This year is critical for eurozone credit ratings: S&P
In the eurozone, 2013 is critical for determining whether credit ratings downgrades will come to an end, rating agency S&P said
In a recent report, the rating agency said that if some economic and political risks do not materialize and the policies promised by European leaders are implemented without sparking social unrest, it could conclude that downgrades in the eurozone have bottomed out.
We believe that it is in the hands of policymakers and societies to prevent a further slide of sovereign creditworthiness and that 2013 will be a decisive year in that respect, the agency said.
As the year progresses, visibility of the economic, policy, and social responses to the crisis will become clearer, it added.
S&P sees 3 main risk areas for the eurozone this year: the economic response to the crisis, the policy response and the social response.
For the economic response, it will be important to see how the twin current account and budget deficits are corrected and not just the extent of the correction but also how sustainable it is in social and political terms.
The credit-fueled growth model has ended and the volume of outstanding credit to the private sector is now falling in many affected member states, S&P said.
Rebalancing the economies is a complex and slow process, often taking ample doses of political courage, it added.
The agency believes that the social and economic costs of the rebalancing would be smaller if higher policy coordination meant that the eurozones core countries, which enjoy external surpluses, were to share the adjustment with the peripheral, deficit countries rather than letting most of the burden fall on the latter.
RISK OF COMPLACENCY
The main risk in the policy response is the fact that the new developments set up to stop the crisis, such as the European Central Banks Outright Monetary Transactions (OMT) and the eurozones permanent rescue fund the European Stability Mechanism (ESM), have not yet been used.
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Complacency could lead to the fragile agreements among European policymakers unraveling if some consider that the eurozone's troubles have passed and previously agreed actions can be shelved or watered down, it said.
If nothing else, such behavior would suggest a degree of unreliability and unpredictability of eurozone economic policymaking which could have negative consequences for the relevant ratings.
The agency said it was too early to say that complacency risk had materialized but that consensus among European policy makers may be more brittle than generally appreciated.
LOW RISK OF POPULIST POLITICS
In elections, S&P said the risk of populist, anti-European forces gaining ground in Italy this year was low, as the polls do not currently signal such an outcome and that in Germany all plausible coalition governments would support the current policy approach.
However, the agency pointed out that if the crisis in the single currency area gets worse in the run-up to the German election, Angela Merkels coalition could be reluctant to promote additional measures to ease it.
On the social front, many countries are experiencing the most severe economic crises in living memory, the report said.
It predicted that unemployment in the eurozone could peak this year at 12.1% from last years 11.6% record high level but noted that the average masks considerable national and sectoral differences, with youth unemployment, for instance, exceeding 50% in Greece and Spain.
European history well illustrates how discontent and economic hardship can lead to support for populist or nationalist recipes that promise easy solutions, the S&P experts said.
In a worst case, such solutions could include repudiation of public debt, nationalization, or an outright unilateral exit from the eurozone.