BBC Radio 4 Today Programme – Eurozone downgrade warning a ‘statement of the blindingly obvious’

This morning I was interviewed on the Today Programme about the decision late last night by Standard and Poor's to review the credit standing of 15 eurozone countries including Germany and France.

Evan Davis opened the interview by asking, ‘how important do you think the Standard and Poor’s declaration is?’

To which I responded, ‘it’s not terribly important in itself. It’s a statement of the blindingly obvious in many respects. The idea that many of the eurozone countries, possible all of them, might be less able to service their debts than people had thought historically strikes me as fairly obvious.’

You can listen to the full interview here.

The full transcript of the interview is below.

EVAN DAVIS: Presenter
Well, yesterday was an extraordinary one, even by the high standards of the ongoing eurozone crisis. On the one side there was a glimpse of a possible solution to the immediate crisis as a compromise between France and Germany was agreed. Maybe that would pave the way to the European Central Bank easing up on its policy. Then, with impeccably bad timing, came the bombshell announcement from the credit ratings agency, Standard & Poor’s, that the debt of every member of the eurozone was being looked at for a possible downgrade; not every member, in fact, Greece and Cyprus, who are already very lowly rated, were exempt. Well, S&P is one of several private organisations that make a living out of rating the security of different governments’ debt; even Germany might go down, they said, France might go down two notches on their scale. Well, obviously, Standard & Poor’s don’t have any particular inside information, they’re just another group of analysts making their own assessment but they are a group who, for good reason or bad, are taken very seriously. We’ll discuss the implications of it, and that French/German agreement, in a few moments, but let’s just get Robert Peston to explain the significance of the Standard & Poor’s review.
Robert, what’s the significance of the Standard & Poor’s review

ROBERT PESTON: Business Editor
Well, I mean, you know, whether eurozone leaders like it or not, investors still take what credit rating agencies say about governments’ ability to repay their debts, seriously, and actually that authority of credit rating agencies is built into the system, because central banks, for example, when they’re lending to banks they actually use credit ratings to determine what kind of assets they take from banks as collateral. So what credit rating agencies say… and in the case of Standard & Poor’s, it’s not actually their analysis that I think people will regard as particularly controversial. We know that banks have been finding it increasingly difficult – that’s eurozone banks - have been finding it increasingly difficult to borrow, we know that governments like Italy and Spain have been finding it increasingly hard to borrow. And we’ve also witnessed how difficult it’s been for the eurozone to come up with solutions to these very serious financial difficulties. And, therefore, the analysis that underpins the downgrading is one I think that many people would accept. It is the timing, as you say, of them that is quite so shocking and explosive, coming as it does midway through what many would regard as make or break negotiations to try and solve these problems.

EVAN DAVIS:
Well, they didn’t mention the… I didn’t see in the bits I read of Standard & Poor’s mention, this French/German agreement. Now does the French/German agreement change the picture so significantly that Standard & Poor’s are out-of-date before they’ve even been published?

ROBERT PESTON:
Well, not yet Evan, because the French/German agreement is only one step along the way to reform; the other eurozone members have to sign up for it. And anyway, we haven’t yet seen all the detail of what the French and the Germans want in respect of limiting the ability of eurozone members to spend and borrow recklessly. We’ll only have a sense of how credible that plan is towards the end of the week, and actually if history is any guide, it may… what we may get at the end of the week is simply more broad brush statements by eurozone leaders, it may be weeks before we have the fine print, and it’s the fine print of these agreements that we now know from bitter experience which determines whether in the end these rescue proposals will actually work, and so far, over the past 18 months, the eurozone governments have rather let us down, given us, you know, wonderful hope on the basis of the thrust of what they’ve been saying and then we’ve seen the fine print we’ve thought, “well, actually, there’s rather less to all of this than we hoped”.

EVAN DAVIS:
Robert, thank you very much indeed. Well, let’s talk through this with Ngaire Woods who’s Dean of Oxford University’s Blavatnik School of Government, and with Terry Smith, a veteran City commentator, Chief Executive of Tullett Prebon and Fundsmith.
Good morning to you both.

TERRY SMITH: Chief Executive, Tullett Prebon and Fundsmith
Good morning.

NGAIRE WOODS: Dean of Oxford University’s Blavatnik School of Government
Good morning.

EVAN DAVIS:
Terry Smith, how important do you think that Standard & Poor’s declaration is?

TERRY SMITH:
It’s not terribly important in itself. I’d agree with Robert Peston’s comments, basically. It’s a statement of the blindingly obvious in many respects. The idea that many of the eurozone countries, possibly all of them, might be less able to service their debts than people had thought historically, strikes me as fairly obvious.

EVAN DAVIS:
Yeah. It’s annoying in the timing, though, isn’t it? There they are, trying to get everything together for Friday and then suddenly this thing is dropped and it’s humiliating saying Germany is going to be downgraded, essentially France, two notches.

TERRY SMITH:
Well, no, I don’t think the timing is particularly bad. If you remember, during the credit crisis, one of the great things levelled against the rating agencies was that they weren’t independent enough. So I think when they start behaving independently it’s a bit remiss to start complaining about them. And I think they’re absolutely right in what they’re saying. One of the great things in this situation is that France appears alongside Germany as one of the, sort of, financially stable, dispensing the way in which this crisis will be handled. If you look at France’s finances they have far more in common with the countries in the periphery than they do with Germany.

