S&P head predicts German rethink on policy

EUROBONDS:THE RECENT upward pressure on German government debt yields may lead to a change in perceptions in Germany about the merits of eurobonds, the head of sovereign ratings at Standard & Poors has said.

Addressing delegates at the Ibec conference for chief executives in the Convention Centre, Dublin yesterday, David Beers said that while the conventional wisdom in Germany was that eurobonds would force Germany to pay more for borrowing, the recent rise in yields “might start to change perceptions”.

Mr Beers said it was difficult to see how recession and deflation in a large part of the euro area could be avoided in 2012. “I think this crisis is going to get worse before it gets better.

“It is very hard to see how a number of countries in the euro zone will avoid a recession next year because of the unweaning effect of financial contraction in some parts of the zone which is not being fully offset by actions of the ECB.”

Mr Beers warned about the consequences of any member state leaving the euro.

“We shouldn’t underestimate the huge costs of even one euro zone member leaving,” he said, adding that the notion of Greece somehow benefiting from leaving the euro zone, was a “completely misdirected notion”.

Asked if he felt the euro zone would still have 17 members in a year’s time, Mr Beers said his “base case scenario” was that the euro region will be intact a year from now.

However, it would be “foolish to underestimate the consequences of because the markets would question, who’s next”, he said.

Mr Beers defended the rating decisions of Standard and Poors over the last decade.

He pointed out that Standard & Poors had made a number of downgrades in the years preceding the financial crisis, including downgrades of Greece and Italy in 2004, a downgrading of Portugal in 2005, and a second downgrade of Italy in 2006, moves that “did not attract much attention”.

“The market . . . disagreed with our negative euro area rating actions for most of this period and continued to fund these and other sovereigns at interest rates nearly flat to Germany’s.”

On the question of Ireland’s return to the bond markets, he said that, while it is hard to answer the questions definitely today, he believes Ireland will return to the bond markets next year as planned.

“The question is who’ll be going back to the markets in 2012. Potentially Europe as a bloc will be going back. [The] eurobond is beginning to move to be a very serious proposition.”

Mr Beers said that Standard & Poors’ triple B rating on Ireland was supported by the Government’s strong commitment, and demonstrated actions, to stabilise the public finances, as well as an improvement in Ireland’s competitiveness.

“Given the Irish economy’s openness and the positive base effects associated with the fall in asset prices and nominal wages since 2007, we still view the upside and downside risks to be broadly balanced,” he said.