S&P says euro zone may need another shock

TEL AVIV Mon Dec 12, 2011 7:25am EST

TEL AVIV (Reuters) - Ratings agency Standard & Poor's put more pressure on the euro zone on Monday, with its chief economist saying time was running out for the currency bloc to resolve its debt problems and that it might need another financial shock to get it moving.

Jean-Michel Six, chief economist of the agency that shocked financial markets last week by putting 15 euro zone countries on a watch for a potential downgrade, said last week's EU summit agreement was a significant step forward, but not enough.

S&P usually takes around three months to act after a warning, but has said that in this case it may do so more quickly.

"There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term," Six told a business conference in Tel Aviv.

"Then there would be a recognition that everybody is indeed on the same boat and that even German institutions can be affected by this contagion. I'm afraid this may still be required."

Twenty-six EU countries -- all, minus Britain -- agreed on Friday to go forward with further and deeper economic integration.

But the outcome has left financial markets uncertain whether and when more decisive action would be taken to stem the debt crisis, which began in Greece, spread to Portugal, Ireland, Italy and Spain and now threatens France and even economic powerhouse Germany.

Six said the summit had made progress "in terms of getting the governments mentally ready to commit in writing in some constitutional format to a medium-term fiscal strategy which would allow the ECB to become what it is not at the moment, at least officially, a lender of last resort."

Many market analysts believe that having the European Central Bank act as a lender of last resort, effectively bailing out countries that get in trouble, would solve the confidence issue facing the euro zone.

But leading power Germany is opposed, fearing the impact on member states' fiscal discipline.


Six said S&P's downgrade threat was designed to send a strong signal that euro zone countries were facing significant risk of a major recession next year and a credit crunch.

He added that the credit agency would not base the downgrade decision entirely on the outcome of Friday's summit, saying there would be many other such gatherings before the crisis was resolved.

"Obviously we would never determine actions so important as rating actions based on just one summit. But we did say this summit was a very important step towards the resolution of this crisis of confidence."

A series of downgrades, taking the likes of France out of the top rated AAA category, has been priced in to some markets. But it still has the potential to shake prices.

"If we get an S&P downgrade, the markets will take another leg down," Said Eugen Weinberg, head of commodity research at Commerzbank in Frankfurt. "It has not been discounted yet."

A new tRBRreaty could take three months to negotiate and may require losable referendums in countries such as Ireland. Britain, the region's third largest economy, refused to join the other 26 countries in the fiscal union and was left isolated.

"Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side," Six said.

(Additional reporting by Steven Scheer. Editing by Jeremy Gaunt)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
Intriped wrote:
You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

Dec 12, 2011 9:22am EST  --  Report as abuse
stanwo wrote:
Britain was astute to refrain from its inclusion with those economical vapid freaks.

Dec 12, 2011 10:53am EST  --  Report as abuse
Harry079 wrote:
It’s just a matter of time now before it is realized that there is no solution to the debt crisis in Europe and elsewhere including the U.S.

The world banking systems are failing and no matter what is done now will not solve the underlying problem of governments overspending for decades.

What little confidence that remains in the world markets is fading more and more every day.

I believe by years end the DOW will be below 10,000 the Nasdaq below 2,200 and the S&P below 1,050.

Dec 12, 2011 12:09pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.