Thursday, March 25, 2010

The Domino Effect

Moving on from the diversion of yesterday's budget, most of the contents of which will probably not come to fruition, the Times reports that European economies are gradually being downgraded one by one.

Downgraded from AA+ to AA-
November 2009

Downgraded from A- to BBB+
December 2009

Upgraded from BB- to BB+
December 2009

Downgraded from AA to AA-
March 2010

This "death by a thousand cuts" is, unsurprisingly, negatively impacting the Euro which fell to a ten month low against the dollar yesterday.

Downgrades make it increasingly difficult for downgraded countries to borrow from the bond markets, without increasing the rates they pay lenders (thus increasing their fiscal woes).

There is of course the possibility of an EU bailout for countries facing ruin. However, that prospect (for Greece anyway) looks rather unlikely given that Chancellor Merkel has called Greece's bluff and suggested that it should go to the IMF (something that Greece has been bluffing it will do).

The economic solution that the EU needs to face, namely expelling Greece, may appear politically unpalatable. However, it is the only solution that will stop the infection spreading.

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