It all started amid the sterile discussions on Greece’s debt. The Greek government has not reached an agreement with private investors on that haircut of 50%. Thus, the country could go bankrupt in March, because it depends very much of a huge loan from the IMF. Loan will be granted only if Greece will get a deal with its investors. In this point, none of the main actors – Mario Monti, Angela Merkel, Sarkozy or private investors – do not want a bankruptcy of Greece.

France downgrading effects will be felt first in the political sector. Nicolas Sarkozy is with four months before the presidential elections. Sensing the threat of the downgrading, Sarkozy filed a very populist theme with strong implications in the economic area. He is the strongest supporter of the Tobin tax. Economic, France will suffer enormously after the downgrading. Borrowing costs on financial markets will increase and the French banks that hold Spanish, Greek and Italian bonds will be nervous about the possibility that these debts could not paid. France is the second country, after Germany, which has huge bonds of eurozone countries that are struggling to survive.

Amid these problems, investors will demand more compensation and to own bonds are now increasingly riskier bonds see Spain, Italy and Portugal.

Italy is the third EU’s economy. The European Central Bank today made a foray back on financial markets and bought Italian bonds. Whose interest began to grow and reach 7%. Spain and Italy will have difficulties to borrow on the financial markets. In order to curb financial deficits, the two countries will have to implement new and new austerity measures. That means new layoffs and the increasing of the unemployment rate, wich is huge.

Euro falls sharply. It is a good news for exporters, but only for now, because it will not boost the eurozone economy. All countries are implementing austerity measures, the debt increase and the main engine of the European Union, namely Germany, is begining to “cough”. The German exports will suffer from this situation and what is really worrying is that Germany could enter in the downgrade dance, especially because in the first months of the year it was announced that Germany is likely to enter in a mild recession for a couple of months.

The European Financial Stability Fund must struggle to raise money on financial markets. Downgrading France, the second contributor to the Fund, resulted in a reduction of resources from 451 billion euros to 271 billion euros. The Fund has already provided 293 billion Portugal, Greece and Ireland.

Starting today, the next six months will be crucial for the euro area. If Greece does not reach an agreement with its investors and will not get loan from the IMF and at the summit in Brussels, which will take place in two weeks, the franco-german coalition will not reach a consensus agreement concerning the implementation of controling measures of the deficits and will not implement common economic policies, especially in the eurozone, the scenario is far too grim to be described.

UPDATE S & P downgraded France and Austria (from AAA to AA +), Slovakia (from A to A +), Spain (from A to AA-), and Italy was downgraded to BBB +.

22:00 Standard and Poors was going to announce which countries will have its rating downgraded. France and Austria, most likely, will lose their AAA rating. S & P officials declined to comment if it’s about 12 countries.

The French government said that this downgrade is not  to consider as a catastrophe. Germany is not among the countries that will face a downgrade. Italy, Spain and Portugal will be most likely downgraded.

The European Financial Stability Facility Fund could be also downgraded, because France is the second largest contributor to this fund. The guarantees offered to the FESF countries will fall from 451 billion to 271 billion, which means a severe blow on the fund. The German government has just approved to increase their contribution to EFSF.

S&P announced in December that ratings of 15 countries from the eurozone are monitored. Austria will be downgraded from AAA and will be put under negative outlook.

The most important consequences of this downgrading: the euro will continue to diminish, the borrowing costs will explode and this would mean that deficitsof the countries concerned will be recalculated, as well as growth prospects for 2012 and even 2013!

Italy is in pole position to be downgraded by rating agency Fitch. Eurozone countries expect the end of January to see who will undergo changes in the countries rating.

Italy is the most vulnerable, because the governors have not yet implemented tough measures to prevent the spread of the crisis. Italy’s borrowing costs on financial markets have increased and the interest rates to jump over 7% reaching. Italy needs to sell in 2012 bonds worth 440 billion euros, which will be very difficult operation, considering the interest.

