The fear of Friday 13th caught up with the
Euro zone, three of its members have been downgraded. France lost its triple A
rating earlier today, confirming the rumors that it was an error late last
year. Standard & Poor’s downgrading has sent a shock wave across the euro
zone, perhaps assuring sceptics that the single currency is about to be buried
alive without a doubt. Austria and Slovakia have also had its credit rating downgraded;
sadly Italy has been downgraded further to Triple B! Out of the seventeen member state
of the euro zone, nine have lost S&P credit rating assuring that the timely
death of the euro is around the corner. The nine member nations are: France, Malta, Austria, Slovakia and Slovenia to AA+. While Italy, Spain, Portugal and Cyprus are all down to BBB+, otherwise junk bonds! There is a domino effect that will
finally nail the coffin of the euro, this will happen when S&P downgrades
that European Central Bank (ECB). A clear reason for this is: the members’ states
of the euro zone by virtue of its credit ratings gives the ECB its credit
rating status, thus allowing it discharge one of its functions of defining and
maintaining monetary policies for the euro zone. If 9 out of its seventeen members
have difficulty selling bonds or raising funds publicly, this will drag the ECB
down and will eventually lead, effectively to the annulment of, and final disintegration
of the euro (zone). France was pulled down by bailing nations such as Greece;
Germany is next, its rating, by its position of a fore runner trying to save
the euro, will be downgraded. When this happens, the end of the euro and the
euro zone will be next.
How the negotiations to rework the Greek debt have
been conducted by the people in Brussels shows the confusion and the enormity
of the task at hand. The truth is that the debt cannot be negotiated, not now,
if the euro zone had allowed Greece default when all this nonsense started,
perhaps this problem could have been contained. Clearly, it will not be solved,
not with the way money has been thrown at the issue by different institutions.
Greece, euro zone leaders and its main creditors actually agreed to a 50% cut
in Greece’s debt, this negotiation is unrealistic and unethical. The question
is who bears the brunt on this debt cancellation? Greece also owes over €100
Billions to the International Monetary Fund (IMF), other euro zone members and
the ECB; if this request is extended to these institutions, how will Greece be punished
for its behaviour thereby deterring other nations from engaging in such an act
in the future? In fact, with the way the negotiations are going, members of the
euro zone have been conned into bearing more burden just to bail out Greece,
this is clearing why France has sunk, and several nations in the zone will
follow in the next 1 month.
Financial analysts have called the restructuring plan
this cancerous nation called Greece: a revolutionary bond exchange. In brief,
the plan suggests that private creditors return their bonds getting a new one
with half the face value of the original. This half-price bond will mature in
the future (many years to come, no specific time has been stated); the idea is
investors will do this not because the idea is the smartest but because
half-priced bond is better that a worthless bond issued by Greece. Although the
details of this exchange are still unknown, one key question about the plan is:
what is the interest rate on the new bond? If this plan goes through, by the
end of 2014 Greece’s debt will be €435 Billion, two-third of this amount will
be held by public entities, i.e. euro zone governments. With all this mess going
on, the ECB has clearly stated that it will not record losses estimated at €40
Billion on the Greek bonds that it currently holds. One starts to wonder if
the members of the euro zone have any idea what they are doing and proposing or
are they just working assiduously toward the untangling of the zone. Time will
tell surely!.
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