By Vesnovskaya Maria
The credit ratings of two EU countries – Hungary and Portugal – have been downgraded to junk status. Italy has joined the French-German consultations on the Eurozone’s bailout. No specific decisions have been adopted so far.
Hungary described the country’s downgrade to BB+ as a “financial attack”. According to a Hungarian government statement, the country’s debt is dwindling, budget deficit is going down too, and a substantial GDP growth was reported in Q3. Moody’s experts explained the downgrade by the falling forint rate. Given that two thirds of the country’s state debt is serviced in foreign currency, a decrease in the forint rate led to an increase in debt payments. Hungary will have to boost taxes and reduce social benefits, Oleg Barabonov of the Moscow Institute of International Relations, says.
“The Hungarian economy used to be the most open in Central Europe. Unlike the Czech Republic, which pursued protectionist policies to support its production sector, Hungary opted for openness. There are a large number of EU banks and Americans working in Hungary. As a result, the Hungarian economy is more sensitive to the Eurozone crisis. Given that Hungary has no currency reserves, it’s surely the weakest link.
Portugal is now in for austerity measures too, after Fitch downgraded its credit rating to junk as well. The country’s government requested assistance from the EU and IMF in exchange for raising taxes and abolishing leave allowances and Christmas bonuses. The authorities are also prepared to increase working hours by 30 minutes and start layoffs in the public sector. People are protesting against the measures but the government is powerless to help, Fyodor Naumov of the Capital Management Company, says.
“Portugal is following in Greece’s footsteps. Spain and Italy might soon join too. They have to pay with social unrest for economic problems. It’s difficult to reduce the budget deficit if you owe a lot but don’t want to go bankrupt. It’s impossible to boost the tax load when the economy is not growing. But it’s possible to cut the expenditure by slashing wages, pensions and allowances. There’s no alternative. Otherwise, they’ll end up bankrupt and will have to leave the Eurozone.”
Hungary and Portugal are making the already bad situation in the Eurozone worse. Germany and France have been working on a rescue plan for months. Italy has now joined the consultations. Chancellor Angela Merkel, President Nicolas Sarkozy and Italy’s new Prime Minister Mario Monti have said that they have agreed on a set of measures to stabilize the situation and will announced the package on December 9th . Angela Merkel warned that the Eurozone would not concede to demands for quick solutions and that Germany remained opposed to the issue of Eurobonds. But Germany will have to strike a compromise sooner or later, Fyodor Naumov says.
“Germany will have to agree to a common EU budget and financial policy. All EU members will borrow money on a joint basis, which calls for the issue of Eurobonds, rather than bonds of separate countries. This step is hard to take but everyone has been expecting it. The European Central Bank should step in on a more regular basis to protect countries against inflation, maintain prices at the same level and ensure financial stability. It will then have the right to buy bonds of various European countries.”
While problems in the Eurozone keep piling up, options for resolving them are going down. Europe’s economic slump may affect a large number of countries, including the US, China, Russia, particularly if the demand for oil and gas drops. Russia has outlined a set of anti-crisis measures in case the worst scenario takes the upper hand. Due to accumulated reserves, the Russian budget will withstand against the crisis even if oil prices drop to 60$ per barrel. The Russian reserves will be enough to see the country through for about a year, no matter what turn the developments in Europe will take.