Threat of downgrade for 15 euro countries
by Daniel Mason
Fifteen eurozone countries including all six of the region's triple-A rated economies were last night told by Standard & Poor's that their credit ratings were under threat because of "systemic stress" caused by the sovereign debt crisis, weak growth forecasts and politicians' inability to agree solutions.
Germany and France were among those placed on CreditWatch negative, meaning there is at least a 50 per cent chance that their rating will be cut following a review. The announcement by S&P sent the euro tumbling and came just hours after Angela Merkel and Nicolas Sarkozy outlined plans for a new European Union treaty with strict rules to prevent eurozone countries building up excessive debt and deficits.
In a statement, S&P said triple-A rated Germany, Finland, the Netherlands and Luxembourg, as well as Belgium, were in danger of having their credit score lowered by one level. And it warned that 10 others, including France – whose top rating has been under pressure for weeks – might see their rating slashed by two notches. The euro fell 0.5 per cent against the dollar as the news broke and European stock markets fell slightly this morning.
The only eurozone countries not included in the action were Cyprus, which is already on CreditWatch negative, and bailed-out Greece, which has been reduced to junk status by all three major credit rating agencies. But the bail-out fund on which Greece and others depend for financial assistance was put on review today.
Explaining its decision, S&P said: "Today's CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole." It said it would complete its reviews as quickly as possible, with much depending on the outcome of this week's crucial summit of EU leaders.
The rating agency indicated five reasons for its move. It said conditions for eurozone banks had tightened; investors were demanding higher risk premiums to take on euro area sovereign debts; politicians had taken too long to decide how to tackle the crisis; government and household debt remained dangerously high; and growth prospects for 2012 had weakened considerably with a 40 per cent chance of recession. Today Eurostat said eurozone growth was just 0.2 per cent in the third quarter, confirming its earlier estimate.
If S&P follows through with the downgrades, it could have damaging implications for the eurozone rescue fund, the European Financial Stability Facility, which relies on guarantees from triple-A rated member governments. It has also been placed on CreditWatch negative, with S&P saying it would be given the lowest rating applied to the current triple-A countries after the review. If it is forced to pay higher interest rates on its bonds to raise money on international markets, it might struggle to provide promised bail-out financing to Greece, Ireland and Portugal.
In its statement, S&P suggested that this week's summit could be a turning point if leaders took note of the seriousness of the situation and put forward a convincing plan. "We are of the view that the upcoming European summit on December 8 and 9 provides an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence."
But it warned of the cost of failure: "If the response of policymakers if not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downwards, meaning higher refinancing costs for banks and governments, further deceleration of credit and demand, and an even greater required fiscal consolidation efforts to arrest deteriorating credit dynamics. Our CreditWatch actions signal our view of the risks to eurozone sovereign creditworthiness should the summit not generate an effective and credible response."
The French and German governments responded in a joint statement in which they said they "affirm their conviction" that the plan put forward by Merkel and Sarkozy would "strengthen the coordination of budget and economic policy, and promote stability, competitiveness and growth". French foreign minister Alain Juppé commented today: "We know now we have more efforts to make than others, that's certain. It's a threat, it's not a decision. Of course it must be taken seriously." Meanwhile Austrian finance minister Maria Fekter said she did not expect her country to lose its top notch rating "at the moment".
Jean-Claude Juncker, prime minister of Luxembourg and president of the Eurogroup, was more critical. He said he was "astonished" by S&P's move, telling Deutschlandfunk radio in an interview: "This threat from the rating agency is like a knockout blow" and "completely excessive". He added: "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."
The governor of the French central bank, Christian Noyer, also had harsh words. "The agencies were one of the motors of the crisis in 2008. Are they becoming a motor in the current crisis? That's a question we all need to think about. When you look at the way S&P formulated its argument, you can see that they have changed their methods. The methodology has become much more political and less linked to economic fundamentals."
But Sony Kapoor, managing director of the economic think-tank Re-Define, said politicians had only themselves to blame for the latest development. "Time and again eurozone leaders have had the opportunity to stem the crisis and every time they have failed. Time is now running out. Unlike what EU leaders may want to think, S&P's actions have not caused the worsening of the euro crisis but are merely a symptom of it. It's hard to fault S&P on its analysis and explanations. It is merely recognising how badly things have been allowed to deteriorate."
In August, S&P stripped the United States of its triple-A rating and today US Treasury Secretary Timothy Geithner arrived in Europe to hold talks with EU leaders including European Central Bank president Mario Draghi and German finance minister Wolfgang Schaeuble. It is Geithner's fourth visit to Europe in the last three months amid concerns that a deepening of the debt crisis would have a damaging impact on the global economy. Both Italy and Ireland have this week announced new austerity drives in an effort to restore market confidence.
Merkel and Sarkozy reached a deal on treaty changes at a meeting in Paris yesterday, and will put their proposals to EU leaders at the upcoming summit. The duo said they preferred a treaty agreed by all 27 EU countries but would go ahead with just the eurozone if necessary. They want automatic sanctions to kick-in if a country's deficit exceeds 3 per cent, with the punishment only reversible by a qualified majority of governments.
The German and French leaders said they also wanted a golden rule enshrined in each country's constitution legally binding them to fiscal discipline, with the European Court of Justice able to rule on whether they had complied. The court would not, however, have the power to veto a national budget.
They said the EFSF should be replaced by the long-term European Stability Mechanism next year instead of 2013 as previously planned – with changes to the ESM also subject to qualified majority voting. Eurozone leaders should meet once a month throughout the crisis, Merkel and Sarkozy said. They dismissed pooling euro area debt in joint bonds and insisted that private sector investors would not lose any money in future bail-outs.