As this debt burden snowballs, Eurozone nations are beginning to see their credit ratings fall. As a result, any future attempts to borrow more money or refinance current debts will be at higher interest rates, further compounding their indebtedness. Due to the increased risk of default, individuals and banks are beginning to refuse to lend to these nations at the previous low rates.
Meanwhile, the banks have already lent huge amounts of money to these debtor nations. If the nations default on their loan payments, the banks themselves are threatened with collapse. As a result, the banks are also beginning to see their credit ratings fall. If investors in the banks begin to flee, then the banks will collapse. Who then will lend to the debtor nations?
New Signs of Eurofail as Sarkozy Preps For Downgrade - Walter Russell Mead
The European situation continues to worsen as embattled French President Nicolas Sarkozy begins to soften the voters up to expect the loss of France’s AAA credit rating
Fitch warns Spain and Italy of downgrade as Moody's cuts Belgium by two notches - Louise Armitstead
The eurozone’s third- and fourth-biggest economies were warned by Fitch of a “near-term” downgrade, alongside Ireland, Belgium, Slovenia and Cyprus.
In a further blow, Belgium separately saw its credit rating downgraded two notches, to Aa3, by another leading agency, Moody’s.
Debt crisis: Brussels accord on the verge of collapse - Louise Armitstead, Philip Aldrick, and Ben Harrington
The banks that were downgraded last night include US banks Bank of America and Goldman Sachs, Barclays and France’s BNP Paribas. Switzerland’s Credit Suisse and Germany’s Deutsche Bank were also cut. The downgrade could raise the cost of borrowing for these banks.
Fitch cut the “issuer default ratings” at the banks to “reflect challenges faced by the sector as a whole”. The ratings agency said: “These challenges result from both economic developments as well as a myriad of regulatory changes”.
