Nicolas Sarkozy of France and the head of the ECB,
Mario Draghi, have both down played the downgrading that sent the euro zone
into panic last week. Standard & Poor even went head to downgrade the EFSF
bailout fund after re-evaluating the nine euro zone nations. Quoting Marion
Draghi:
“As
regulators we should learn to do without ratings. Or at least we should learn
to assess creditworthiness in a way in which ratings or credit rating agencies
are one of the many components of our information,”
This statement made to the public is
not only misleading but also deficient in sense-making as the zone had thrived enormously
from the ratings of Standard & Poor in the past. Investors know that the
ratings play a crucial role in how they play in the market, nations also,
without a doubt, reckon that ratings give them a positive leverage in terms of
raising cash. To turn around and understate the effectiveness or judgement of
this rating agency of repute is simply put: stupid. The manner with which the
euro zone and its leaders have gone about solving the issues of the zones is
careless, uninspiring and garish.
The fact is that, rating by which
ever institution raises questions. Questions that create caution in the market by
investors and also in how government develop strategies to raise funds. If
nothing is done to boost investor confidence, rating will continue to fall,
leading to worse situation than we all are currently facing at the moment. The
worry of the euro zone, ECB and the officials of the EFSF should be Greece.
This nation is far more worrisome than the downgrades. Ignoring the poor,
negative signs that this country is showing will definitely bring the union and
the euro crashing down faster than expected. The effects on the global economy
are of greater concern than addressing a conference on issues about how to live
without ratings.
The Greek government has weeks to
agree to a mysterious deal with bondholders if its humongous debt will be
written-down and finalized ahead of a €14.6 Billion bond redemption on March
20. If this deal does not go through, Greece will not get €130 Billion of the
bailout funds required to repay the bonds. This will lead to a dishevelled
default! Although negotiations are still ongoing, the only reason we have experienced
this stalemate is because of the deterioration in the country’s finances since
October 31, 2011. The assumptions of this deal are, to say the least, abnormal!
Investors have been proposed to, to accept a 50% haircut in the value of their debt;
this would help bring down Greece’s debt burden down to 120% of GDP by 2020.
Evidently, this country is on the verge of a quicker collapse if the bondholders do not
agree to this odd request. Its request to push for lower coupon and longer
maturities on the new bonds to be offered to its existing investors, increasing
the net present value to up to 70% should be more worrisome to the euro zone.
Bondholders will never agree to this since it will end up triggering credit
defaults swaps to offset losses. In fact a large proportion of the bondholder, hedge
funds institutions, have clearly refused to take part in this deal. This should
be a source of concern not just to the heads of the euro zone but also to
everyone around the continent of Europe.
With these negative signs coming out
of all the meetings held to salvage this country, suggestions should be for the
euro zone leaders to put on their thinking caps and find a way to solve the
Greece mess, rather than run after rating agencies. The euro will, with a 100%
certainty, collapse, the thoughts should be for a systematic and realistic disentanglement
of this experiment. To allow it fall apart will have dire consequences on Europe
and the world at large, one that we all cannot afford to face again. No after
what we have been through!
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