The euro continues to dominate the headlines, albeit usually for the wrong reasons as it opens this morning close to its lowest level against the pound since March 2008 and at a two year low against the US dollar.
On Monday, credit ratings agency Moody’s put three out of the four euro zone countries that still have a AAA credit rating (Germany, Holland and Luxembourg) on a ‘negative outlook’ footing giving notice that all three could lose their long cherished AAA status in the next 6 months. Finland is now the only AAA euro zone country with a ‘stable’ outlook.
The euro fell throughout yesterday after the publication of weaker than expected German manufacturing data following from Moody’s downgrade.
Data showed that German manufacturing contracted at its fastest rate in over three years in June. Data also showed that its service sector contracted while in France, factory activity declined at its fastest rate in three years.
Moody’s followed up its announcement on Monday yesterday with a cut in the outlook of the AAA rating for the temporary European bailout fund, EFSF (European Financial Stability Facility) to ‘negative’ from ‘stable’. According to Moody’s, the risks that would negatively affect the creditworthiness of the EFSF programme, leading to a downgrade of the EFSF’s rating, would include a deterioration in the creditworthiness of the participating euro area member states (as would be reflected by a change in Moody’s ratings for these states).
At the same time, an improvement in these countries’ ratings outlook to ‘stable’ would imply a similar change to the perspective on the EFSF.
Meanwhile, the situation in Greece seems to be deteriorating with a warning from Prime Minister Antonis Samaras that the economic contraction in his country could be deeper than 7% this year, with growth not returning until 2014. Greece’s central bank has forecast economic activity to fall by around 5% whilst the OECD expects a 5.3% contraction and the European Commission’s last estimate was for a 4.7% contraction.
Today, inspectors from the so called Troika (inspectors from the European Commission, the International Monetary Fund and the European Central Bank) are due to arrive in Athens to evaluate the government’s progress on implementing reforms in accordance with its bailout terms. According to the Greek online newspaper ekathimerini, the Greek government is still struggling to find an additional €2.5 billion in cuts as part of the bailout agreement in which it is required to reduce spending by €11.5 billion in 2013 and 2014.
Greece remains in the spotlight as one of the major risks for all euro zone members. It is worth remembering that Moody’s specifically mentioned “the risk of an exit by Greece from the euro area has increased relative to the rating agency’s expectations earlier this year” as the reason behind the cut in the outlook on the credit rating of Germany, Holland and Luxembourg on Monday.
The situation in Spain is hardly better after its latest bond auction recorded the highest financing costs since the introduction of the euro way back in 1999. The Spanish Treasury raised €3.05 billion in funding with the sale of 3 and 6 month T-bills in comparison with the €3 billion target yet borrowing costs rose on both issues. The average yield on the 3 month rose from 2.362% to 2.434% while the 6 month jumped from 3.237% to 3.691% seen in the previous auction.
To cap a thoroughly bad day for the euro, the Markit euro zone PMI Composite Output Index signalled the 10th contraction in the private-sector economy in the last 11 months in July. The index remained stable at 46.4 for July but the reading for the end of June marked the steepest quarterly downturn for three years. Markit noted that the “fall in output was widespread across the euro zone with both the core and periphery contracting.”
“The flash PMI for July suggests the euro area downturn showed no signs of letting up at the start of the third quarter and is consistent with GDP falling at a quarterly rate of around 0.6%, which is similar to the rate of decline we expect to see for the second quarter,” said Markit chief economist Chris Williamson.
Particularly worrisome, euro zone employment fell for the seventh straight month and dropped at the fastest rate since January 2010 as a larger number of firms increasingly cut capacity. “Job losses gathered pace in both manufacturing and services, with the former posting by far the steeper rate of decline,” Markit reported.
“Companies across the region are cutting staff numbers at the fastest rate for two-and-a-half years as the outlook darkens. Service providers are now the gloomiest since March 2009, while manufacturers are slashing their inventories of raw materials in the expectation of ongoing weak sales in coming month,” Williamson warned.