Wednesday, January 18, 2012

France's nightmare realized:Is there life after downgrade for the EU

It is likely the one thing that kept France’s Prime Minister up at night. Protecting France’s credit rating was to become Sarkozy’s greatest challenge of the past 4 months, nevertheless, Sarkozy saw it coming. France and the other EU leaders were hoping to slide under the radar for a bit longer, before S&P focused its attention on the financially stressed members.

I’m sure that the historic downgrade of the US’s debt last year, made it all the more realistic for France. Well, last Friday was the day of reckoning for the Euro-zone, as members suffered downgrades on their debt. This was inevitable given the unresolved financial crisis which has consumed the EU in the past 18 months. Standard & Poor’s swooped down and left France and Austria stripped of their pristine Triple-A rating. It did not stop there, seven others EU members were downgraded including Italy, Portugal. Germany is the EU’s # 1 economy, and it was able to retain its triple-A rating. The anticipated, but dreaded downgrade of France’s debt, being EU’s #2 economy, will undoubtedly create a huge dilemma for the EU’s bailout plan.

As the downgrade of the European Union's #2 economy sinks in in the next couple of days, global perception of the European Union’s ability to bail itself out, leaves potential investors concerned. This of course translates to higher cost of borrowing. The entire bailout plan is in hinging on the EU’s ability to bounce back from this downgrade and swiftly move toward executing the bailout plan. The sooner the wheels begin turning toward resolving the issues, the better.

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K. Reilly
The Cohn-Reilly Report

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