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Recent Credit Ratings downgrades

Recent Credit Ratings downgrades : Greece and Italy

Last Friday, the ratings agency Fitch downgraded Greece’s sovereign debt rating by 3 notches in one go. This was followed shortly by Standard & Poors (S&P) downgrading Italy by a notch. What are the likely repercussions and meanings of these actions? There are many rumours surrounding what Greece’s will do going forward – will it leave the Eurozone, or will it default on its debt?

It has become increasingly apparent that Greece has no options without receiving bail-out from the IMF and the IMF in turn is intransigent without Greece proving it’s fiscal sustainability. Thus Greece has very little choice, and it must be stressed that all of their options are painful. It is obvious that Greece, as well as other peripheral European countries require a structural solution and the “kicking the can down the road” approach can only take it so far.

So either they must default or they require a flexible exchange rate to help balance their trade deficits. This will only happen if they leave the EMU. However, leaving the Eurozone may be unpalatable, as there is much political will to ensure the integrity of the European bloc. But this means that a structural economic depression is being forced upon their citizens, and it will only be a matter of time before it gets out of control.

Rising risk aversion on the back of what is happening in Europe should not be ignored in South Africa. On the sovereign front we are very far from being in the same debt trap hole as many peripheral Europeans, but as S&P warned in a report this week our banks are not immune to downside risks to growth and stability. In particular their funding and liquidity requirements will be challenging going forward. So to a large extent our ability to grow (via access to credit) will be constrained by these bank challenges, and this will be in an extremely challenging global environment for the foreseeable future.

Atlantic Asset Management:
Written by : Arno Lawrenz : CIO Atlantic Asset Management
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