Eurozone growth stagnates as markets slide on downgrade threat

By , and Emma Rowley
The Telegraph

Markets slide after S&P threatens 15 out of 17 eurozone nations with credit rating downgrades, a move which may undermine French and German plans for treaty reform.


10.50 Reaction starting to trickle in from economists on those latest euro growth figures. “Recession Looms,” is the verdict from the indefatigable Howard Archer at IHS Global Insight.

Quote We expect Eurozone recession to occur in late-2011 and the first half of 2012 in the face of the ongoing Eurozone sovereign debt crisis, tight credit conditions resulting from persistent funding problems for banks, tight fiscal policy, the pressures facing consumers (high and rising unemployment, low wage growth and current elevated inflation – although this will fall back as 2012 progresses) and muted global growth.

We expect the Eurozone to start growing gradually again during the second half of 2012, although much will depend on sovereign debt developments.

10.45 Louise Armitstead on the business desk has more on the eurozone rage at that S&P warning – and explains why its timing has so infuriated leaders.

 Germany is furious. S&P could have warned on eurozone sovereigns at any stage in the past few weeks but to issue its blockbuster announcement just hours after Germany and France made genuine advances has come as a hammerblow in Berlin.

Leading the online version of Handelsblatt, the German newspaper, is the headline: “S&P takes the pliers to the eurozone: politicians are foaming.” The website says there is “great resentment” and “indignation” towards S&P and the demand for the company to “face the consequences is loud”.

Jean Claude Juncker, the prime minister of Luxembourg, has been on German radio berating S&P for its “unfair” and “completely excessive” decision.

Handelsbatt adds that the S&P has hit the Dax – the “German stockmarket is again set for a tour of the cellar”, it says.

Across the border, France seems to be taking S&P’s decision on the chin. Alain Juppe, foreign minister, this morning said France needs to “try harder than others” to maintain its credit rating. He said the “threat” would be “taken seriously” but pointed out that no downgrade decision had yet been made.

10.41 Ooh la la. Bit more from France on last night’s warning from credit rating agency S&P that the country could be one of 15 eurozone nations to have its credit rating cut. The line from the French President’s Office is that S&P made the decision to issue its eurozone downgrade warning “last Tuesday”, according to Reuters.

Not yet clear where this argument is going, other than having a pop at the rating agency’s possible slowness to act.

10.27 Tweet from Fabrizio Goria, a financial journalist in Italy, is sparking a lot of comment:

Twitter @FGoria A Cleary Gottlieb lawyer to me: “We’re almost ready to advise Greece in an exit from Eurozone. We began our job over one year ago”.

10.15 More on those eurozone growth figures, which offer an illuminating snapshot of just how disparate these economies are. Germany, the biggest euro economy, actually picked up pace in the third quarter of this year despite the turmoil, with growth going from 0.3pc in the second quarter to 0.5pc. France likewise returned to growth – its economy expanded 0.4pc, after shrinking 0.1pc in the previous three months.

The table, showing the quarter-on-quarter growth rate, does not give comparable figures for all the bailout recipients, but on a year-on-year comparison, Greece saw its economy shrink 5.2pc, while Portugal saw a fall of 1.7pc.

“Data not available” for Ireland and Italy, if you’re wondering.

10.05 Brussels has just put out updated figures on the stagnating eurozone economy.

Economic growth across the euro nations was just 0.2pc in the third quarter of this year, the same low rate seen in the previous three months, Eurostat, the EU’s statistical body, confirmed in its second estimate of GDP growth.

The 27 countries in the European Union saw shared growth of 0.3pc, against 0.2pc in the previous quarter. The latest figure was a slight upward revision on an earlier figure of 0.2pc – but no one will be cracking open the bubbly over that.

09.40 The head of the Bank of France has also played down worries that France could find it harder to borrow money after Standard & Poor’s treatened a downgrade for most eurozone nations.

Christian Noyer said:

Quote The idea that… these market pressures… would have a restrictive effect on liquidity in France seems to me completely false.

09.30 Chris Adams of the Financial Times wonders if the S&P ratings warning is not all bad news for Germany ahead of Friday’s make-or-break summit. He tweets:

Twitter @ChrisAdamsMKTS Got to wonder whether the S+P warning is fortuitously timed for Germany. Should boost its negotiating position at this week’s summit…

09.00 France has given a Gallic shrug to last night’s warning from S&P that the country could be one of 15 eurozone nations to have its credit rating cut because of the continuing uncertainty in the area.

The country will not be embarking on any new austerity measures as a result, and does not expect to have a problem selling government bonds next year.

France’s foreign minister Alain Juppe said this morning:

Quote It’s a threat, it’s not a decision. Of course it must be taken seriously. We know that we have more efforts to make than others, that’s certain.

08.45 While the leaders of France and Germany want to bring in tougher sanctions for debtor nations using the euro, Ambrose Evans-Pritchard, the Telegraph‘s international business editor, points out that in the case of Ireland, the country really could not do any more to reduce its debts, yet it is still

 If Ireland is delivering on its side of the reform bargain, Europe is not — though the penal rate on the EU’s share of the €87bn rescue has been cut by 300 basis points.

There is irritation with the ECB, first for making life even harder for Europe’s broken half by tightening earlier this year, and now for refusing to act as lender of last resort as southern Europe spirals out of control.

