What is happening in the UK? Why aren't they interested in closer topics such as the European Union crisis which they are member of? Do they understand that the international politics (and conflicts) are more interesting that international economics? How close do they feel to the E.U.?
One possible hypothesis, probably the most historically accurate, is that they look at themselves quite different because their different currency: The Sterling Pound, also know as the British Pound. Once upon a time, the British Pound was one the most valuable currency in the monetary system. However, the dollar gained importance very quickly and the Euro appeared massively in the Euro Zone in the early XXI century.
Even though, the British maybe still consider themselves apart from the continental Europe, and definitely outside the Euro Zone. In fact, this recent crisis has proven that hypothesis right, that British won't let their currency down. Maybe it's a proof of respect towards the Kingdom, maybe it's pure monetary economics.
How important are the ”PIIGS” crisis for the UK? One could say very, but the fact is that one of the better opportunities for the UK's Budget is to let the E.U. take charge of past prodigal child, the formely know Kindgom of Ireland, which could provoke a positive effect on UK's province “Northen Ireland”.
Although, the UK could think that the crisis is already in the way to being solved, without the help of the U.E., therefore, perhaps, they don't feel the need, even if they could, to help its neighbour Ireland, nor the PIIGS.
Is that really so? Well, the lowering of Portugal's credit rating is not a surprise, nor should be the lowering of any of the PIIGS anyway. Financial Analysts simply don't believe they will get out of the crisis that easily or maybe they don't want them to. Probably, it's better to find some centre of speculation and work on it from time to time, because almost every financial analyst has already discounted the rate projections in these countries. Hence, every public announcement of Portugal not succeeding the road to recovery will provoke another adjustment of rates, and the smart one that adjust the first wins.
But, isn't the European Commission led by a Portuguese representative, José Manuel Barroso? How could he let his country fail the recovery while having every tool available for that task? As a matter of fact, there is an international conflict of institutions. A mess actually between the IMF and the UE.
Nevertheless, the U.E. has kicked in first, and established the European Financial Stability Facility (EFSF) for Greece and, why not, Portugal. Problem solved? Not at all.
In fact, Portugal has to clean its own mess first. And recently, events haven't been aiming on that direction: We've just seen this week how constitutional rules can affect the economics of a country, when the rejection of austerity plans could force the partial resignation of the government. Definitely that's looks so tasteful for Credit Rating Agencies, an opportunity to aggravate even more the analysts nerves.
Finally, one should imagine that Spain and Italy are next, there's no surprise about that. The question is “when” and “how”, and obviously, “how much”. Thus, sadly we have to say that the appetite of financial analysts will cause the doom of the PIIGS, sooner or later. The remaining questions are: Will that be enough? What if they are still hungry for more? France and Germany could be next? The Balkans? Why not Euro Zone's newest member Lituania? It's very true that “the Agencies” have options, but I could bet that the UK think they're not on that black list. Time will prove right or wrong.
José-Manuel Martin
Senior Partner
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