Eurozone downgrades: Where’s the Third World now?
The latest downgrade of eurozone countries’ debt should make us ask just who are the world’s economic powerhouses. There are developed nations whose borrowings are now ranked as junk but emerging market countries with debt that is investment grade.
Three of the G7 countries have lost their treble-A credit ratings from the Standard & Poor’s agency in the past year. Portugal, Ireland and Greece have been relegated to junk status but those three eurozone countries still regard themselves as members of the club of developed nations. Yet the debt of several countries still classed as emerging markets - including Colombia, Peru, Mexico and India – is ranked as investment grade by S&P.
So there are institutions in Europe that cannot hold their own government’s debt because it is too risky but which can invest in paper issued by Third World nations.
The old order has not only been revised, it has been turned upside down. Panama, Brazil and Russia are also now deemed to be investment grade. Yet since the start of the financial crisis, the US, Iceland, Ireland, Spain and Japan have lost their AAA rankings and now France and Austria have been added to that list.
Yet, ironically, it is emerging market countries that are being asked to bail out the developed nations. The IMF used to borrow from the established economies and lent to what were called undeveloped countries. Now the latter are being asked to lend to the former: it is the Middle East nations and China that Europe is turning to to bail out its profligacy.
In the past two decades, emerging-market debt has performed twice as well as the developed countries – despite agencies like S&P ranking them more likely to default. That is reflected in the fall in interest rates that emerging counties have to pay compared with the developed nations.
So despite the squeals from France and the other eight eurozone nations that have been downgraded, the record suggests that the credit-rating agencies have not yet gone far enough.
