On the Specter of Japan – in Europe

From Ambrose Evans-Pritchard at the Telegraph:

Highlighting the “unpleasant fiscal arithmetic” facing states across the Old World, Fitch said that none of the “arguably” benchmark AAA states can safely rely on their top rating for much longer.

Public debt in both Britain and France will reach 90pc of GDP by 2011, higher than the 80pc (net) level when Japan lost its AAA rating earlier this decade.

Ah, Japan. The country that brought us anime, gas-sipping autos, and bizarre – yet absolutely hilarious – TV game shows. They were also the predecessor to the Asian debt crisis, and out credit crunch. And as you can see from this chart, Japan has not slowed down in its deficit spending:

Now the specter of the Japan experience is starting to shroud the continent. First there was Greece, now there’s France, the UK, and Spain. Regarding France and the UK, Fitch also added this parallel to Japan:

Japan’s error at the time was the failure to set out any serious plan to rein in spending, a lesson that the Europeans need to study closely. “The UK, Spain, and France must articulate credible fiscal consolidation programmes over the coming year, given the budgetary challenges they face in stabilising public debt. Failure to do so will greatly intensify pressure on their sovereign ratings,” it said.

And speaking of Spain, Goldman’s Chief Global Economist Jim O’Neill had this to say:

“If you start having serious problems credit wise with the likes of Spain, then the issue for the euro’s credibility and its pricing against other currencies becomes a much bigger issue,” O’Neill said in an interview with Bloomberg Radio in New York today. “Obviously the euro appears to be already affected by this.”

And Alvaro Guzman of Bestinver Asset Management had added this perspective:

Bestinver’s downbeat view of Spain is based on the assessment that Spanish debt could rise quickly even though the levels of indebtedness still look low compared with countries like Greece, said Guzman.

Standard & Poor’s lowered its outlook on Spain’s AA+ credit rating on Dec. 9 and the ratings company’s credit analyst Trevor Cullinan said the country’s debt burden could more than double to as much as 90 percent of gross domestic product.

The metric everyone will be watching will be debt-to-GDP. It seems pretty obvious from all of the discussions around sovereign debt that everyone who has skin in the game will be monitoring this.

It’s also pretty obvious to me Fitch is at the proverbial “tip of the spear” in the ratings space. They seem to be the first mover in ratings upgrades/downgrades with the sovereigns, with S&P and Moody’s following their lead.

I smell a benchmarking exercise coming with agency debt ratings vs. a model in an upcoming post.


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Filed under finance, government, macro, Markets, Monetary, Way Forward

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