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News Analysis: Experts see mixed effects of U.S. rating downgrade on Europe

(Xinhua)

09:22, August 11, 2011

BRUSSELS, Aug. 10 (Xinhua) -- As European stock markets suffered considerable losses following the downgrade of U.S. credit rating last Friday, experts said that concerns of the debt problem on both sides of the Atlantic could make life harder for highly-indebted countries in Europe, while some still saw a positive effect.

Except for a slight gain in London and Paris on Tuesday, European stock markets dived through the first half of this week with London stock market down 3.05 percent, Germany's Dax falling 5.13 percent and CAC in Paris plummeting 5.45 percent respectively on Wednesday.

"The downgrade increases risk aversion in general and highlights the problems of excessive public debt across the Atlantic," Daniel Gros, Director of Center for European Policy Studies (CEPS) told Xinhua in an interview.

"Investors are thus becoming even more cautious than before and refuse to invest in highly indebted countries," Gros said.

But Professor Iain Begg from London School of Economics saw a positive effect of the downgrade, saying that "the doubt about the U.S. may, eventually, make the euro look like a more attractive international reserve currency."

Professor Gerd Grozinger from University of Flensburg in Germany also saw a silver lining in the downgrade.

"Now it is clear to the last investor that most public debt has some risks, and although I don't see any problem for the United States to borrow, it will somewhat ease the pressure in Europe," Grozinger said.

To curb contagion of the European debt crisis, Gros suggested that the eurozone should implement changes to the European Financial Stability Facility (EFSF) decided at an emergency summit by eurozone leaders on July 21.

At the emergency summit on July 21, eurozone leaders decided to offer a new bailout package to Greece and to increase flexibility of the EFSF to allow it to buy bonds of troubled eurozone member states in a bid to stabilize the financial market.

However, the decisions are still waiting to be approved by parliaments of member states of the bloc.

All that can be done now is to implement the changes in the EFSF as quickly as possible to ensure that it has enough financing, not by augmenting its capital, but by giving it access to the European Central Bank (ECB), Gros said.

As the ECB Monday began to bailout Italy and Spain which helped reduce yields of their bonds, its President Jean-Claude Trichet Tuesday called European governments to do their jobs.

"What we are waiting is that the governments do what we consider are their jobs up to their responsibilities," said Trichet.

Singling out Italy and Spain, Trichet urged all 17 eurozone governments to accelerate implementing the decisions reached on July 21 and warned if no important actions are carried out, Europe would face the most serious crisis since World War I.

Meanwhile, analysts said that troubled economies such as Italy and Spain should also take their own responsibility.

"The objective of the ECB intervention is to offset market dynamics, driven by the state of tension of financial markets and the high risk aversion, that could have made the debt of these two countries unsustainable," said Cinzia Alcidi, a research fellow from CEPS.

"But this is not the solution to the fragility of those two countries. Both of them (and especially Italy) will have to undertake appropriate policies to put in order their fiscal house and restore investor confidence in the credit-worthiness of the country, " she added.

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