Europe's Crisis

In November 2011, European leaders were pressing some countries to cede partial budget control to the Central European Authorities in order to deal with the debt crisis. On December 9 all 27 EU countries came together and 23 of them (the UK did not) agreed on a fiscal pact to rescue the Euro; it included greater discipline on national budgets. On January 16, 2012 Standard and Poor’s (S&P) downgraded France stripping it of its top AAA rating, Italy, Spain, Cyprus and Portugal were cut two notches, with the latter two given "junk" ratings, Austria, Slovakia, Slovenia and Malta were the other countries downgraded and the European stock market fell.

On February 7 the Romanian government collapsed after weeks of protests over budget cuts and European leaders put pressure on Greek politicians to comply with the bailout conditions. On February 9 the Greek debt talks broke down and more than 100,000 Greeks protest the austerity measures to cut their retirement and wages by 22%; at least 50 buildings were set on fire; police used tear gas against rioters and looters; nearly 200 were injured; despite opposition on February 13 the plan was passed; it’s said sales tax is up 23%, 50% of 25 year olds and younger are unemployed and suicides are up 40% over last year; stocks in Europe went up. Greek politicians took a hard stand to do their part to save the world economy. I feel bad for the Greeks but I’m reminded that some American auto workers took a 40% cut in pay and cuts in benefits for 4 years before they were rewarded.

On February 14 Moody’s Analytics downgraded Austria (affirmed short-term debt rating of Prime-1) and France from Aaa to negative, Italy and Malta were downgraded from A2 to A3, Portugal from Ba2 to Ba3, Slovakia and Slovenia from A1 to A2, Spain from A1 to A3 and the United Kingdom’s outlook on its Aaa rating was changed to negative. Moody’s kept the ratings of the following European sovereigns Denmark (Aaa), Finland (Aaa), Germany (Aaa), Luxembourg (Aaa), Netherlands (Aaa), Sweden (Aaa), Belgium (Aa3), Estonia (A1), Ireland (Ba1) and Greece (Ca). In November 2011 Moody’s issued Cyprus a Baa3 rating but their review is ongoing. In downgrading Italy Moody’s said peers at the top of the single-A category (like the Czech Republic and South Korea) as well as those in the middle of the category (like Poland) do not face Italy's high debt and structural growth challenges. February 15 articles in US News & World Report and the Chicago Tribune quoted Anthony Valeri, a fixed income strategist at LPL Financial based in San Diego, California as saying "The market expected this, and is not treating this as anything new per se . . . A successful Italian bond auction is an indication the market is largely ignoring this news." And on February 17 we heard the European market rose. The Chicago Tribune article also said - Credit ratings agencies serve an important purpose in the financial world, providing a shorthand estimate of the creditworthiness of debt issuers like countries and corporations. A rating provides an independent estimate of risk to investors and issuers alike. A downgrade for countries that look risk-free (France) can be a major blow to outside investment. However, recent experience suggests that the ratings agencies are following-rather than dictating-how investors view Europe's sovereign debt risk. Markets were calm after S&P's January and Moody’s February European downgrades and S&P's downgrade of U.S. credit last year did not push US borrowing costs upward. Government debt downgrades can hurt domestic banks that hold large quantities of government bonds; for example, following an S&P downgrade of Italian and Spanish debt the agency downgraded 34 of Italy's financial institutions as well as 15 Spanish banks.

I read many websites by economists on the European crisis, one gave reasons for China to help (2 reasons would hurt the US economy), one gave reasons for the US (our position is weak as S&P on 11/30/11 lowered the rating for the biggest banks and on 2/18/12 only 7 of 10 top economists said we’re on our way up) and one gave ways for Europe to bail itself out – one comment on this resolution was from -  @Rob saying ... Issuing bonds, printing money, and giving the EU more authority to tell member states how to handle their finances are all the same thing - I don't think you're going to pass your economics or reading comprehension tests; Rob seems sure that his view is correct. All of the solutions were provided by economic experts; this only proves there are no professionals skilled at handling the situation). The one thing all the websites had in common was that if Europe falls it will cause major ripples in China’s, the US’s as well as other economies. On February 20 the European leaders approved a $172 billion bailout for Greece so they would avoid bankruptcy.

I’m not an economist but I do know this–raising the borrowing rate for already troubled countries only makes their plight worse. In November China cut interest rates which made it easier for Chinese companies and workers to borrow money and Asian and US stocks went up. I heard Europe has the same problems we do with tax evasion and an unfair taxing system which means they too have problems with Swiss banks assisting high-profile tax evaders. I don’t believe there is one answer to the crisis; a combination of all 3 proposals is necessary for an equitable solution and I hope the US steps up to help. Lessons I hope Americans and Europeans have learned – freedoms and safety cost money, politicians should not be getting more than the people; government should be streamlined before taking from the people, businesses and rich people should pay their fair share, corruption is everywhere, in being civil we are too easy on criminals and greed even at the lowest level will be our downfall.