Its another week of Europe.

6th December 2011

Ian Copelin, Investment Director, my wealth, comments “Italian borrowing costs dropped yesterday as Italy’s new Prime Minister, Mario Monti (the technocrat who replaced Silvio Berlusconi last month), announced a €30 billion package of new austerity and growth measures.  Under Mario Monti’s plans, Italy will balance its budget by 2013 by increasing taxes, cutting budgets and reforming pensions.  The markets reacted positively:  Italy’s generic 10-year bonds rose strongly, reducing the yield from 6.682% to 5.952% (over 1.3% lower than its high on 25 November); while the main Italian stock index (the FTSE MIB) rose 2.91%.

The German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy, again stated their intentions to push for a rewrite of the EU’s governing treaties to tighten economic cooperation as a first step to ending the debt crisis at this week’s EU summit.  During the talks over lunch at the Élysée Palace, the two leaders also agreed to propose automatic penalties for eurozone countries that exceeded deficit limits and the creation of a monetary fund for Europe.  This helped European equity markets, with the Stoxx Europe 600 index extending its biggest weekly rally since November 2008 with a rise of 0.8%.

The credit rating agency, Standard & Poor’s said it may downgrade credit ratings across the Euro region.  S&P said that ratings could be cut by one level for Germany, Netherlands, Finland, Luxembourg, Belgium and Austria and by up to two notches for the other eurozone countries (France, Italy, Spain, Ireland, Italy, Portugal, Malta, Estonia, Slovakia and Slovenia), with the exception of Cyprus (which is already on a negative outlook) and Greece.

Although the actions of the last couple of years have shown that the individual eurozone governments are not prepared to act collectively to find a long-term solution in a way that convinces markets, Standard & Poor’s actions were criticised by many in the market for again injecting itself into the political process, ahead of this week’s Euro summit aimed at ending the sovereign-debt crisis (S&P downgrading the US in August following government gridlock over the US debt ceiling).”