Europe is back on the front page today after Standard & Poor’s Ratings Services downgraded Italy’s sovereign credit rating by one notch on Tuesday, citing the country’s worsening economic prospects.
The ratings firm said its downgrade reflects its view of a further worsening of Italy’s economic prospects coming on top of a decade of stagnation, where real growth averaged a negative 0.04%.
S&P noted that Italy’s economic output in the first quarter was 8% lower than in the last quarter of 2007 and continues to fall.
The firm lowered its gross domestic product forecast for the year to negative 1.9%, down from a negative 1.4% forecast in March and a forecast for 0.5% growth in December 2011.
S&P expects 2013 per capita GDP will be an estimated €25,000 ($33,000), which is somewhat below 2007 levels.
S&P said Italy’s low growth stems in large part from rigidities in the country’s labor and product markets.
S&P said its projections suggest that the general government debt to GDP ratio would not start to decline unless Italy’s budgetary surplus, excluding interest expenditures, approaches 5% of GDP.
The downgrade by itself is a no-news due to the fact that it was already in thge price, but it served to bring the European crisis back on the table. Strange though, for the first time the ECB instead of waiting for the market reaction, anticipated S&P’S move through its executive board member Jörg Asmussen: who during an interview with Reuters said that the central bank may keep interest rates low beyond 12 months, expanding upon remarks by ECB President Mario Draghi last week. Adding that the central bank wouldn’t rule out another round of cheap loans, which were used two years ago to pump capital into struggling euro-zone banks.
Thus, the ECB message: we are not done with our job!
Is the Fed done? We will be searching for hints in tonight FOMC minutes.
In the mean time it’s clear that the PBOC is not done with its job:
China’s key export sector shrank 3.1% in June compared with a year earlier, down from 1% year-on-year growth in May and the first contraction in a non-holiday month since the height of the financial crisis in November 2009. Imports fell 0.7% year-on-year, pointing to weak demand at home as well as abroad.
Coming after a raft of disappointing data in April and May, June’s weak trade results add to fears that economic growth in the second quarter has continued to slow; despite that China Premier Li Kequiang repeated his commitment to steer clear of stimulus for the world’s second-largest economy.
This commitment reflected recognition by China’s leaders that pumping ever-increasing amounts of credit into infrastructure and real estate projects, as they have in the past, isn’t a sustainable way to boost output.
How long before other leaders will recognize that flooding the world with money forever isn’t sustainable?