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Eurozone debt crisis live: UK credit rating under threat amid Moody’s downgrade blitz

• George Osborne: Moody’s is a wake-up call
Markets fall, but no panic
Greek cabinet to meet this afternoon
Today’s agenda

11.57pm: Many people have pointed out tha Britain has been here before. In 2009 Standard & Poor’s cut the UK to negative outlook, only to return it to stable after the General Election.

However, this time it may be different. Here’s a few expert views:

Simon Hayes of Barclays Capital:

Two years ago, when S&P had the UK on negative outlook, the question was whether the government could come up with a credible deficit reduction plan. The risk to the rating was therefore largely in the government’s own hands.

This time the situation is more precarious. A credible plan is
in place, and the question now is over the strength of the economy

Jane Foley of Rabobank:

This morning’s news has not caused the same degree of market reaction as in 2009….This is largely because the US and France have already lost their AAA S&P rating.

That said the UK government will be hoping that the austerity already in the pipeline will prove to be sufficient to stave off a downgrade and that the threat to growth stemming from the Eurozone will improve this year.

David Miller, partner at Cheviot Asset Management:

Investors are getting use to living with downgrades now, and the latest decision by Moody’s won’t change their views of the UK.

It’s a story rather than a Market Mover.

11.43am: Further proof that the City isn’t spooked by Moody’s downgrade – the FTSE 100 just nudged into positive territory (plus 6 points at 5912).

Analysts and economists have broadly agreed that Moody’s actions were largely ‘priced-in’, although the UK warning was the most surprising element.

11.05am: Today’s poor eurozone industrial production data (see 10.38am) shows how many of Europe’s weaker peripheral nations have suffered since the financial crisis began.

As this graph from Eurostat shows, European industry now produces about as much as it did in 2005 (and again in late 2008, on the way down), and is still 11% lower than its peak level.

Industrial output in Greece is 28.4% below the 2005 level, Portugal is down 13.6%, Spain 18.3%, while the UK has declined by 11.7%. German economic output, though, is 8.8% higher than in 2005.

Tim Ohlenburg, senior economist at the Centre for Economics and Business Research, commented:

These figures offer an important perspective on the on-going sovereign debt crisis: the Eurozone has failed to recover and is now backtracking rather than making progress.

The ECB has been able to plaster over the cracks of strained monetary union. Recession will make this unenviable task harder.

10.38am: More proof that the eurozone economy is in trouble and heading into recession. Industrial production across the region tumbled in December 2011, down 1.1% compared with November.

The fall was particularly steep in Germany, Europe’s industrial powerhouse, where output plunged by 2.7% during the month.

Howard Archer, chief European economist at IHS Global Insight, commented:

The December Eurozone industrial production confirm that the manufacturing sector suffered a torrid fourth quarter of 2011 and contributed significantly to probable appreciable Eurozone GDP contraction (we estimate it at 0.4% quarter-on-quarter).

But despite the malaise, German investor sentiment has risen more than expected this month. The closely watched ZEW survey hit its highest level since April as economists and investors felt more optimistic about the German economy.

According to ZEW (a think tank), the wider picture is that the euro crisis looks “less scary than three months ago”. The data was collected, though, before violence erupted in parts of Athens over the weekend.

10.31am: Here’s a question that should interest regular readers – how can we cover the euro crisis better?

With Moody’s ratings changes dominating the political and economic agenda today, the Guardian News Desk would like to know how we can improve our coverage.

My colleague Claire Phipps blogs here:

Here we’ll be asking what readers want from our coverage – does the world of credit rating agencies and “negative outlooks” need more explanation? What would you like our business and politics reporters to be looking into?

Obviously we do respond to your daily feedback and criticism through the reader comments (many mistakes and typos have been caught Below The Line). But this is another good chance to influence things, so do join in.

10.18am: Grim economic news from Portugal, hard on the heels of Greece (see 10.03am).

The Portuguese economy shrank by 1.3% in the last three months of 2011, compared with the previous quarter, as the austerity measures demanded by its international lenders took hold.

For 2011 as a whole, Portugal shrank by 1.5% during 2011, its National Statistics Institute reported. It already expects to contract by around 3% this year, as tax hikes and spending cuts kick in.

10.03am: New data from Greece shows the desperate state of Greek’s economy – its GDP plunged by 7% in the fourth quarter of 2011, on a year-on-year basis.

The latest GDP data show that Greece’s economic decline accelerated in the last three months of the year.

