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France Worries About AAA Rating; UK Economists Urge Greece to Abandon Euro; Spanish Prime Minister Losing Support; Japan’s Industrial Output Weakens

France Worries About AAA Rating; UK Economists Urge Greece to Abandon Euro; Spanish Prime Minister Losing Support; Japan’s Industrial Output Weakens

Courtesy of Mish 

Inquiring minds might be interested in an international roundup for Memorial Day. Let’s take a look at top stories about France, Germany, Greece, the EU, Spain, and Japan.

French Finance Minister Says "Keeping AAA Rating a Stretch" 

As Eurozone trade unions prepare to battle over various austerity programs, the French budget minister warns on credit rating.

France admitted on Sunday that keeping its top-notch credit rating would be "a stretch" without some tough budget decisions, following German hints that Berlin may resort to raising taxes to help bring down its deficit.

Euro zone trade unions are preparing for possible confrontations in the coming week if governments impose austerity measures or labor reforms unilaterally. But ministers made clear they were ready to take unpopular steps to prevent the Greek debt crisis spreading to their economies, although doubts are growing about whether the Spanish government in particular has enough support to get its way.

Budget Minister Francois Baroin indicated on Sunday that France should not take for granted its AAA rating, which allows Paris to borrow relatively cheaply on international markets and finance its big budget deficit.

"The objective of keeping the AAA rating is an objective that is a stretch, and it is an objective that, in fact, partly informs the economic policies we want to have," Baroin said. "We must maintain our AAA rating, reduce our debt to avoid being too dependent on the markets, and we must do this for the long term," he told Canal+ TV in an interview.

France has forecast its deficit will hit 8 percent of gross domestic product this year, but aims to bring it down to within the European Union’s 3 percent limit by 2013.

UK Economists Advise Greece to Abandon the Euro

The Times Online reports Greece urged to give up euro

THE Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greece’s departure from the euro would prove disastrous for German and French banks, to which it owes billions of euros.

Doug McWilliams, chief executive of the CEBR called the move “virtually inevitable” and said other members may follow. “The only question is the timing,” he said. “The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.

I believe it is impossible for Greece and Spain to pay back those debts. Here is a hilarious video on that subject.

Clarke and Dawe: Lending merry-go-round

Spanish Prime Minister Loses Support 

If you think Spain will head full force into austerity measures to shore up its credit rating and reduce its deficit, you need to think again. Please consider Zapatero Losing Credit as Fitch Strips Spain of AAA.

Spanish Prime Minister Jose Luis Rodriguez Zapatero, isolated in parliament and his popularity slumping amid the biggest budget cuts in 30 years, is finding his efforts aren’t paying off internationally either.

Fitch Ratings late last week stripped Spain of its top AAA credit grade and questioned the nation’s ability to grow its economy as the government reduces spending. U.S. stocks and the euro declined after the downgrade to AA+, on concern the European debt crisis will deepen.

“It’s bad news for the government,” said Fernando Fernandez, a former International Monetary Fund economist at IE business school in Madrid. “It shows a lack of confidence in the government internationally. It looks like the budget cuts haven’t helped.”

Zapatero, a Socialist running a minority government, faces strike threats from his traditional allies in the unions and risks being unable to pass next year’s budget because of opposition to his plans. His attempt to rein in the euro area’s third-largest budget deficit has also failed to reverse a surge in Spain’s risk premium amid concern that the European Union’s 750 billion-euro ($920 billion) bailout plan won’t solve the problems of its indebted nations.

The measures are aimed at reducing the budget gap from 11.2 percent of gross domestic product last year to 6 percent in 2011. While they were initially welcomed by markets, pushing up bond prices and Spanish stocks, concerns have resurfaced.

Spain’s Ibex-35 share index fell 0.6 percent at 9:40 a.m. in Madrid to 9,360 points. The Ibex has declined 22 percent this year amid concerns over the economic outlook. Even as bad loans are stabilizing after a two-year surge, shares in Banco Bilbao Vizcaya Argentaria SA have fallen by almost a third.

The yield on Spain’s benchmark 10-year bond rose 4 basis points to 4.27 percent, while the 2-year bond yielded a three- week high of 2.60 percent, up 18 basis point.

The extra yield that investors demand to hold Spanish debt rather than German equivalents rose 5 basis points to 158 basis points, 15 basis points less than the post-euro high of 173 basis points reached on May 7. The average spread over the last decade is 23 basis points.

Japan’s Industrial Output Advances Less Than Forecast

Bloomberg reports Japan’s Industrial Output Advances Less Than Forecast.

Japan’s industrial production increased less than economists forecast in April, the latest sign that the economic recovery may be losing momentum.

Factoryoutput rose 1.3 percent from March, when it gained 1.2 percent, the Trade Ministry said in Tokyo today. The median estimate of 26 economists surveyed by Bloomberg News was for a 2.5 percent increase.

“The report reinforces the view that the pace of recovery is going to get slower this quarter,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Even so, we’re likely to see production stay on a rising trend because of the recovery in exports, particularly from Asia.”

The expansion may lose steam as the effects of stimulus spending taken worldwide last year wear off, according to Naoki Tsuchiyama, market economist at Mizuho Securities Co. in Tokyo. Government expenditure cuts in Europe may damp sales of Japanese cars and electronic goods over time, he added.

“Production will remain in a recovery trend but its pace of growth may slow in the months ahead,” Tsuchiyama said. “The effects of the governments’ stimulus will wane, and we can’t ignore the European sovereign problem as a downside risk to the global economy.”

It will be interesting to see the reaction of Trichet when Spanish government yields take out the May 7th high. This crisis in sovereign debt is far from over. In fact the crisis has barely begun.

These problems cannot help but slow the world economy, much more than the cheerleaders think.

Mike "Mish" Shedlock


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