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DERMOT MURNAGHAN: Now we turn to the European economy and those eurozone downgrades at the end of last week plunged the currency into yet another crisis. This week inspectors from the European Union and the International Monetary Fund head back to Greece to decide whether it is meeting the conditions of its bail out, and there are reports that the top rating of the European Financial Stability Facility is threatened, which could jeopardise its ability to bail out troubled eurozone economies. Well joining me to discuss this is Simon Derrick, Chief Currency Strategist at BNY Mellon, Chief European Economist for the Royal Bank of Scotland Jacques Cailloux and Louise Cooper, market analyst at BGC Partners. A very good morning to you all, let’s start with Louise. I mean what a recipe, we have met periodically to discuss the eurozone crisis but it doesn’t look good and one of the crucial things as well is at the weekend you always get these dramatic events it seems at the end of a week and then everybody sits back, the markets stew on it and who knows what’s going to be unleashed on Monday morning?

LOUISE COOPER: The rumours started Friday about lunch time and it is always difficult with rumours how seriously to take them, however equity markets went from being up about half a percent to being down about half a percent and European government bond markets turned round quite dramatically as well so obviously it was being taken seriously. I actually find it quite extraordinary that given the level of downgrade, even though we knew that France was going to be downgraded, the level of downgrade is that the market hasn’t reacted more. We have got 14 countries now with a negative outlook, that means there will be more downgrades to come. We had nine countries downgraded between one and two notches, this is not one crisis, this is a whole load of hotspots, any one of which could cause a domino effect to all the others.

DERMOT MURNAGHAN: Simon, does it lead back to I suppose the lack of ability in the early days to deal with what bubbled up initially in Greece and now that looks like getting even worse and leading to the scenario that Louise is talking about?

SIMON DERRICK: I think that is absolutely right. It was the failure of the eurozone nations to really react more positively two years ago when this crisis first came along and it has always been about doing just enough. I do think that this does cause fairly major problems in southern Europe and I think in particular for Greece because quite clearly we have got a bond redemption coming up in the middle of March and at the moment there doesn’t look to be enough money there. The problem particularly with regard to France and the downgrade there is it is going to make it far more difficult politically for Sarkozy to agree to bring yet more money on the table and therefore what’s really happened over the weekend is it’s making the default in Greece look all the more likely.

DERMOT MURNAGHAN: Jacques Cailloux, would that lance the boil though? Would it have done two years ago, as Simon was suggesting, a default, a eurozone exits and who knows what’s next?

JACQUES CAILLOUX: Yes, I think if we look at the downgrades themselves, markets had obviously been talking about the downgrades looming so I think the implications are more from a political standpoint rather than the financial markets, although it is not helping of course. The rating agencies are typically pro-cyclical so they make matters worse at the worse time and that again has happened but I think the political implications are pretty serious but from French domestic politics, I think that complicates in the run up to the general elections and then you also have the bargaining power between France and Germany. In a sense it would probably have been easier if you had Germany as well being downgraded so you have a level playing field between France and Germany. It helps the negotiations, if you are weaker at the table it makes it more difficult.

DERMOT MURNAGHAN: We haven’t got much time left because we have obviously been telling our viewers about the rescue on board the Costa Concordia but I want to come back round the panel if we can and look at that issue of the EFSF, hard to say as I always say, the potential of that being downgraded and staying with you Jacques, that calls into question isn’t the European Central Bank the only point of call here, the only one that can draw a line in the sand and say look, we can stop this, we’ve got enough money, backed by Germany of course?

JACQUES CAILLOUX: Yes, the ECB has always been the only credible backstop, the EFSF was never and probably will never be. There is obviously a focus on a new institution coming through this year, the new acronym is ESM, and that might be the focus of attention in coming months but the ECB remains the only credible backstop, only that they are not doing what everyone would like them to do and the reason is that they feel politically and legally quite stuck in a corner.

DERMOT MURNAGHAN: What if things continue to drift until something like that happens, Simon Derrick?

LOUISE COOPER: I agree, I don't think anything is going to come of this until the ECB steps up to the plate so I think the reality is now that Italy and nations like Italy are on their own and as a result they are now going to have to pay the kind of interest rates they used to pay before joining the euro and there’s the irony. They joined to get their interest rates down and now they are going to end up paying the kind of risk premiums of beforehand but are still stuck with the …

DERMOT MURNAGHAN: But meanwhile their economic position just erodes slowly until they end up in a Greek position.

SIMON DERRICK: Yes, it is this very slow drip-drip-drip that I think is the real threat. We are not talking about anything dramatic quickly but it is that slow erosion of their competitive position.

DERMOT MURNAGHAN: Louise, you were telling us with your opening answer that these are issues that are of course much discussed in the dealing rooms. I mean the question I have for you is why are the markets being, I wouldn’t say chipper but so calm during the first two weeks of the new year? I mean this hasn’t gone away and if anything it is coming back worse than ever in 2012.

LOUISE COOPER: I don’t fully know to be honest. I think there’s a lot of bad news out there, maybe everyone’s just fed up with the bad news. I think in terms of equities, the reason why they are holding up so well is where else do you put your money? You can get a 4-5% yield on good quality names, dividend yield, actually compared to where else you can earn your money, that actually is attractive so I think with equities …

DERMOT MURNAGHAN: So there is a bit of a bubble building up then?

LOUISE COOPER: A possibility, the FT was suggesting there is a bit of a bubble building up into dividend paying stock because where else do you put your money? But in terms of credit markets, I sit with the brokers on our floor and I can tell you now, there are still a lot of strains in the system. Equity markets may be a bit chipper but in wholesale funding and credit markets and rates markets, there are a lot of strains. This is not going away and even if the ECB doesn’t engage in QE, I don't think we’re actually getting a solution to the underlying problem that we are too indebted and we have lived beyond our means for too long. That involved welfare cuts and a complete reappraisal of the European welfare system and that is not even remotely on the political agenda.

DERMOT MURNAGHAN: There is so much more to discuss on this but I’m going to cut it short, to be continued at a later date. We know that we will be doing that. Louise Cooper, than you very much for that, Simon Derrick and Jacques Cailloux as well, thank you very much.