Europe has itself to blame, says PM

PRIME Minister Julia Gillard says the credit downgrade of European nations was the result of avoiding hard decisions.

By InvestSMART · 16 Jan 2012

By InvestSMART ·
16 Jan 2012

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PRIME Minister Julia Gillard says the credit downgrade of European nations was the result of avoiding hard decisions.

Speaking after Standard & Poor's stripped France and Austria of their prized triple-A ratings and downgraded Italy, Portugal, Spain, Cyprus, Malta, the Slovak Republic and Slovenia, Ms Gillard said the moves were the "price to be paid by national governments who have put off tough reforms".

"For too many years, European governments have deferred the nation-building productivity-enhancing reforms which Australia has made the foundation of our dynamic and resilient economy," she said.

Their leaders should "swiftly undertake structural reforms to boost their economic potential and lift growth".

But leading Australian economist Shane Oliver, of the AMP, warned that swift action to repair European budget deficits could cut growth further.

"Fiscal austerity leads to economic deterioration and budget deficits blown out. It has the effect of worsening the economic outlook," he told The Age.

Ms Gillard called on the leaders to "implement credible medium-term plans to put their budgets on a sustainable footing, because taxpayers rightly expect governments to manage their money prudently and global financial markets demand responsible fiscal management".

Shadow treasurer Joe Hockey lambasted the Prime Minister for the intervention saying it was "a little rich" for the Prime Minister to lecture Europe.

"She and her treasurer have presided over a massive blowout in Australia's debt and turned strong budget surpluses into record deficits. Voters won't forget pink batts, cash for clunkers, Building the Education Revolution and $900 cheques to dead people," he said.

The downgrades leave Germany the only major economy using the euro to maintain a triple-A rating. Portugal and Cyprus have had their ratings cut to so-called junk status.

The decision endangers the triple-A rating used by the European Financial Stability Facility to borrow cheaply and lend to ailing euro zone members. France is the facility's second-biggest guarantor.

The Australian dollar is close to an all-time high against the euro, buying 81.41 euro cents.

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Frequently Asked Questions about this Article…

What was the recent European credit downgrade by Standard & Poor's and which countries were affected?

Standard & Poor's stripped France and Austria of their prized triple-A ratings and downgraded Italy, Portugal, Spain, Cyprus, Malta, the Slovak Republic and Slovenia, according to the article.

Why did Prime Minister Julia Gillard say the European credit downgrades happened?

Julia Gillard said the downgrades were the result of European governments avoiding hard decisions and deferring productivity-enhancing structural reforms. She said the ratings moves were the “price to be paid by national governments who have put off tough reforms” and urged leaders to implement credible medium-term plans to put budgets on a sustainable footing.

How did economist Shane Oliver of AMP say fiscal austerity could affect eurozone growth?

Shane Oliver warned that swift action to repair European budget deficits—fiscal austerity—could cut growth further. He said “fiscal austerity leads to economic deterioration and budget deficits blown out” and that it can worsen the economic outlook.

What political reaction in Australia followed Gillard’s comments on the European downgrades?

Shadow treasurer Joe Hockey criticised Julia Gillard’s intervention as “a little rich,” saying her government had presided over a large increase in Australia’s debt and turned surpluses into record deficits. He cited domestic examples such as pink batts, cash for clunkers, the Building the Education Revolution and $900 cheques to dead people.

Which eurozone country remained with a triple-A rating after these downgrades?

After the downgrades, Germany remained the only major economy using the euro to maintain a triple-A rating.

What risk do the downgrades pose to the European Financial Stability Facility (EFSF)?

The decision endangers the triple-A rating the EFSF uses to borrow cheaply and then lend to ailing eurozone members. The article notes that France is the facility’s second-biggest guarantor, so sovereign downgrades have implications for the EFSF’s credit standing.

How did the credit downgrades influence the Australian dollar against the euro?

The article reports the Australian dollar was close to an all-time high against the euro following the downgrades, buying 81.41 euro cents.

What are the key takeaways for everyday investors from these eurozone downgrades?

The article highlights a few investor-relevant points: downgrades reflect risks from delayed structural reforms in Europe; attempts to rapidly repair budgets can weigh on growth (per AMP’s Shane Oliver); sovereign rating moves can threaten the borrowing capacity of rescue facilities like the EFSF; and currency moves followed, with the Australian dollar trading near record strength versus the euro. These are factors investors may want to monitor when assessing eurozone exposure and currency risk.