France escaped the Fitch’s ax, which announced Tuesday that the state led by Nicolas Sarkozy will not be downgraded in 2012. Returning to Italy, Prime Minister Mario Monti started to put pressure on Germany and France, to make place in their coalition. Italy is the third eurozone economy and Monti wants more rights for the state he governs.

If Italy would be downgraded, it would mean even greater costs for the country to borrow from the financial markets. Interest on bonds would increase even more, and Italy’s economy would suffer greatly. In the same situation with Italy are also Belgium, Spain, Slovenia, Ireland and Cyprus.

“Italy needs to convince investors that can grow in the eurozone as a competitive country, not only a country that proposed austerity measures,” said David Riley, one of the leadears of rating agency Fitch

Malev, the Hungarian airline state company, must find financial resources in four months to return the money received as state aid, aid found to be illegal by the European Commission. The Hungarian government will meet on January 16 to discuss proposals submitted by the Minister for National Development.

Besides the problems that Hungarians have with public transport in Budapest, the Hungarian government must solve the problem of airline-state Malev. The company was privatized in February 2007 but was nationalized in 2010, the Hungarian state holding 95% of shares. One solution, of course, is the state to pull back on sale the majority stake and find an investor to take over the company. It should support the company’s losses and to return the money owed by the company as a result of the sanctions dictated by the European Commission.

For example, in 2010, despite the financial aid from the state, Malev had losses of 25 billion forints. For 2011, is still waiting on Q4 results recorded.

The problem is that Malev now owes 100 billion forints, money illegally received in the form of state aid. “The Commission’s investigation concluded that Malev, considering the difficult financial situation, could not be able to get the financial resources of the financial markets in terms agreed with the Hungarian state,” it said in a statement the European Commission.

Another solution would be a Hungarian government is to make another national company in a public – private partnership with Chinese and European investors, but their names were not released.

According to the Hungarian bankruptcy law aproved in summer 2011, Malev, being a company in a strategic sector of the national economy, could avoid the standard procedure of bankruptcy. This means that the state can sell the best company’s assett to investors to cover it debts without this procedure to be made public. There is concern in Hungary, as Malev would be sold in pieces, that the best asset could be sold at low prices to “certain” investors, to create a new airline, and the rest going to be just scrap and Malev to handle to pay it’s debts as possible.

Hungarians receive another bad news. The public transport in Budapest, Hungary’s capital, is on the brink of bankruptcy! Istvan Tarlos, the mayor of Budapest, is making huge efforts to keep the situation under control.  BKV’s (Budapest Zrt Közlekedési) bankruptcy would cost Hungary 14 billion forints a day!

BKV Zrt, the company that has control over the public transport in Budapest, is indebted way over the head and has a debt of 65 billion forints, needed to be payed immediately. Government led by Viktor Orban has allocated only 32 billion forints, given that, in order to function normally, the company needs 150 billion forints, about 480 million euros. The cost of the public transoport tickets means 50% of the company’s operating costs. BKV has survived so far by selling old garages and a number of repair bases, where, in their place, there had been built a mall and apartment buildings.

Tarlos announced that he sent to Viktor Orban a package of measures to save the bankrupt company BKV. Measures are extremely tough and unpopular, such as:
- Changing regulations for district councils to co-finance the city’s public transport
- Introducing a public transport charge
- Creating an infrastructure necessary to introduce a so-called congestion fee
- New car parks and building new garages for cars
- Eliminating inefficient activities
- Outsourcing of bus transport

If Orban-led government will not take a decision quickly, the company that controls the public transport in Budapest could go bankrupt within one month. The fastest action would mean giving up the night transport, reducing the number of daily buses, which would lead to staff redundancies.

BKV has been established since 1968 and operates 3 underground lines, 32 tram lines, 15 trolley bus lines and 235 bus lines, of which 28 are at night.

