European Debt Crisis Widens

Includes: EIRL, EWD, FXE, RSX
by: Weiss Ratings

European countries are in crisis. Sovereign debt downgrades reflect the difficulties being faced by five of the European countries -- Hungary, Ireland, Portugal, Russia, and Sweden -- underscoring the impact of the eurozone crisis on the world economy.

Weiss Sovereign Debt Ratings





















Weiss Ratings scale: A = Excellent, B = Good, C = Fair, D = Weak, E = Very Weak.

Plus sign = top of grade range; minus sign = bottom of grade range.

Ireland faces difficult years ahead. With additional austerity budgets and mandated contractions facing the banking sector, Ireland is especially vulnerable to a general European recession. The economy has shown some indications that initial austerity measures will place the country on a stronger footing but at the cost of mass unemployment and emigration. And, in an attempt to counter these problems and maintain a competitive advantage for foreign investment, the government has stubbornly refused to give up its low corporate tax rate.

Portugal’s economy continues to deteriorate and is likely to face a significant contraction in 2012, perhaps as much as 3%. Substantial European assistance has been promised but is contingent on privatization of national industries, such as airlines, power and the national energy grid.

Hungary is suffering from the relative strength of the Swiss franc (CHF) and the euro (EUR) compared to the forint (HUF). The forint has dropped 17% against the Swiss franc since April and 9.8% against the euro in the last three months. Notably, substantial borrowing in foreign currencies coupled with the currency weakness created difficulties in debt repayment that may lead to economic contraction.

Russia faces major challenges. It is increasingly vulnerable to the financial crisis in Europe, causing markets to question its economic stability in light of risk factors and recent history of default. This, coupled with dependence on high energy, as well as other export commodity prices and tightening liquidity indicate that the macroeconomic picture is not strong.

Despite Sweden’s overall economic strength and fiscal prudence, it too is feeling the effect of the eurozone crisis. The property market is showing signs of stress, with prices trending down in many areas and extended time to sell. The government has recognized the banking industry’s exposure to the financial markets and is committed to strengthening the industry by implementing higher Tier 1 capital requirements. Declining debt levels and the attractiveness of Swedish bonds are expected to help maintain economic stability.

With a potential new recession on the horizon, these eurozone countries are particularly exposed. While the tighter fiscal union proposed by Germany and France intends to maintain a core of stability around the two countries, it will take significant time to implement, if an agreement is even reached. It seems the European financial crisis is as large as ever and will continue to cause difficulties, as it develops, well into 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.