Risk of recession in eurozone: S&P

15 Jan 2012, 1:54 pm   -   Source: AAP
Share This
S&P downgraded credit ratings of a string of European countries. (AAP)

S&P downgraded credit ratings of a string of European countries. (AAP)

There is a 40 per cent risk of a recession in the eurozone, credit rating agency Standard & Poor's says.

RELATED

There is a 40 per cent risk of a recession in the eurozone, whose economy could contract by up to 1.5 per cent this year, credit rating agency Standard & Poor's said.

"We are now forecasting a recession with a 40-per-cent probability for this year," S&P credit analyst Moritz Kraemer said on Saturday. "That could lead to a eurozone contraction of around 1.5 per cent."

The agency warned eurozone countries that their efforts to fight the debt crisis was too focused on reducing debt and that a fiscal unity pact - agreed at a European Union summit last month to tighten budgetary rules - did not fully address the bloc's financial problems.

"We believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone," S&P said in a statement.

On Friday, the agency downgraded the debt rating of nine European countries, including France and Austria, who were stripped of their prized top-notch triple A ratings.

S&P said the fiscal union pact alone was not enough to solve the debt crisis which forced Greece, Ireland and Portugal to seek bailouts and is now threatening to engulf Italy, the 17-member eurozone's third largest economy.

"The political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures," said the ratings agency.

Kraemer said Italy was particularly at risk, pointing out that it needed some 130 billion euros ($A161.87 billion) in debt refinancing in the first quarter and some 300 billion euros for the whole of 2012.

It would be hard for Rome to generate enough income if a recession strikes, he warned.

The French government was quick to downplay the impact of the downgrade, saying it had been expected and that the government was in a position to weather rising borrowing costs.

"The budgetary measures taken by us are enough," said Prime Minister Francois Fillon, adding that France had expected yields on 10-year bonds to average 3.7 per cent this year and had six billion euros in emergency reserves to meet rising borrowing costs.

The yield on French bonds was 3.08 per cent at an auction last week.

"The decision constitutes an alert which should neither be dramatised nor underestimated," said Finance Minister Francois Baroin.

While Baroin admitted that the downgrade was not "good news," he said it was also "not a catastrophe." He added that France was left with a respectable AA+ rating, the same as the United States.

The downgrade prompted rivals of Nicolas Sarkozy to heat up their criticism of the French president, who is seeking re-election this year.

"It is the policy that has been downgraded, not France," said Socialist Party presidential candidate and poll frontrunner Francois Hollande, adding that Sarkozy had made it his main goal to preserve France's prized triple A rating.

Sarkozy's government last year defended pension reforms and public spending cuts as necessary to prevent a ratings downgrade.

"The government justified its pension reform, which every one knows is unjust, for the sole reason of preserving the triple A," Hollande told Le Monde newspaper in an interview. "This argument has failed."

  • Follow us: 
  • Follow us on Facebook
  • Follow us on Twitter
  • Follow us on Youtube