As markets nervously awaited the results of the stress tests on European banks due as MoneyWeek went to press, there was more news from Europe to keep them jittery. Credit ratings agency Moody’s downgraded Ireland: its public debt continues to pile up and its growth rate is set to remain sub-par for years.
On Sunday, the EU and the IMF ended talks with the Hungarian government over how to control the country’s budget deficit. One minister said that “further austerity was out of the question”. Hungary will now no longer have access to the remainder of a $20bn credit facility previously agreed with the two organisations in 2008.
What the commentators said
This stand-off is “a chilly reminder that sovereign debt crises do not end with a rescue package and a click of the fingers”, said Ambrose Evans-Pritchard in The Daily Telegraph. There is a continual threat of political turmoil throwing countries off course as austerity grinds on. Pervasive discontent has spread through Hungary since cutbacks were first imposed four years ago. The Latvian prime minister’s approval rating is at 7%. And the key issue for Greece is whether the government “can carry the Greek people” with it when the next round of cuts begins in 2011.
Hungary, meanwhile, may not need the remaining €5.5bn in the credit line immediately, said Lex in the FT, but the government is likely to “blink” before too long. Higher borrowing costs as a result of this tiff and downward pressure on the forint (which squeezes the economy because 60% of bank lending is in foreign currencies) undermines the growth outlook. What’s more, with unusually high overall public and external debt, it would be “the first target” in another bout of global risk aversion, said Tim Ash of RBS.
As for the stress tests, uncertainty and scepticism are rife. Little is known about the exact criteria being used; nor is it clear what, if any, measures will be proposed to prop up ailing banks. Last year’s US stress tests restored confidence in the financial sector, noted Liz Alderman in The New York Times. But it looks as though Europe’s versions could struggle to match that feat.