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Euro crisis takes new twists
Moody's Investors Service today cut Greece's credit rating to junk, bringing it down four notches to Ba1 from A3. The decision by the credit rating agency follows a similar move by Standard & Poor's several weeks ago. Greece's finance ministry immediately criticized the decision, saying in a statement that "today's downgrade of the Greek economy by Moody's does in no way reflect the progress achieved over the past months or the perspectives created by the tidying up of finances and the improvement of the economy's competitiveness." Read the story
Separately today, Spain's Treasury Secretary Carlos Ocana said some foreign banks are declining to lend to the country's banks. While a problem, he denied that his government was seeking an aid package.
The Greek downgrade took some of the steam out what had been a more optimistic day on global markets, which had rallied earlier on data that showed factory output in the euro zone surged in April, suggesting the debt crisis among the 16 countries that share the currency was not derailing an economic rebound. But the Dow Jones industrial average and the S&P 500 both ended the day down just slightly, while the S&P/TSX composite was up less than one point. The Canadian dollar , which at one point was nearing 98 cents U.S., ended up just 0.12 of a penny higher at 96.85 cents. Read David Berman's Market Blog
Canada among least exposed to fiscal shocks
The global economy will be rocked by "rolling fiscal shocks" over an extended period, but Canada stands "far apart" from other countries in terms of external debt exposure, Scotia Capital says. Economists Derek Holt and Gorica Djeric used World Bank data for measurements in five areas, including outstanding gross external debt as a share of GDP, foreign reserves as a share of the economy relative to total external debt, share of external debt owning to markets, and the "rough" maturity profile of external debt outstanding. Also studied were "future oriented views," given the increasing sensitivity to interest rate hikes among countries that need constant access to markets.
Canada, the economists found, is among the least exposed to shocks among the major industrialized nations: "Its external debt to GDP ratio stands at 70 per cent and toward the bottom of the list of the diverse set of countries for which we have data. The sovereign share of Canada's external debt position is also tiny at 15 per cent of GDP and among the lowest in the sample of countries. Canada also ranks favourably in terms of a low share of bank financing of external debt, a modest share of short-term external debt, and relatively high foreign reserves relative to the size of its economy."
Who holds what in European debt
A lengthy report by the Bank for International Settlements today notes that French and German banks are the most heavily exposed to the troubled economies of Portugal, Ireland, Greece and Spain. Among the findings of the international banking group:
- Banks headquartered in the euro zone, which include the 16 countries that share the currency, account for 62 per cent of all global bank exposure to those countries, collectively holding $727-billion (U.S.) in exposure to Spain, $402-billion to Ireland, $244-billion Portugal and $206-billion to Greece.
- French and German banks held $493-billion and $465-billion, respectively, in exposure to those economies, or 61 per cent of all exposure among banks in the euro zone. "French and German banks were not the only ones with large exposures to residents of euro countries facing market pressures," the report said. "Banks headquartered in the United Kingdom had larger exposures to Ireland ($230-billion) than did banks based in any other country."
- Government debt accounted for a smaller portion of the exposure among euro zone banks than did claims on the private sector.
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