Here’s a breakdown of Greece’s GDP over the last 12 months:
Q1 2011: -8.0% year-on-year
Q2 2011: -7.3% y/y
Q3 2011: -5.0% y/y
Q4 2011: -7.0% y/y

9.59am: News from Athens – the Greek cabinet are planning to meet at 1pm GMT (3pm local time) to discuss the country’s economic crisis.

PM Lucas Papademos’s offices said that the cabinet will discuss what further actions need to be taken to qualify for a second international bailout. Time is ticking – the Eurogroup wants a decision by its meeting on Wednesday.

9.49am: Being downgraded by Moody’s didn’t prevent Spain selling almost €5.5bn of debt, at cheaper costs than previously.

Spain just reported that it sold €2.9bn of 12-month loans at an average yield (effectively the interest rate) of 1.899%, down from 2.049% previously. It also auctioned €2.5bn at yields of 2.3%.

9.35am: UK inflation data is just in, showing a drop in the rising cost of living.

The Consumer Prices Index came in at 3.6% in January, down from 4.2% in December.

The Retail Prices Index fell to 3.9%, from 4.8%.

Both measures fell because the rise in VAT, to 20%, is now falling out of the calculations. Clothing and footware, transport and food prices all fell on a month-on-month basis.

9.24am: Our colleague Andrew Sparrow is tracking all the political fallout to the Moody’s announcement on his Politics Live blog.

He’s pulled together some of the immediate reaction from Twitter

It includes a crucial point from Allister Heath, editor of City A.M:

Why does Osborne say he “won’t waver when dealing with [UK's] debts”? He means deficit, not debt, which is still exploding. Big difference.

9.08am: Being lowered to negative outlook means there is roughly a one in three chance that Britain will lose its AAA rating with Moody’s.

Britain’s gilts have not fallen in value this morning, though. The yield (effectively the interest rate) on 10-year UK bonds remains virtually flat this morning at 2.13%.

According to Linda Yueh of Bloomberg, just eight countries can boast a AAA rating with stable outlook:

Now only 8 AAA with stable outlook (-UK): Australia, Canada, Denmark, Germany, Norway, Singapore, Sweden, Switzerland from S&P Moody’s Fitch

— Linda Yueh (@lindayueh) February 14, 2012

8.48am: Here’s the details of the six Eurozone countries who were downgraded by Moody’s last night (rather than just seeing their outlook cut):

Italy: A one-notch downgrade to A3 from A2, + negative outlook
Malta: A one-notch downgrade to A3 from A2, + negative outlook
Portugal: A one-notch downgrade to Ba3 from Ba2, + negative outlook
Slovakia: A one-notch downgrade to A2 from A1, + negative outlook
Slovenia: A one-notch downgrade to A2 from A1, + negative outlook
Spain: A two-notch downgrade to A3 from A1, + negative outlook

8.41am: Europe’s financial markets have opened a little lower this morning following Moody’s actions, but there’s no sign of panic.
The FTSE 100 is 16 points lower at 5889, with banking shares losing around 0.5%.

While the Spanish market is down around 0.6%, The Italian FTSE MIB is actually higher despite Italy being downgraded last night by Moody’s.

Chris Weston of IG Index said Moody’s was telling the City what it already knew: “that there are clear fiscal worries out there”.

Clearly this was not a game changer but comes at a time when risk assets are in reflection mode after a strong run and the timeline to March 20 [when Greece must repay €14.5bn remains tight.

8.20am:Humphrys asks if any more knighthoods will be taken away. Osborne repeats we need to end the anti-business rhetoric.

We’ve got to celebrate business and business success in this country, we want our economy to grow, dealing with our debts is an important part of creating confidence in Britain, we are not going to waiver from dealing with this country’s debts.

And that’s the end of the Today interview.

8.20am: Humphrys: you have collectively rattled business hugely. The message you are delivering to big business is you don’t like them very much, you don’t trust them very much. Osborne replies the treatment of the banking system has been different to the rest of business.

I draw a distinction with the banking system, I’ve got a responsiblity to the people that we don’t have to bail out banks as they fail. the fundamental part of the free market is you get rewards for success but there shouldn’t be rewards for failure. I banks fail they should go bust.

Humphrys reminds Osborne that Sir Martin Sorrell has accused the government of moral capitalism and banker bashing. Osborne replies that Britain rewards success:

If you are successful in Britain we are welcoming to you, our country is open to investment, open to business. What we will not accept is what happened over the last decade which is certain institutions got far too overindebted and when they failed the tax payer had to step in.

