Eurozone's Friday the 13th

Demonstrators from the Parti de Gauche protest the rumoured downgrade of France's AAA rating Protesting against the prospect of France losing its AAA credit rating

Even by the recent standards of the eurozone, Friday 13 January has been a messy day.

What may turn out to be most important is that the Greek government moved nearer to a formal default on what it owes, as talks collapsed between the Greek premier, Lucas Papademos, and representatives of banks on a voluntary 50% reduction on what they are repaid.

If there were such a default, that could trigger big losses for banks, eurozone governments and the European Central Bank. It would be the first default by a developed nation in living memory - and would increase the perceived risks of lending to other financially stretched eurozone governments.

So although investors have known for many months that there is a genuine risk of Greece unilaterally reneging on what it owes, there would be a ratcheting up of the currency union's financial crisis, were that to happen.

The second bit of bad news is that the cost for banks of trading in Italian government bonds rose, because an organisation that clears and settles such transactions, LCH.Clearnet, insisted they put up bigger deposits for such deals - which may have the adverse effect of making it more expensive for Italy to borrow.

Finally the event with the most symbolic impact - though not necessarily the greatest economic impact - was the leak that France and Austria are to lose their coveted AAA credit ratings, and other governments, such as Spain, will have their already lower ratings downgraded.

It has been widely expected for some weeks that Standard & Poors would strip France of its AAA, the badge that implies that lending to the French state carries almost no risk.

That said, prominent French bankers warn that as and when that happens, it will become a bit more expensive for French banks to borrow - because all banks are viewed by their creditors as only as strong as the public sector that would stand behind them in a crisis.

For Austria the loss of the AAA will be a bigger shock - although the financial woes of Hungary have conspicuously weakened the finances of Austrian banks that have big Hungarian loans.

But what would really matter about Austria and France losing their AAA is that the downgrade would almost inevitably lead to the loss of the linked AAA held by the eurozone's bailout fund, the European Financial Stability Facility.

And if the bailout fund lost its AAA, it would become much harder and more expensive for the eurozone to raise the funds perceived to be needed to provide possible support to the likes of Italy and Spain, should they be boycotted by investors.

What does it all mean? Well I've talked widely to bankers, regulators and officials today. And frankly they all state what you may see as the bloomin' obvious - which is that the eurozone is a long, long way from being mended.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 21.

    "What does it all mean?..."

    Live and let die...

    It's only rock and roll but I like it!!! :-)

  • rate this

    Comment number 20.

    S&P is one of three agencies - are they more influential than the others? Why does anyone pay them any attention, anyway?

  • rate this

    Comment number 19.

    I am hoping that Greece defaults, if that happens, the possibility of a Euro collapse increases, if the Euro fails then the European Union will be dead, if the European Union dies then all countries will get back control of there affairs themselves, re devalue there own currency to make their econmys more competetive, increase/decrease interest rates to suit, GREECE, DEAFULT AND KILL EU MONSTER

  • rate this

    Comment number 18.

    What is it?... four years since S&P swore that the derivative rubbish coming out of the US was AAA, and an eager and greedy audience sucked it up... and here we are!

    So, with desultory timing, they embark on their latest mission to educate the ignorant about that which they already know.

    "Hello!... S&P... welcome to the party! What kept you?

    (They really should employ a Peston Blog reader.)

  • rate this

    Comment number 17.

    Just print some more money, put your fingers in your ears and sing.

  • rate this

    Comment number 16.

    After watching the continual French sniping at our economy and credit rating over the last few weeks - the is the best news of the year for me!

    Sarkozy needs to go.

  • rate this

    Comment number 15.

    Anything that mover this bizarre situation along (either way) as got to be good!
    (I was going to say crock of shi te but it would have been scrubbed!)

  • rate this

    Comment number 14.

    When EC politicians play silly politics for two years rather than dedicate themselves to the monetary problems of the EuroZone can we really expect anything but a chaos in the pending file?

    We should interpret todays S&P downgrade as a notice of intention that if Merkozy fail again after the 30January summit, all hell will let loose in Europe.

  • rate this

    Comment number 13.

    Anti-Euro propagandists? Does the fact that millions across Europe are facing misery on a scale not seen for generation mean nothing to you? Sorry I forgot, everything is expendable except the beloved dream of a United Europe. This dream is fast becoming a nightmare for everyone except the cloud cuckoo land dwellers who have systematically hood winked the populous.

  • rate this

    Comment number 12.

    The loss of AAA ratings? For the US no effect, for France a teacup storm.

    So why are Clegg and Cameron destroying the economy preserving ours?

  • rate this

    Comment number 11.

    This could be the beginning of the end ... or then end of the beginning. It really depends on if EZ leaders have the spine and the will to take on their own banks and start a restructuring of the European financial system (sovereign bailouts are just an indirect way of saving big European banks from their own mistakes), including releasing from the Euro those nations that are not prepared for it.

  • rate this

    Comment number 10.

    So the banks will take a loss, eh? It happens to all businesses from time to time. Perhaps their business model needs reviewing?

    ...Or we could just give them all our money and move into cardboard boxes instead.

    Hmmm. I wonder what will happen.

  • rate this

    Comment number 9.

    This would be funny if it wasn't true.

    Only this morning a mate was saying how things for the Euro were looking up (i.e. good bond auctions earlier in week) and maybe the great escape had materialised!

    "Pah!" I said. "All smoke and mirrors, it'll be back to sorrow and woe in 2-3 weeks times".

    Well I was wrong, the bliss only lasted a few hours!

  • rate this

    Comment number 8.

    They( ? ) are just staving off the big day when, those of us who love England will rejoice. They should have accepted their demise gracefully, but will now go down drowning in their own apathy. I trust the British people will not allow themselves to be hoodwinked by political fraudsters again..

  • rate this

    Comment number 7.

    This is a Greek Tragedy with parts in it for complacent, conniving governments; lazy and greedy bankers growing fat on the lunches which form their 'workload'; wealthy financiers willing to destroy countries and their people for a fast buck. All of those will be okay. And some 'bit parts' for the ill, the weak, the vulnerable, the elderly, the poor ... all of whom will suffer the Tragedy.

  • rate this

    Comment number 6.

    Without integrity of both oversight and process there can be no rescue of the Euro zone. Hitting the poorest hardest to protect the bloated rump just illustrates how little integrity there is in the current austerity sweeping Europe. Not a formula for success. Rob the poor and ordinary to give to the wealthy and powerful. Sound familiar across the ages?

  • rate this

    Comment number 5.

    Managed break-up, end the non-sensical language that we heard from Draghi yesterday and stop the idea that we can borrow money from ourselves to cover the interest on debts that we owe ourselves!!!!!

    The EU is either going to erupt in revolution or it is going to destroy itself.

    Default is the least painful option, get on with it.

  • rate this

    Comment number 4.

    Here we go again. Christmas break is over and the army of anti-Euro propagandists (all from outside the eurozone of course) is back at work. A bad day for the Euro, you say. So what happened? Standard and Poor's has downgraded someone again. This is nothing real, just part of the efforts of said army. So when will your next big repeat warning of the imminent Euro apocalypse come through?

  • rate this

    Comment number 3.

    I do enjoy a good deficit slasher movie.

  • rate this

    Comment number 2.

    It's like watching Unstoppable, except we don't have Denzel Washington and Chris Pine in the cab....


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