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European Leaders Really Don’t Get It!

European leaders dawdle as if they have all the time in the world to solve their credit crisis. Their minds are so fixed around power and control that they do not understand they are not the ones in control of when the euro crisis will spin out of control:

European leaders on Saturday called “incomprehensible” Standard and Poor’s credit rating downgrades of nine debt-laden EU countries, including stripping France and Austria of their top triple-A rating. (Economic Times)

Everyone in the world knows that European countries are in extensive and complex financial meltdown, so there are ONLY two things here that are incomprehensible here: 1) that it has taken this long for credit-rating agencies like Standard & Poor’s to reflect those known concerns with a mild downtick in their ratings; 2) that Europe’s leaders continue to bicker over resolutions as if time is on their side, walking away from summit after summit without a solution in place.

The fact that they find this credit downgrade “incomprehensible” after so many warnings only reveals how incapable of comprehension they are. They have spent so much time at the top of the food chain that they feel the world revolves around their timing needs. That is classic denial — thinking the world is the way you need it to be. They are obviously not the quickest rats in the maze, and their current tirade against S&P makes it appear they would rather stand around and carp about others reporting the truth than resolve the credit issues being reported.

Ratings agency Standard & Poor’s is defending its decision to downgrade nine European countries, reiterating that Europe’s leaders aren’t doing enough to solve their debt crisis…. S&P analyst Moritz Kraemer said in a conference call Saturday that government measures aren’t sufficient to restore confidence and that austerity packages may prompt a backlash.

Agency spokesman Martin Winn … said, “the track record of our sovereign ratings as indicators of default risk worldwide is very strong.” (USA Today)

Here’s proof that Europe’s leaders don’t get it when it comes to how a credit crisis unrolls:

The European Union’s internal market commissioner Michel Barnier said Saturday he was “surprised” by the timing of Standard and Poor’s downgrades just when the bloc is toughening budget rules. (EU Observer)

Surprised by the timing? Everyone in the world has seen this coming since the end of summer.  He’s standing in a railroad track, the train is bearing down on him at 300 miles per hour, everyone has been yelling at him for some time to get off the track, and he’s surprised that someone on the train blew the whistle right when he was talking about getting off the track? That’s exactly the problem with Europe’s leaders: all they have accomplished in months is TALK, and they think that’s accomplishment!

“I am surprised at the moment chosen by the Standard and Poor’s agency, and fundamentally of its evaluation which does not take into account recent progress,” Michel Barnier said in a statement sent to AFP.

EU governments and institutions are working to reinforce budget discipline, Barnier said. (EU Observer)

Progress? Europe has had summit after summit and still has not even resolved problem one — Greece’s credit crisis — much less every other European nation’s credit crisis. The Greek summit broke up again this past week without any agreement in place, and that was before S&P announced its credit downgrade. How can you be surprised by an announcement like S&P’s after yet another dismal postponement in resolving the Greek problem following months of negotiation by the world’s top leaders?

Fitch, one of the big-three credit-rating agencies, announced it, too, is considering downgrades of European nations by the end of January.  Will the EU’s market commissioner be surprised by those when they happen, too? He seems too easily surprised by things he’s been warned about.

Europe is out of time to end the euro crisis

The core of Merkel’s solution will require amendment of the European Union’s constitution, which will take months to happen and may easily fail completely. How much more likely to fail or get delayed is a constitutional amendment that has to be ratified by European nations than an agreement with creditors over Greece’s debt?

Recently some European leaders said they hoped to have a solution to part of the problem in place by January 2013. That kind of thinking should have scared everyone immediately. This whole crisis could turn into a train wreck in weeks, but the leaders think they have a year to get parts of it worked out? Once the European train wreck starts, cars can start flying off the rails quickly and in unstoppable fashion. All that has to happen for the problem to become unmanageable just did, and S&P has warned of it for some time while European leaders continued to argue as if they could ignore the risk of a credit downgrade:

The looming debt rating downgrade of France and Austria by Standard and Poor’s on Friday [now no longer looming, but a fact] will not only push up their borrowing costs, it also threatens to hurt their economies, analysts said.

One immediate consequence of the ratings downgrade will be that the governments concerned have to pay more to borrow money….

Higher interest rates drive up the cost of debt, adding to the debt burden itself and reducing governments’ room for manoeuvre.

“That could generate self-fulfilling phenomena as in the case of Italy,” which was forced to push through austerity plans in the wake of the downgrade of its debt by both S&P and Moody’s in the autumn….

Banks could be hit in a knock-on effect because of their use of sovereign debt as guarantees to borrow funds from the markets.

And that, in turn, could harm the real economy, because banks will try to pass on the higher costs via higher interest rates to businesses and households….

The debt downgrade could throw a further spanner in the works of efforts to resolve the debt crisis, because the triple-AAA rating of eurozone’s EFSF bailout fund depends on top-notch ratings of the member states that finance it.

For this very reason, Standard & Poor’s has also threatened to downgrade EFSF’s own ratings. (The Economic Times)

S&P’s chief economist for Europe, Jean-Michel Six, said that the above cascade due to a ratings downgrade may not happen, given that a similar downgrade of the United State’s credit rating didn’t cause the U.S. to pay higher interest.

How do such blind economists keep their jobs? Certainly recognizing the obvious ought to be a minimum qualification for their profession: The primary (and maybe only) reason the U.S. did not have to start paying higher interest when S&P downgraded its credit rating was that Europe immediately stepped in the way by accident! Europe’s problems loomed suddenly larger than the U.S. at the end of summer, so investors fled from European bonds to the U.S. as a safe haven, in spite of the U.S. credit-rating downgrade.

Europe cannot become a safe haven to investors who are fleeing Europe! So, Europe isn’t going to have any lucky safety net like the U.S. had at just the right moment. There is no windfall that is going to save them. In fact, the downgrades on European bonds will only make the U.S. all the more of a safe haven for the time being, and the threat of downgrades by all other agencies is already promised if Europe doesn’t find a solution quickly.

So, obviously S&P’s own economists aren’t the sharpest pins in the cushion either. That’s why S&P missed predicting the entire Great Recession and saw no problem with the credit derivatives that caused it.

Many investors may have already priced the downgrade into the market because any smart investor already knew Europe’s condition is scarier than even S&P now rates it, so that could diminish the immediate impact of Standard & Poor’s downgrade. Many major institutions, however, have legal or policy restraints that require they invest only in AAA bonds, so they will have to move their investments out of these downgraded national bond. That means the credit-rating downgrade inevitably makes Europe’s problems one step worse.

No one is going to give Europe endless time to solve its problems. The above cascade of events could begin at any moment. It may have already just begun. S&P just knocked a crack in the dike (as it should have even earlier than this). Fitch will follow soon. Yet, Europe fiddles with proposals it says should be in place within a year or so. No wonder Rome burned to the ground.

 

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