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June 06, 2012 at 05:11 AM
The news for Spain just kept getting worse on Wednesday as its industrial output fell the most since October 2009, surprising economists who had not expected such a severe drop. Moody’s downgraded seven of Germany’s banks and three Austrian lenders, citing the debt crisis, and gold was revealed apparently to have regained its luster for, among others, the billionaire investor George Soros, who had called it the “ultimate asset bubble” in January 2010.
Meanwhile, the European Central Bank (ECB) was expected to cut interest rates, but instead left them unchanged at 1%.
Bloomberg reported that Spain’s industrial output was shown to have dropped by 8.3% in April from a year ago, according to the National Statistics Institute in Madrid. Bloomberg economists had predicted a median drop of 6.5%. In March output for factories, refineries and mines dropped 7.5%.
Domestic demand is expected to shrink by 4% in 2012, according to the government; that’s four times the rate at which it contracted in 2011. Spain is Europe’s fourth largest economy and is already battling a crisis with its banks.
Germany came in for its own troubles when Moody’s cut seven of its banks’ ratings. Commerzbank saw its rating cut by one level, to A3, with five other German banking groups cut as well. In addition, the local subsidiary of UniCredit, Italy’s biggest bank, was also downgraded. Moody’s said that its review of Deutsche Bank was not yet concluded; as a result, it took no action.
Three Austrian banks were lowered as well, with UniCredit Bank Austria and Raiffeisen Bank International dropped one level each, to A3 and A2, respectively; Erste Group Bank lost two levels and is now at A3.
In a statement, Moody’s attributed its actions to “the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity.”
Sandy Mehta, CEO of Value Investment Principals, a Hong Kong-based investment advisory company, characterized Moody’s actions as “a bit harsh.” However, he was quoted adding, “But given the events in Europe, unless the authorities and the powers that be are more decisive and take firmer action, then you do have the risk that the economic problems will engulf Germany as well.”
