Irandaily | No. 4380 | International Economy

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Dark Clouds Over US Credit Rating

In 2011, the United States emerged from a damaging budget battle with a downgrade of its pristine triple-A rating for the first time in history. In 2013, it could be dealt even a bigger blow.
The battle over avoiding the so-called fiscal cliff is the first of a likely series of partisan confrontations in Washington in the coming year that, if not resolved, could cause more downgrades of the US credit rating.
“The rating is in the hands of policymakers,” said John Chambers, chairman of Standard & Poor’s sovereign rating committee, the agency that downgraded the United States in August 2011.
In interviews with Reuters since the Nov. 6 election, all three major rating agencies said cutting the US debt rating is highly likely if next year’s budget process replays 2011’s debt ceiling debacle or if the seemingly simple goal of cutting deficits goes unmet.
Should that happen, it could have a detrimental effect on the country’s cost of borrowing and also shift some investment away from the United States.
In the absence of a sustainable, coherent medium-term vision for the US federal budget, which has produced deficits above $1 trillion in each of the last four years, the rating will fall. The fiscal cliff is one step in that process, but the possibility of a downgrade will still loom over Washington throughout the year.
“If no budget deal is reached in the early part of next year and the debt trajectory just continues to rise...then we’d be looking at a downgrade of a notch to Aa1,” said Bart Oosterveld, managing director at Moody’s sovereign risk group.
If Congress and the president can’t reach a deal to stabilize and eventually reduce the debt, now at $16 trillion, Moody’s will probably cut the United States’ current Aaa rating.
Fitch, meanwhile, said even a deal to avert the cliff might not be enough to save the country’s AAA rating.
Temporary measures to stave off the budget shock without a credible strategy for the years beyond could earn the country a downgrade, said David Riley, managing director for sovereign ratings at Fitch.
“We’re going to find out over the coming months if that (a compromise) will be the case or not. There isn’t that much time.”
Rating agencies will also be watching talks on raising the debt ceiling next year. S&P cut the United States to AA-plus from AAA on Aug. 5, 2011, blaming bitter debt debates that threatened to plunge the country into default and Republican obstruction during a process that was for years a formality.

2nd Recession Hits Eurozone

From Page 1

Where Germany goes, France is likely to follow and economists expect its economy to shrink in the October-to-December period.
For all of 2012, the European Commission sees the eurozone contracting 0.4 percent, while growing just 0.1 percent in 2013. Business surveys point to difficult times ahead and the public’s backlash to austerity polices is growing.
Millions of workers went on strike across Europe on Wednesday to protest the government spending cuts they say are driving the region into a deeper malaise but which Germany and the commission say are crucial to healing the wounds of a decade-long, credit-fueled boom.
“We are now getting into a double dip recession which is entirely self-made,” said Paul De Grauwe, an economist with the London School of Economics. “It is a result of excessive austerity in southern countries and unwillingness in the north to do anything else.”
European leaders, who have benefited from a tenuous calm on financial markets in recent months, are likely to face additional pressure to ease the government austerity programs that have undercut growth in Southern Europe.

Depressionary Environment
Economists at Nomura warned of “a depressionary environment in a growing share of the region”. In a note to clients, they said, “This negative loop has the potential to threaten the stability of the whole system.”
Some analysts had forecast a bigger decrease in output. But France registered a surprise uptick in growth and the Italian economy shrank less than expected, moderating the pace of decline across the region. Considered along with sagging factory output and business sentiment, though, the numbers on Thursday reinforced expectations that the eurozone as a whole could remain in recession well into next year.
“An end to the recession in the eurozone is still out of sight,” Christoph Weil, an economist at Commerzbank in Frankfurt, said in a note to clients.
But with unemployment in the eurozone at 11.6 percent and nearly 26 million people out of work, few dispute that the region is in a deep downturn.
“Leading indicators suggest that the eurozone recession will broaden and deepen in the current fourth quarter,” said Martin van Vliet, an economist at ING Bank.
The European Union, which includes 17 countries in the eurozone and 10 others primarily in Eastern Europe, managed to return to growth in the quarter as several countries, including Latvia and Lithuania, recovered strongly.
Growth for the bloc as a whole was 0.1 percent compared with the previous quarter, after a decline of 0.2 percent in the second quarter.
But in Western Europe, the economic decline spread to Austria and the Netherlands, which had been growing in previous quarters. The Austrian economy contracted 0.1 percent, while the previously healthy Dutch economy plunged 1.1 percent, catching economists off guard.
One reason for the decline was that Dutch consumers cut back on purchases of cars, illustrating how the crisis in the European auto industry is having a broader effect. Slower export growth and a decline in construction also had an effect, according to Statistics Netherlands, the official data provider.
France grew more than analysts forecast, at 0.2 percent, because of increased exports and higher consumer spending. The Italian economy shrank 0.2 percent, which was less than expected and a less severe decline than in previous quarters. Foreign demand compensated for a decline in household spending in Italy, economists said.
There had been some signs in recent months that the eurozone, now in its third year of crisis, was beginning to stabilize. The exodus of money from Spain had stopped and borrowing costs for Spain and Italy have dropped out of the danger zone, thanks to a promise by the European Central Bank to intervene in bond markets.
Exports from some of the troubled countries have risen, as companies put more emphasis on foreign markets to offset poor demand at home.

Meeting Next Week
Eurozone finance ministers are expected to meet next week to consider whether to release the next installment of aid for Greece, which it needs to avoid defaulting on its debt.
Next month, European heads of government will hold a summit meeting to continue working on ways to make the common currency area more resilient, for example by pooling supervision of banks.
“It is essential that the period of relative calm on financial markets is preserved,” said Marie Diron, an economist who advises the consulting firm Ernst & Young. “This will necessitate further quick progress on key reforms, including securing Greece’s financing and moving towards a comprehensive banking union.”
But disputes remain on the future shape of the eurozone, and there is a risk that leaders will not move fast enough.
“The International Monetary Fund suggested that Europe should act to reduce Greece’s debt, insisting the fund itself was not prepared to contribute more to the country’s bailout. The IMF has already extended Greece’s rescue loan to four years from three years and lowered interest rates,” IMF Spokesman Bill Murray said at a regularly scheduled news briefing. “That’s the IMF contribution.”
Asked what Europe should do to reduce Greek debt, Murray declined to give specifics, but said, “presumably, that’s who has to take the action.”
“IMF Managing Director Christine Lagarde will cut short her Asia visit to attend a crucial eurozone finance ministers meeting on the Greek crisis on Tuesday in Brussels,” he said.
The meeting was announced by Eurogroup President Jean-Claude Juncker, who has clashed publicly with Lagarde over extending the country’s agreed debt-to-GDP ratio target of 120 percent by 2020.
Juncker says the target should be pushed back to 2022. Greece’s current level is an untenable 170 percent.

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