Watch Athens more than Standard & Poor’s. The biggest source of immediate trouble for the euro zone could be the one country the ratings agency didn’t examine in a review that led to the downgrade of France and eight other states. Even if the short-term shoals can be navigated, the rest of the zone won’t find it easy to get by Greece.
The points S&P made when stripping France and Austria of their triple-A ratings and knocking two notches off the ratings of the likes of Italy and Spain were valid. It is true, for example, that policymakers can’t agree what to do to solve the euro crisis and that “fiscal austerity alone risks becoming self-defeating.” But these points, as well as the prospect of S&P downgrades, were already in the market.
Meanwhile, what Mario Draghi said last week about “tentative signs of stabilization” is true. The European Central Bank (ECB), over which Draghi presides, is itself partly responsible for that stabilization by virtue of providing 489 billion euros of three-year money to banks just before Christmas. Mario Monti’s promising beginning as Italy’s prime minister is the other main factor. The Super Mario Brothers have got off to a good start.
In Greece, though, matters go from bad to worse. The economy, which shrank about 6 percent last year, is now forecast to shrink an additional 4 percent or so by Credit Suisse and Goldman Sachs –- even worse than the International Monetary Fund forecast in November. What this means is that the numbers behind the latest bailout plan-cum-debt restructuring are probably out of date.
The immediate problem is corralling private-sector bondholders to swap 206 billion euros of bonds for new paper nominally worth half that value. There are actually two problems: persuading the negotiators for the bondholders to accept a deal and then getting virtually all the bondholders themselves to agree.