As expected France and Italy (and a host of others) received ratings downgrades, an event which was hardly surprising.
Too much debt, too little growth, too many imbalances – these can only be both deferred and accentuated for so long.
The real story will be how the crisis ends, its resolution, because this is merely merely one battle in a long campaign against a strong and menacing adversary.
For want of a better hyperbole, this is a Lord of the Rings’ moment, but without an immediately obvious ring to deliver.
European government debt to GDP ratio is some 87% (as of Q2 2011) with liabilities expected to increase as governments are still running significant deficits into a recession: debt to GDP could well exceed 90% by early next year as the Euro GDP declines and debt accumulates.
The ECB balance sheet is now close to 30% (28.5%) of Eurozone GDP, almost on a par with that of Japan and well above that of the US and the UK – the Fed’s balance sheet is some 18% of GDP, having risen from around 6% prior to the crisis. So where is the room to manoeuvre?
Source Eurostat – ECB balance sheet