08.20 External pressure on the eurozone arrives in the form of US Treasury Secretary Timothy Geithner today. The Telegraph’s Benedict Brogan has the details:

 US Treasury Secretary Timothy Geithner is in Europe to lobby EU leaders into a solution. His tour begins in Frankfurt , then goes through Berlin, Paris, Marseille and Milan as he meets every politician and Eurocrat possible in an impressive diplomatic offensive.

08.05 The euro also slipped this morning, after the news of a possible credit rating of eurozone countries including France and Germany by S&P.

The currency was down 0.5pc against the dollar at $1.3340, and down 0.1pc against the pound at 85.52p.

08.03 London markets are now open and trading lower:

The FTSE 100 slipped 0.5pc to 5,537 points shortly after opening.

07.50 The latest UK retail sales figures are not going to give the Chancellor a warm Christmas feeling.

The British Retail Consortium’s figures for November showsales fell by 1.6pc on a like-for-like basis, which strips out the effect of new shop openings.

Retail Editor Harry Wallop reports:

 The BRC pointed out that the food and drink sales increased, but non-food fell. The most difficult area appears to be clothing, with many retailers struggling to sell winter coats, boots and scarves when the weather was relatively mild.

07.45 Telegraph commentator Jeremy Warner says the euro has entered the last chance saloon.

Markets have been expecting a big intervention from the European Central Bank and the wealthy eurozone nations ever since the ECB first started buying government debt to try and relieve the crisis. But is this rescue ever coming, he asks?

 Not on the evidence of Monday’s press conference by Nicolas Sarkozy and Angela Merkel, where any agreement that might have been reached was about as clear as mud. Nor was there anything in what they said to address the immediate crisis.

By attempting to address the long-term problem before the immediate one, Germany has chosen a curiously back-to-front approach to the crisis. Ah, say the markets, but that’s how the Germans like it. They want the cart before the horse. Once the cart is in place, then they can start talking about the horse.

That’s the assumption, but what if Ms Merkel means what she says? What if she actually believes that budget discipline and structural reform alone are enough to solve the eurozone’s problems? Crazy though this might seem, that’s the implication of the rhetoric.

07.35 Looking at this morning’s newspaper headlines, the

The Telegraph: Ratings cuts may hit euro rescue

The Times: Cameron in a fix after euro giants forge pact

The Guardian:Sarkozy and Merkel clutch at last-ditch deal on euro

The Financial Times: Deal over eurozone fiscal rules

07.30 European markets are also expected to fall in early trading, according to the futures market:

The FTSE 100 is set to fall 1.1pc to 5,512 points, France’s CAC is expected to slip 0.9pc and the German DAX to open down 1.5pc.

07.20 Asian markets dropped today after the announcement of the possible downgrade of the eurozone by S&P.

Japan’s Nikkei fell 1.3pc to 8,575.16, Hong Kong’s Hang Seng shed 1.3pc and Australia’s S&P/ASX 200 slid 1.4pc.

The S&P announcement came only hours after French President Nicolas Sarkozy and German Chancellor Angela Merkel unveiled sweeping plans to change the European Union treaty in an effort to keep tighter checks on overspending nations.

Mr Sarkozy and Ms Merkel discussed several broad changes for the EU treaty, including the introduction of a penalty for any government that allows its deficit to exceed 3pc of gross domestic product.

The penalty would be automatic – unless a majority of nations opposed it, a loophole that drew criticism from analysts.

The proposal, which demands strict austerity measures, could make feeble economies like Greece even weaker, by making it impossible to borrow money and repay loans.

Derek Cheung, chief investment office of Neutron INV Partners in Hong Kong, said he believes that central banks printing money – instant cash with which government debt could be repaid – is the only way to stanch the crisis in the short-term.

Quote In the short term, belt-tightening will do more harm than good. If their economies continue to slow down, do you think people will still continue to buy their bonds?

US markets closed higher last night, still buoyed by the news of treaty change to strengthen the eurozone earlier in the day.

The Dow Jones rose 0.7pc to 12,097.83 points, while the S&P 500 rose 1pc.

07.15 The move by S&P means there is a 50pc chance that Germany and France will lose their prized AAA ratings after this week’s EU summit in Brussels.

For more on the possible doengrade, take a look at:

S&P’s full statement

Market reaction

…and a handy Q&A compiled by S&P

07.10 Those ratings agency folk have been busy again, with Standard & Poor’s warning last night that it had put 15 of the eurozone’s 17 nations on CreditWatch.

Louise Armitstead writes:

 Fifteen out of 17 eurozone nations – including Germany – were threatened with downgrades to their credit ratings in a move that may imperil the foundations of a landmark rescue deal agreed on Monday.

Standard & Poor’s (S&P) last night put all members of the single currency – barring Cyprus and Greece – on “credit-watch negative” because of a rise in the “systematic stresses” in the eurozone in recent weeks.

The countries under review include the six eurozone members with a AAA-rating, France, Germany, Austria, Finland, Luxembourg and the Netherlands.

S&P highlighted five reasons for the move, including tighter credit conditions, a greater risk of eurozone recession, as well as the “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis”.

07.00 Good morning and welcome back to live coverage of the global debt crisis.

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