Tuesday, 6 December 2011

Germany Calls S.&P. Downgrade Threat a Spur to Act on Euro

BRUSSELS — Despite anger in Brussels over the timing of a warning of a broad credit-rating downgrade days before a crucial European summit meeting, German officials on Tuesday portrayed the threat by Standard & Poor’s as a spur for leaders to make a deal to rescue the euro.
Heinz-Peter Bader/Reuters
In Vienna, Finance Minister Wolfgang Schäuble of Germany called the S&P downgrade warning the "best encouragement" to find a solution to the debt crisis.

Late Monday, S.&P. warned that the ratings of 15 euro zone countries, including Germany and France, were vulnerable to a downgrade. On Tuesday, the agency extended its threat of a possible downgrade to include the top-notch, long-term credit rating on the European Union’s main bailout fund, if any of its gilt-edged guarantors are downgraded.

Just before the latest move, the European commissioner responsible for financial market regulation, Michel Barnier, complained that the rating agency had acted without waiting to evaluate the results of the summit meeting, set for Thursday and Friday.

Jean-Claude Juncker, who heads the group of euro zone finance ministers, added during an interview on German radio, “I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit — this can’t be a coincidence.”

On several occasions in the past rating agencies have made announcements before meetings on the euro debt crisis. This time S.&P.’s downgrade threat was effectively a warning to European leaders of the consequences that would flow from failure to tale sufficiently convincing action.

Few now dispute the central thrust of the argument advanced by the rating agency that the economy of the euro zone is deteriorating so fast that quick and far-reaching action is required to avert disaster.

“I actually see a positive effect, because now everyone must be aware of how serious the situation is,” Norbert Barthle, the budget spokesman for Chancellor Angela Merkel’s conservative party in Germany, told Reuters.

The German finance minister, Wolfgang Schäuble, called it the “best encouragement” to find a solution.

“The truth is that markets in the whole world right now don’t trust the euro area at all,” he said in Vienna, Bloomberg News reported.

S.&P.’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence of global investors.”

Market indexes in Europe were lower in late trading Tuesday, while the yields on German and French bonds rose, a sign of added risk to holders of the securities.

Speaking in Brussels, Mr. Barnier rejected the idea that the S.&P. announcement was an act of revenge after the European Commission announced last month plans to tighten regulation of rating agencies.

In fact, had the new rules been in place, they would not have covered Monday’s statement. “Our proposals apply to ratings, rather than warnings, though it might be worthwhile to discuss whether they should apply to both,” said Chantal Hughes, a spokeswoman for Mr. Barnier.

The governments concerned had been informed in advance of the announcement, said one European official who requested anonymity because of the sensitivity of the issue.

Before the announcement from S.&P. the financial markets had reacted positively to the outcome of Monday’s meeting between the French President, Nicolas Sarkozy, and Mrs. Merkel, in which they bridged most of their big differences over how to create a tighter fiscal framework — or “fiscal compact” — for the 17-country euro zone.

The hope among many European officials is that an accord along these lines will give the European Central Bank political cover to intervene more aggressively to alleviate the crisis.

But key issues remain to be resolved in Brussels later this week. All 27 member states need to agree if the European Union’s governing treaty is to be amended — the declared first option of the French and German leaders.

If some countries outside the euro zone object, or demand significant concessions in exchange for their acquiescence — as the British Prime Minister David Cameron is under domestic pressure to do — then France and Germany reserved the right to press for a euro zone only agreement.

Many details have yet to be filled in. They includes the precise role of the European Court of Justice in policing new financial rules that will aim to prevent countries running big debts and deficits. Mrs. Merkel had wanted a key role for the court but has retreated in the face of French objections.

The two leaders agreed on the early introduction of a permanent bailout system for the euro next year and Mrs. Merkel has eased her insistence that, under this arrangement, private creditors must be involved in any future sovereign debt restructuring.

But again the detail is opaque and it remains unclear how a country like France can make its contribution to the fund without jeopardizing its triple-A credit rating.