UK and Germany Have Been Downgraded

Fitch Ratings has downgraded the United Kingdom from ‘AAA’to ‘AA+’. The outlook is predicted to be stable. The rating action reflects a weaker economic and fiscal outlook and possibility of higher UK budget deficits and government debt. The Egan-Jones rating agency, which usually predicts things more accurately than other official agencies, has downgraded Germany from A+ to A with a negative outlook. The agency stated that, although Germany’s credit metrics are respectable, the country has exposure to its banks and the weaker EU members. Germany’s debt to GDP was 80.6% as of 2011. However, increasing Germany’s debt by EUR 500B raises the adjusted debt to GDP to 100%. Germany’s parliament has voted by the vast majority on Thursday to grant Cyprus a 10 billion euro bailout. Minister Schaeuble stated that if the parliament doesn´t vote for the aid, the contagion will spread across the 17-nation single currency bloc; the very same person who stated just a few months ago that Cyprus did represent a systematic threat to the Eurozone. In the meantime the Cypriot parliament has approved a hike in the country’s corporate tax rate from 10% to 12.5%.

European Central Bank Governing Council member Mr. Weidmann said the bank would only cut interest rates if economic data worsened. He stated that the ECB considers the rates currently appropriate and in accordance with the bank´s assessment of economic developments, price stability and our monetary analysis. Given the fact that all rates are all time record low, it means that economic development within the euro-block is not very well and once they cut them, it will only mean that the situation has worsened even more.

As we predicted the austerity measures are not popular among any politicians, and they are starting to reconsider their policies. The euro zone will probably slow its budgetary belt-tightening to help reinvigorate economic growth. It means that they are planning to borrow more money to stipulate economy because their tax revenues are out of touch with reality to stipulate anything. And why not? The ECB will intervene once the rates of bonds increase and the bill is paid by someone else – taxpayers by higher taxes or inflation. The austerity is not popular in France as well. French president, Hollande, is facing an anti-austerity revolt from his own three ministers as he tries to push tax rises and austerity measures to meet EU deficit targets. His ministers have warned him that cuts have become self-defeating and are driving the country into a recessionary spiral. France is going to establish a currency swap with China to make Paris a major offshore yuan trading center in Europe and to compete with London as the financial center of Europe. The planned swap line would be one of the latest in a string of bilateral currency agreements that China has signed in the past three years to promote use of the yuan in trade and investment.

But China is starting to have some other problems rather than being a new reserve currency. China has serious problems with the public debt and housing bubble. A senior Chinese auditor has warned last week that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash. Auditors have warned that the situation in the local government environment is so bad that the only possibility to pay older debts is to issue a new one which is unsustainable. The housing bubble doesn´t add to the better outlook on the situation. The bubble is in the office property and residential homes across the country according to the head of China’s Commercial Real Estate Association.

Japan wants inflation. The measures of the Bank of Japan to boost inflation in the country are certainly getting it. Mr. Kuroda’s plan was to devalue the yen to boost exports and restart the economy growth. The only problem is that corporate input costs are raising faster. One company which could no longer tolerate soaring energy and food costs is McDonalds. The company announced that the price of its products will increase by 20%. So inflation is starting. We will see outcomes.

One reason behind the stock markets’ optimism is a better outlook on the U.S. economy. The unemployment is allegedly going down and markets expect some 2-3 % GDP growth. The “strong” performance of the U.S. economy is very well-described by the food stamps statistics. They hit a new record: 23,087,886 US households on food stamps in January; it is a really true economy recovery, isn´t it.

Matus Posvanc