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Kermits' Kurrency Krunch

Posted by Richard Saturday, January 14, 2012

So, as widely forecast, the Kermits - struggling under the burden of a national debt in the order of £1.4 trillion - have lost their "gold-plated" AAA credit rating. Standard & Poor's (S&P) has chopped them one point to bring them down to a lowly AA.

Such is the latest instalment of the train wreck European economies, which also has Austria on the rack and Italy on its way down to a triple B. Of the 17 eurozone countries, only Germany, the Netherlands, Finland and Luxembourg now enjoy the top triple A rating.

For status-conscious France, however, the loss of its top rating is a severe blow, and especially for the Kermit-in-Chief, who has only months before a presidential election sweeps him into the history books.

This is not going to look good when he tries to convince the French electorate that he is the ideal custodian for the French economy. Thus, Sarkozy has called an emergency cabinet meeting for today.

Finance minister Francois Baroin is in damage limitation mode, claiming: "It's not good news, but it's not a catastrophe". France "must follow and amplify reforms", he adds, saying: "We must be bold. We must preserve employment" – thus contradicting himself within two sentences.

There are, however, broader implications. France is one of the major contributors to the European Financial Stability Facility (ESFS) and if as a result of its downgrading this fund also takes a hit, its lending power will be substantially cut.

The EFSF's €780 billion lending capacity, says Reuters is based on guarantees from eurozone governments. Even with six of the 17 contributor governments AAA-rated, all member states still had to provide over-guarantees to ensure that the fund remained AAA rated.

But, with only four holding on to their triple-A status, the overall impact will be to suck power from the EFSF and make it that much harder to scale up the resources that are already committed to the facility – and the borrowing more expensive.

The "colleagues" no doubt will have contingency plans in place, which include bringing forward the European Stability Mechanism, on top of which they hope their new treaty will begin to have an impact if they get it in place by March.

The direction of travel, though, is still all too evident, the expected outcome being a pile of wreckage and a fleet of ambulances queuing to take away the casualties. No one knows yet who will be paying for the petrol – or the medical bills.

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