The solvency of banks was understandably the focus of 2008. But as 2009 begins, markets are beginning to think the unthinkable: what about governments?
Standard & Poor’s started the year by casting doubt over a host of highly rated sovereigns, including downgrades for Spain, Portugal and Greece, and negative outlooks for New Zealand and Ireland.
The gloomiest investors have even begun questioning the AAA ratings on the US and UK governments, and US president Barack Obama acknowledged the pressing need to address the spiralling costs of the US Medicare system in his inauguration speech.
For now, however, the downgrade of Greece may be the most significant. In October 2008, the European Central Bank (ECB) agreed to accept as collateral for repo transactions paper rated below its previous threshold of A-, but only until the end of 2009, as a temporary measure to tackle the financial crisis. As Greece now perches precariously on that A- threshold, any further downgrade would make its own government debt ineligible for Greek banks to repo at the ECB after 2009.
No wonder the European Commission has revived the idea of a single eurozone debt agency – discussed in our article last month on the future of the euro on its tenth anniversary. The willingness of AAA rated Germany and France to drive up the cost of their own debt by shouldering the Greek burden remains deeply in question. And perhaps their reluctance is right. International co-operation may help stabilise the banks, but restoring public finances once the crisis is contained will involve tough political decisions, and responsibility for these can only be taken at a national level.