Humphrys mentions the Royal Bank of Scotland and Osborne says RBS was a “symbol of what had gone wrong” in Britain.
Osborne replies to a question about the removal of Fred Goodwin’s knighthood, saying:

That was a decision of an independent committee of civil servants. The point is in this country we should not have rewards for failure we should have rewards for success.

There is a bit of a culture that has developed in the media that is anti-business. we draw a distinction between sorting out the banking sector and rewarding success and encouraging business.

8.14am: George Osborne is on the Today programme now to discuss Moody’s decision to lower the UK’s credit outlook to negative.

John Humphrys is asking the questions. First up: Did Osborne have a bad night, did he lose sleep over the move?

The chancellor replies:

When I heard yesteday, just before it was made public, for me it was a reality check that Britain has to deal with its debts and here is yet another organisation warning Britain that if we spend or borrow too much we are going to lose our credit rating and that will lead to a loss of investor confidence in our economy.

Britain doesn’t have an easy route out of the economic problems, it’s got to confront them and that’s what I intend to do.

But aren’t your fiscal cuts damaging growth, asks Humphrys.

The weaker growth prospects have been a challenge… the idea that I have abandoned growth is nonsense. But if you don’t have confidence in a coutry’s ability to pay its debts you get negative growth, less jobs and no prospect of recovery.

Osborne adds that Moody’s is warning that Britain would be downgraded if there was a reduced commitment to dealing with the debts and if there was any more discretionary borrowing (see 8.04am for more on this)

8.04am: Moody’s statement does offer George Osborne some comfort. It says that a “reduced political commitment to fiscal consolidation” could actually lead to Britain being downgrade from AAA.

From las night’s statement, Moody’s says the UK could be downgraded if it suffers:

a combination of significantly slower economic growth over a multi-year time horizon — perhaps due to persistent private-sector deleveraging and very weak growth in Europe — and reduced political commitment to fiscal consolidation, including discretionary fiscal loosening or a failure to respond to a deteriorating fiscal outlook;

Two other possible triggers for a downgrade are “a sharp rise in debt-refinancing costs” and “renewed problems in the banking sector”.

7.56am: Ed Balls, the shadow chancellor, hit the airwaves as dawn broke over the UK, insisting that George Osborne should change course.

Balls told the Radio 4 Today Programme that the Treasury must make growth a bigger priority. Otherwise, we risk sliding ino a second Great Depression, with deflation and mass unemployment.

Here’s the key quote from Balls:

Even the rating agencies now recognise that austerity alone is self-defeating. The world is making 1930′s mistakes – and rating agencies are partly responsible.

Today is the first evidence that even the rating agencies are waking up to this.

Osborne will get his chance to rebut Balls in a few minutes – he’s due on the Today programme at 8.10am.

7.54am: Moody’s warning is the headline news on a busy day for economic data – including the latest UK inflation reading. There are also some interesting government bond sales scheduled.

Here’s today’s agenda:

UK inflation (CPI and RPI) – 9.30am GMT
Portuguese GDP for Q4 2011 10am GMT / 11am CET
Greek GDP for Q4 2011 10am GMT / 11am CET
German ZEW economic sentiment survey -10am GMT / 11am CET
Eurozone industrial production – 10am GMT / 11am CET
US Treasury secretary Tim Geithner testifies to the Senate Finance Committee – 3pm GMT / 10am EST

Bond auctions:
• Italy auctioning €6bn of debt,
• Greece auctioning three-month bonds
• Spain auctioning 12 and 18-month bonds

7.49am: Moody’s said its rating changes were based on each country’s susceptibility to the “growing financial and economic risks” created by the eurozone debt crisis.

The main drivers were:

• The uncertainty over (i) the euro area’s prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.

• Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

• impact that Moody’s believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

You can see the full statement here.

7.40am: Good morning, and welcome to our rolling coverage of the European financial crisis.

Credit rating agency Moody’s has cut its rating on six European countries — Italy, Spain, Portugal, Slovakia, Slovenia and Malta. It put a further three on negative watch – France, Austria and the UK, in a threat to Britain’s AAA rating.

The move, which came a few hours ago, underlines the depth of Europe’s debt crisis.

We’ll be tracking all the reaction and analysis to Moody’s move today, as well as watching events across Europe – as Greece’s future within the eurozone hangs in the balance. As usual, you can have your say in the comments below – or get in touch via Twitter.

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