‘External realities caused the cut in Malta’s ratings’

Rating agency Standard and Poor’s downgrade of Malta’s credit rating was caused by external realities and had little to do with domestic economic factors, Finance Minister Tonio Fenech said yesterday.

“A look at Standard and Poor’s assessment makes it clear that Malta was downgraded due to external realities, not because it was somehow lacking domestically,” Mr Fenech said.

In light of the downgrade, the minister said last week’s government decision to cut public sector expenditure by some €40 million wasfurther vindicated.

“We need to ensure that the country has enough breathing room to protect jobs and maintain economic stability should the crisis grow any further.”

Economic prudence and vigilance meant that the government could not rule out further budgetary measures if matters deteriorated, he added, but insisted “we are not in panic mode”.

Nine eurozone nations were downgraded by Standard and Poor’s last Friday with the US-based ratings agency giving every eurozone country bar two a negative outlook. The downgrades leave Germany as the only major eurozone economy with a top-notch AAA rating.

A negative outlook means that a country has a one-in-three chance of being further downgraded this year or the next.

The eurozone-wide downgrade was met by a political backlash across affected countries, with EU monetary affairs commissioner Olli Rehn calling the decision “inconsistent”.

Mr Fenech was more tempered in his criticism, describing the downgrade – which he said had been communicated to government onFriday afternoon – as “not that justified”.

Standard and Poor’s defended its decision, saying that eurozone members have not done enough to overcome the financial crisis. Last December’s EU summit, the agency said, had “not produced a breakthrough of sufficient size,” to overcome their fiscal woes.

Further trouble may be on the horizon, with the ratings agency hinting that the European Financial Stability Fund, European Investment Bank and a number of other supranational entities might be next in line for a rating cut.

“We are currently assessing the credit implications of today’s eurozone sovereign downgrades on those institutions and will publish our updated credit view in the coming days,”Standard and Poor’s said.

Mr Fenech was keen to reiterate Malta’s relatively strong performance throughout the 2008-2009 financial crisis. A study of EU-wide unemployment post-crisis, he noted, had found that only Luxembourg had done better at reducing unemployment since the crisis.

“But even our best efforts cannot change the fact that we are a small country easily affected by external realities,” Mr Fenech said.

European leaders say the ratings downgrade is incomprehensible.

“The Labour Party lives in another world, painting the economy as something static. In economics, things change.”

Malta’s economy, Mr Fenech noted, did not exist within a vacuum. “We are part of a European chain. If European forecasts are revised downwards, then things must be adjusted.”

Malta’s downgrade, from AA2 to AA1, came at the tail-end of a busy seven days for localeconomic analysts.

The government’s decision to trim 0.59 per cent – approximately €40 million – off public sector expenditure last week was followed some days later by the announcement that theEuropean Commission would not be pressing ahead with excessive deficit procedures against Malta.

In a statement, the Commission said it felt “very confident” Malta had taken the “right corrective measures” to keep its deficit below the three per cent threshold allowed by the EU.

Reacting to the downgrade, Labour leader Joseph Muscat said the political instability was not helping the country to deal with the financial and economic turmoil.

“The GonziPN system is not guaranteeing stability,” he told a news conference.

He said the Standard and Poor’s downgrade was a result of many issues, several relating to the eurozone.

However, this was one of the biggest challenges facing the country, so a new government must have the technical expertise to tackle it and not waste its time on internal conflict.

He was flanked by MPs Karmenu Vella and Charles Mangion as well as MEP EdwardScicluna, who will contest the next general election and has been earmarked for the position of Finance Minister.

Asked who would be appointed in Mr Fenech’s shoes if Labour were elected to power, Dr Muscat refused to say, but quipped: “I definitely won’t complain about having a limited pool of talent” – a reference to a comment made by Prime Minister Lawrence Gonzi to a former American ambassador, as reported in Wikileaks.

Dr Muscat said Mr Fenech had lost credibility, when he claimed that the recently announced Budget cuts were thanks to the government.

While the government liked to make positive comparisons with Germany regarding Malta’s economy, Dr Muscat noted that neither Germany or Estonia were downgraded.

What does it all mean?

Who was downgraded?

Nine of the eurozone’s 17 member states were downgraded by credit rating agency Standard and Poor’s. Austria, France, Malta, Slovakia and Slovenia were downgraded by one notch, while Cyprus, Italy, Portugal and Spain were downgraded by two.

Every eurozone country bar Germany and Slovakia was placed on a negative outlook, meaning they stand a 33 per cent chance of being further downgraded over the next two years.

Why the downgrades?

In its analysis, Standard and Poor’s attributed the mass downgrades to what it felt were the “insufficient” responses by policymakers to the deepening financial crisis throughout the eurozone. Furthermore, the rating agency felt that in certain countries, “external risks”, most notably refinancing costs and deteriorating funding conditions, were worse than others.

What did it have to say about Malta specifically?

The agency noted Malta has relatively strong public institutions and a relatively diversified economy. It also took note of the government’s commitment to stabilise government debt.

However, it felt the country had “relatively large contingent liabilities,” with a specialmention reserved for Enemalta, which it described as an “ailing energy utility”.

Other criticism included Malta’s “very low” female workforce participation rate and “relatively weak” competitiveness.

What does the downgrade mean?

Although Malta’s downgrade is discouraging, it does not stem from any new factors – reasons for the downgrade reflect those given by Moody’s when it downgraded Malta last year.

More alarming is the widespread downgrade of eurozone economies. France’s downgrade is of particular concern, given its size and clout.

Downgrades rattle investors and may reignite fears about the eurozone’s long-term sustainability, which member states sought to quell with last December’s summit.

There could also be a knock-on effect on the European Financial Stability Facility, the bailout fund established in the wake of Irish and Portuguese economic collapses. Malta has made a €700 million guarantee to the EFSF.

The EFSF has no capital of its own, instead providing weak economies with capital by borrowing against the credit of stronger nations. Ratings downgrades could potentially limit the amount of money the EFSF can deploy in times of crisis.

Compiled by Bertrand Borg