Europe’s stock markets mostly rode out Standard & Poor’s downgrade of several eurozone players when they reopened stable yesterday, but the single currency itself remained under pressure.
Meanwhile, in a sign of trouble to come, European banks stowed record sums in the ECB for safe keeping and a top IMF official warned the eurozone faces a “downward spiral” if it fails to get its governance in order.
France’s President Nicolas Sarkozy received a boost when Moody’s declined to match rival agency S&P in stripping Paris of its triple-A credit rating headed for crisis talks in Spain with clouds gathering.
And Paris was further buoyed when it successfully sold €8.59 billion in short-term bonds paying a lower rate of interest than at a previous similar auction despite the loss of its top-line rating.
“An investment is rarely risk free, which is why it is often profitable. But a risk free investment does exist; that’s an investment in the sovereign wealth of our country,” said French finance minister Francois Baroin.
Eurozone banks, however, took a more gloomy view of the situation.
They put €493.3 billion on 24-hours deposit with the European Central Bank overnight Sunday, topping a record set on Friday of €489 billion and highlighting fears of a credit crunch.
Meanwhile, IMF First Deputy Managing Director David Lipton warned Asian finance and banking chiefs meeting in Hong Kong of trouble ahead. “Europe could be swept into a downward spiral of collapsing confidence, stagnant growth, and fewer jobs,” he said. “In today’s interconnected global economy, no country and no region would be immune from that catastrophe.”
European leaders are due to meet on January 30 to agree a new fiscal pact to coordinate deficit reduction programmes and attempt to reassure the bond markets that they are on top of the sovereign debt crisis.
But Friday’s S&P downgrade of nine European economies and stalled talks between private lenders and debt-wracked Greece have raised fears that the markets will not be content to wait until governments provide answers.
The agency’s decision “points to inadequate governance within the eurozone as a risk factor,” Italy’s Prime Minister Mario Monti told journalists after meeting the European Union’s President Herman Van Rompuy.
Greece promised to resolve its disagreements with creditor banks to allow for an orderly “haircut” on its debt, rather than running the risk of a “hard default” that would surely trigger market panic.
“The discussions which are ongoing have I think helped us to reach a point, which is close to an agreement, but some further reflection is necessary on how to put all the elements together,” Prime Minister Lucas Papademos told CNBC.
Mr Sarkozy, who saw France stripped of its top AAA credit rating, was in Spain to receive an ward from King Juan Carlos in Madrid before holding a working meeting with Prime Minister Mariano Rajoy.