both through structurally stabilising public debt and by further reducing external deficits,” said Standard & Poor’s credit analyst Moritz Kraemer.

“Achieving this will take a disciplined and transparent response from policymakers both at national and European levels.” S&P said it felt this was a challenging but achievable agenda, although implementation risks loom large. “These risks are the main reason the majority of our outlooks on our eurozone sovereign ratings are still negative. Nevertheless, European leaders have laid, or at least announced, much of the groundwork for the eurozone to emerge from its lingering crisis.”  The eurozone’s success in reversing its credit trends will depend on national and pan-European policymakers’ responses to the eurozone’s continuing economic, political and social risks, the report said, adding that it believed economic rebalancing still had some way to go and would seriously challenge political leaders.

“We are also of the view that the economic and social costs of economic rebalancing could be more easily contained if a higher degree of policy coordination leads to a more symmetrical adjustment shared between the eurozone’s core external surplus and peripheral deficit countries, rather than with most of the burden falling on the latter,” it said. While there have been noteworthy new policy developments, such as outright monetary transactions and the ESM, none of these tools have been used yet and implementation risks remain, the report said. Another key risk would be the sense of complacency that could develop along with an improvement in market conditions. Complacency could lead to the fragile
agreements among European policymakers unravelling if some consider that the eurozone’s troubles have passed and previously agreed actions can be shelved or watered down.

“We consider that it is too early to firmly state that complacency risk has materialised. We are of the view, however, that the consensus among European policymakers may be more brittle than generally appreciated,” said Kraemer. With the key of successful crisis resolution in the hands of governments, the electoral calendar remains a vital factor in assessing the future course of policies as well as progress in crisis resolution.

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