Wednesday

27th Jul 2016

Eurozone crisis worsens as Germany warned on top rating

  • Spanish airport: The country's borrowing costs have soared to record highs (Photo: Luc Mercelis)

The euro-crisis is accelerating as Spanish borrowing costs continue rising and Germany, Netherlands and Luxembourg on Monday (23 July) were warned they may lose their triple A rating due to 'rising uncertainty.'

Moody's, one of the big three credit ratings agencies, said risks that Greece may quit the eurozone and an "increased likelihood" that Spain and Italy would need more financial assistance weighs down on the three top-rated countries, as Germany is the main contributor to the bailout pot.

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Moody's kept a triple A rating for France and Austria but warned that this may change by the end of September. Both countries were downgraded earlier this year by Standard&Poor's, another major agency.

Markets fell across the world on Monday and investors dumped European assets, except for German government bonds, which are still considered a safe haven at record low interest rates of little over one percent. Spanish borrowing costs, however, rose above 7.5 percent - both for 10-year as well as 5-year bonds - a level which is considered bailout territory.

"By means of its solid economic and financial policy, Germany will retain its 'safe haven' status and continue to play its role as the anchor in the euro zone responsibly," the German finance ministry said in a statement.

Despite the downgrade warning, "Germany continues to find itself in a very solid economic and financial situation," it added.

The only triple-A rated country not to face a downgrade in the following months is Finland, which has demanded collateral on bailouts in Spain and Greece, runs a fiscally conservative budget and has limited trade links with the rest of the eurozone.

In a bid to stem the markets' descent, Italy and Spain on Monday reinstated a ban on so-called short selling - bets on falling stocks.

The government in Madrid - despite a freshly agreed eurozone bailout of up to €100 billion - faces further funding problems as one of its regions, Valencia, officially asked for a bailout to pay off its debt. El Pais newspaper reports five more regions may soon do the same, as they have no means of paying back their €15 billion of debt redemption due later this year.

Spanish economy minister Luis de Guindos is expected in Berlin on Tuesday for talks with his German counterpart, Wolfgang Schauble. De Guindos has so far insisted that his country will not seek a full-blown bailout. But its unsustainable borrowing costs and the bankruptcy facing its regions make investors believe the opposite.

"The rise in the 10-year yield well beyond 7 percent carries a very distinct reminder of events in Greece in April 2010, Ireland in October 2010 and Portugal in February 2011," the Bank of New York Mellon said in a note to investors. "In each case, a decisive move beyond 7 percent signalled the start of a collapse in investor confidence that, in each case, led to a bailout within weeks," it added.

The only way to avoid that would be if the European Central Bank intervened - as it did last year - in buying up Spanish bonds. Spanish officials in recent weeks have called on the ECB to step in, but so far this has not happened.

According to data published on its website, the ECB has not bought any sovereign bonds since February. The governing council of the ECB is meeting next week in Frankfurt when a decision on bond purchases could be taken.

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