EVAN DAVIS:
Well, hang on, the debt level’s no higher than ours; it’s just because of the banks. It’s only because their banks will be infected by what goes on.

TERRY SMITH:
I don’t want to say ‘just because of the banks’, because if the banks need recapitalisation I think the debt level will soar, and there seems little doubt that they will need recapitalisation.

EVAN DAVIS:
OK. Well, give us a reason why Germany should be downgraded then?

TERRY SMITH:
Germany is the one that actually in the end will end up risking its credit for the remainder of the zone, if it goes down the path which is currently being outlined. So Germany doesn’t have the resources to support the whole of this. That’s why.

EVAN DAVIS:
OK. Well, look, let’s focus a bit more on this French/German agreement and ask this question, as to whether that somehow makes Standard & Poor’s a bit out-of-date. Ngaire Woods, I don’t know whether you think, what we saw yesterday – and the markets reacted very optimistically to it – what we saw was a glimpse of a solution.

NGAIRE WOODS:
No… I think there’s a political logic to the French/German agreement, which is that neither Merkel nor Sarkozy want to be seen as writing a blank cheque to all of Europe’s debtors. Of course that’s what the markets would like them to do but that’s not what they want to do. But what they’ve put in chain is a very long process, it’s going to take years for that treaty to be ratified and it’s going to have to be ratified in countries which are deflating fast, where people are losing 35%, 40% of their income and being expected to vote in favour of the euro. So I think it’s going to be a very contested process that will send many more shivers through the markets. And what the markets are looking at – and this is what Standard & Poor’s is saying, and I very much agree with Terry – is that they want to know how it is that Italy and other debtors are going to refinance several hundred billion euros of government debt over the next four or five months, and they can’t understand why the French and Germans are sitting, you know, designing their summerhouse while their house is burning around them.

EVAN DAVIS:
But isn’t the answer to that: that if they design a nice summerhouse the ECB will come in and sort it all out next year? But the ECB aren’t going to do that until they’ve got the cover of a proper structure being designed for dealing with the insolvency issues down the road.

NGAIRE WOODS:
Well, I think the other issue, though, is that for every step that governments like Italy and Greece and Ireland are trying to take to move forward, by cutting government expenditure, they’re risking sliding two steps backwards because they’re not growing. And debt, of course, depends not just on how much you owe and how much you’re spending, but also on how much you’re earning and how much you’re growing. And what the markets are looking at is a situation where, although governments might be making strenuous efforts, the growth prospects are looking more and more pessimistic. So they want to know, you know - the numerator and the denominator – ‘what’s going to happen to the debt and what’s going to happen to growth?’. And I think that’s what the eurozone leaders haven’t delivered on yet.

EVAN DAVIS:
Right. So in a way, we’re saying they haven‘t solved the immediate problem, because that would still rely on the ECB coming in. We haven’t solved necessarily the long-term problem, which is this growth austerity nightmare that there’s only a limit to how much austerity is going to work. Do you agree with that analysis, Terry Smith?

TERRY SMITH:
Yes, I do agree with the analysis. But I would pick up on one thing. We’ve seen, literally, countless summers here, and we’ve seen pronouncements of agreements - and it’s quite true this is a long process and it’s quite true we haven’t seen the details - but even if it all came to pass – and I must say the odds, looking at history, are against it – the idea that the ECB would then be able to buy bonds and that’s a solution, I’m afraid is farcical, because what you’re talking about is the central bank for these countries buying bonds that the countries are issuing. If you’re spending more than your income – and these countries are going to be spending more than their income for the foreseeable future – you need to be able to sell these bonds to some outside third party that’s got money. And for that to happen you’d need to convince them - as we’ve already heard - that your economies are competitive and that they’re able to grow. And I just don’t see how most of the peripheral countries, and France, can grow within the straitjacket of the euro. In fact, the whole point about these proposals, is putting in place things that will probably prevent their growth for quite some time.

Comments

[d eddy]

Treat of the morning: Terry Smith "statement of the blindingly obvious" .... Always gets straight to the point with incisive logic that's hard to argue with. More please ;)

[Michel d'Anjou]

It's disappointing that a commentator should describe S&P's timing as "shocking and explosive". Given the pace of events perhaps S&P scheduled their announcement for after the final solution only to find yet another final solution being tabled. Clearly they would be failing to delay until the predicted outcome arises!

[Terry Smith]

Debbie, thank you.
Unfortunately I did not get to say all I wanted in response to Evan Davis’ suggestion that S&P’s timing of its warning about the Eurozone countries was in some way unreasonable. I wonder if he would regard it as preferable if the agency waited until the crisis is over (not that there is much chance of that in the foreseeable future) before issuing a downgrade.

[Terry Smith]

To Michel

I suspect that supporters of the Euro project and commentators who are biased that way are shocked by anything which happens in the markets or rating agencies which does not suit their plan as it is outside their control. That is why they hate markets so much-because they hold them to account, which electorates increasingly are not allowed to do.
On which point, I was dismayed but not surprised to read this Tweet from a journalist:

EU to avoid any votes - parliamentary or popular on treaty change - via obscure Lisbon Treaty 'passerelle' clause, Art. 126 (14) via protocol 12. "This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes," says confidential Van Rompuy text. Funnily enough, only Britain will have to have a parliamentary vote under the Tories recent Sovereignty Act even though it is eurozone only changes.

http://www.tweetdeck.com/twitter/BrunoBrussels/~ZqKce