Fleet of BKV is also obsolete. In the last five years were only 150 new buses bought, Volvo ones. The oldest bus of BKV is 24 years old (3.5 million kilometers on board) and the average age is 16.5 years for the diesel buses.

The company was involved in a huge corruption scandal. During 2009 – 2010 it was made an investigation for all the contracts concluded in the last 20 years and many employees – and key executives were being sentenced to prison.

Budapest has 1.7 million inhabitants and 54% of the population uses public transport, the rest being provided by private companies.

Angela Merkel and Nicolas Sarkozy have put pressure on Greece and Greek bondholders to reach quickly agreement on the haircut agreed in October 2011.

Since November, Greece began to negotiate with the private investors. Governors would like investors to give up more than 50% of the debt and Greek officials threatened earlier this year that if investors will not accept this and the IMF will not grant a new bailout, worth 130 billion euro, they will exit from the eurozone.

Merkel and Sarkozy have put pressure on Greek government and investors, announced that Greece will not access the new package from the IMF as long as they do not reach an agreement.

For this reason, the euro could reach the 16th month of decline and Greece would need more money from the IMF. On the other hand, Greece has not implemented not even one austerity measure from the ones agreed at the summit in October.

The Greeks had to sell public assets worth 50 billion euros, but so far have sold only 1.7 billion euros. They had to lay off 30,000 people from the public system, but they have lay off just 1,700. The Greeks have not reduced pensions, as they agreed in October.

Instead, Greek lawmakers have only approve the budget for 2012, one fancy at the moment, based on investor’s haircut and the astronomical loan from the IMF. Loan will not come as long as Greece will not reach understanding with the bondholders and will not implement the austerity measures agreed in October, which was the express wish of Christine Lagarde, head of the IMF.

“We want to see progress in Greek debt restructuring. From my point of view and Nicolas Sarkozy’s, the second rescue package of Greece depends on the debt restructuring,” said Angela Merkel. “The situation is very tense in the eurozone, perhaps now more than ever,” Nicolas Sarkozy added.

Italy has the highest paid Prime Minister in the European Union. Although the country is strongly affected by the economic crisis, the italian politicians do not want to tighten their belts and start to feel the impact of their austerity measures. Below, the top 20 highest paid politicians of the European Union according to ISTAT.

01. Mario Monti, Italy’s MP – $175.000
02. Mark Rutte, Netherland’s MP – $135.000, per year
03. Werner Faymann, Austria’s, MP – $125.000, per year
04. Angela Merkel, Germany’s chancelor – $120.000, per year
05. Elio Di Rupo, Belgium’s MP – $120.000, per year
06. Nicolas Sarkozy, France’s president – $115.000, per year
07. Enda Kenny Irelan’s MP – $103.000, per year
08. David Cameron, UK’s MP – $98.000, per year
09. Helle Thorning-Schmidt, Denmark’s MP – $83.000, per year
10. Fredrik Reinfeldt Sweden’s MP – $78.000, per year
11. Jyrki Katainen, Finland’s MP – $76.000, per year
12. Jean-Claude Juncker, Luxembourg’s MP – $73.000 per year
13. Lucas Papademos, Greece’s MP – $70.000, per year
14. Viktor Orbán, Hungary’s MP – $66.000, per year
15. Borut Pahor, Slovenia’s MP – $58.000, per year
16. Passos Coelho, Portugal’s MP – $47.000 per year
17. Demetris Christofias, Cypru’s president – $44.000 per year
18. Andrus Ansip, Estonia’s MP – $41.000, per year
19. Mariano Rajoy, Spain’s MP – $40.000, per year
20. Donald Tusk, Poland’s MP – $33.000 per year

Week ends badly for the eurozone. The euro reached a new historic low, and news coming are increasingly waring. Here are the five bad news, of this week.

