The Dow Industrial and S&P 500 hit new bull-market high yesterday. Clearly, the sovereign debt crisis in Europe is over and there is nothing worry about. Or is there?
Standard & Poor’s Ratings Services on Wednesday cut its long-term rating on Ireland to A-minus from A and lowered its short-term rating to A-2 from A-1. The agency said the ratings remain on CreditWatch with negative implications, where they were placed on Nov. 23. The move comes in the wake of S&P’s revised assessment of risks tied to the Irish banking industry. “Were the labor market to deteriorate further, a rise in the level of delinquencies in the domestic banks’ mortgage books could result in higher new capital requirements than we presently assume,” said S&P analyst Frank Gill. The emergence of a European framework for restructuring sovereign debt could trigger a reconsideration of Ireland’s creditworthiness, he said. The resolution of Ireland’s CreditWatch listing will likely leave the government’s ratings in an investment-grade category, Gill said. The CreditWatch placement is expected to be resolved by April, the agency said.
The recent modest improvement in the world economy has bought these “at-risk” countries some time to fix their books, but little progress has been made. Furthermore, those countries that have been applying austerity measures have not seen the economic gains others have. For example:
The UK economy shrank by a shock 0.5% in the last quarter of 2010 as Britain’s recovery from recession faltered.
Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit.
Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of “stagflation”.
The eagerly awaited GDP figures put the government’s austerity programme under fresh scrutiny, with Labour again arguing that cuts are being made too deeply, and too rapidly.
Now, economists and politicians are arguing the merits and demerits of austerity. They still have not realized they are damned if they do and damned if they don’t. If they continue to run big deficits, interest rates will rise and the country will be forced to default, send the country into economic and political chaos. If they impose austerity measure, it will certainly hurt the economy, but the country will survive.
Austerity is a painful, but necessary medicine. Politicians would rather take the placebo.