Unemployment in the euro area reached 16.4 million people, and, in the European Union, unemployment is up to 23.7 million people. That means 10% of the total population. Data was provided by Eurostat.

European Central Bank had to intervene again to buy Italian and Spanish bonds, whose interest rose again to sky. Analysts said the ECB is using a water pistol, not a bazooka in the struggle to combat the economic crisis. Mario Draghi is pressed by the financial markets to reduce, again, interest rates.

Germany goes on the edge. The domestic demand for industrial products fell by 4.8% and  and the external demand, with 7.8%. Although Germany is expected to have an economic growth of 0.5% at the end of this year, Germany could go into recession in first quarter, due to lower exports amid the crisis in the eurozone.

IMF has changed its forecasts for global economic growth, made ​​in September last year. Now, is expected to be below 4%. “The IMF will be very attentive to the role that banks play,” said Lagarde.

Nicolas Sarkozy warned that France will implement on its own the financial transactions tax, if EU partners do not want that. Mario Monti see this as an opportunity to find a breach in the Franco-German coalition. Italian PM wants more influence for his country, which is the third of the EU economy. Both Monti and Merkel were carefully about Sarkozy’s idea. We expect new tensions in the European Union.

Nicolas Sarkozy said in a press conference tonight that, regardless of its European partners desire, he wants to introduce a tax on financial transactions.

“When you buy an apartment, you pay a tax in each country. When you buy food from the store, you pay a tax. When you do financial transactions you do not pay any tax! Who understands that? Who accepts it?”, he asked, rhetorically.

France wants to impose a tax on financial transactions and has in UK, the biggest opponent. He also spoke recently on a charge so-called “Tobin” on financial transactions, and Sarkozy announced that France is ready to impose such a tax, even if the European partners do not want that.

UK, who vehemently defended the City of London, is opposing to the implementation of this tax. Although, if we calculate the money that Britain would raise from this tax, it would be billions of pounds.

Apparently, Italy and Germany is backing Nicolas Sarkozy, in his approach. Angela Merkel’s spokesman said the German government wants to analyze in detail this proposal, in the first three months of this year. Sarkozy’s desire is that this decision should be taken at the end of January, when there will be a new Euro summit.

The Prime Minister of Italy, Mario Monti, spoke in favor of imposing the Tobin tax, but only in the whole EU.

On the other hand, the Czech Prime Minister Petr Nečas, warned that the EU does not need new taxes that apply only in the EU and should be a general consensus.

This fee, in the opinion of Sarkozy, would mean that financial institutions are actively involved in repair of EU economic disaster.

Tobin tax, suggested by Nobel laureate James Tobin, was originally defined as a tax on all spot swap between one currency and another. The fee was intended to penalize the short term financial speculation of a currency to another.

BNR, the Romanian Central Bank, took a bold decision, lowering interest rates for the second time in the last two months, reaching now 5.75%.

“The BNR Board reaffirms that the central bank will continue to monitor domestic developments and international economic environment, so that, by appropriate adjustment of the instruments at it’s disposal for achieving medium-term price stability and financial stability”, said in a statemant the central bank’s officials.

Romania was one of the few countries last year that has seen it’s country rating improved and the national currency remained stable. Romanian figures look good. Inflation dropped to 3.4%, being in the target established by the Central Bank , which is 2-4%. Romania tries to keep this year the budget deficit to 1.9%, although last year it was 4.4%, and expects an economic growth of 2%.

If Romania is trying to do the right things, the same can not be said about it’s neighbor, Hungary. The Hungarian government said it was ready to start new negotiations with the IMF, but it may have some rough treatment.

“As Hungary is small and outside the euro zone, the systemic implications of a potential default are comparatively limited. In these circumstances, the EU and IMF are unlikely to be very flexible in negotiations with the Hungarian government about any new aid program. They will impose tough conditions, which would be politically very difficult for Prime Minister Viktor Orban”, said Christian Schulz, senior economist at Berenberg.