Merkel vows faster eurozone reform after S&P downgrades

BRUSSELS/BERLIN Sat Jan 14, 2012 8:10pm EST

1 of 2. German Chancellor and leader of the Christian Democratic Party (CDU) Angela Merkel arrives for a news conference during a party convention in Kiel, January 14, 2012.

Credit: Reuters/Fabian Bimmer

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BRUSSELS/BERLIN (Reuters) - European leaders promised on Saturday to speed up plans to strengthen spending rules and get a permanent bailout fund up and running as soon as possible, a day after U.S. agency S&P cut the ratings of several euro zone countries' creditworthiness.

In a conference call with reporters and analysts after downgrading nine of the euro zone's 17 countries, Standard & Poor's said it saw continued risks from the debt crisis that has overshadowed Europe for the past two years and said the single currency area was heading towards recession.

It also warned that France, which suffered a downgrade to AA+ from the top-notch AAA, was at risk of further cuts if a recession further inflates its debt and budget deficit.

"The policy response at the European level has in our view not kept up with the rising challenges in the euro zone," S&P credit analyst Moritz Kraemer said on the call, forecasting a 40 percent chance of euro zone gross domestic product contracting by up to 1.5 percent in 2012.

The downgrades were delivered hours after talks between private bond holders and the Greek government aimed at restructuring Greece's vast debts broke down, pushing Athens closer to default, an event that would tarnish euro zone unity and pose a contagion threat which could engulf the bloc.

In Germany - whose top AAA rating survived unscathed - Chancellor Angela Merkel said the downgrades underlined why a so-called 'fiscal compact' must be signed by member states quickly, and the next bailout mechanism, known as the ESM, should be funded soon.

"We are now challenged to implement the fiscal compact even quicker ... and to do it resolutely, not to try to soften it," she said at a meeting of her conservative Christian Democrats (CDU) in the northern city of Kiel.

"We will also work particularly to implement the permanent stability mechanism, the ESM, so soon as possible -- this is important regarding investor trust," she added.

European Central Bank policymaker Joerg Asmussen warned that Europe's drive to tighten fiscal rules was being softened, considering the latest draft of the agreement a "substantial watering down" of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported.

Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.

S&P said it was not working on the assumption of a euro zone break up, although it blamed its leaders for focusing too much on cutting debts and not sufficiently on competititveness.

"We think that the diagnosis of policymakers regarding the crisis is only partially recognising the origin of the crisis," said Kraemer, mentioning the focus on budget austerity.

"The proper diagnosis would have to give more weight to the rising imbalances in the euro zone in terms of the external funding positions, current account positions, much of it is based in diverging trends of competitiveness," he said.

WAKE-UP CALL

Austria, which was downgraded one notch from AAA, called S&P's decision a wake-up call for the country to cut debt and deficits, and for Europe to move more quickly on reforms.

"The downgrade is bad news for Austria but it should wake everyone up when such a thing happens," Finance Minister Maria Fekter said. "Now everyone recognises that this ... is a matter of debt and deficits, not primarily of the economy."

The ratings decision hit some countries harder than others, with France, Austria, Malta, Slovakia and Slovenia suffering single-notch downgrades, but Italy, Portugal, Spain and Cyprus falling two notches. Portugal's debt is now rated junk.

ECB policymaker Ewald Nowotny, an Austrian, said Italy in particular would now face problems given large refinancing needs this year in that country and its banks.

Asked in an interview broadcast by Austrian radio if Italy - now rated at the same BBB+ level as Kazakhstan - was "problem child number one," Nowotny agreed.

"In a certain sense, yes, because we know this year Italy has a very significant refinancing need. Italian banks also need refinancing," he said.

"In normal times this is all possible, in very nervous and difficult times it can be a problem and in my view this sharp downgrade of Italy is probably one of the most difficult and problematic aspects of this sweeping blow from the ratings agency."

NO TORPEDO

Long-standing frustration with ratings agencies echoed across Europe after the S&P decision. While Germany and France downplayed the decision and called it expected, Spain's finance minister was more alarmed.

"The downgrade is far too broad, it effects too many countries, it effects the very credibility of the euro," Treasury Minister Cristobal Montoro said on the radio.

"It's important that the European institutions understand that it's time to do everything possible to build and reinforce the euro," said Montoro, whose highly indebted country has the highest unemployment level in the euro zone.

Meanwhile, in a move to circumvent their influence, Germany's Merkel backed a proposal to reduce the reliance of institutional investors on ratings agencies, which some of her allies say are politically driven.

The idea would be to introduce legislation to allow institutional investors to evaluate risk themselves and make decisions independent from the U.S.-based agencies.

"I think it is very useful to look at this and see where if necessary we can make changes to legislation," Merkel said at her party meeting.

European leaders are set to meet at a summit on January 30 to discuss how to boost growth and jobs, and Merkel's words on Saturday suggest she will also be looking for faster progress on tighter common fiscal rules.

But now, policymakers at the meeting may have bigger fish to fry. The downgrades threaten the top rating of Europe's current bailout fund -- the European Financial Stability Facility -- as contributors France and Austria are no longer rated AAA.

A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc's weaker members. S&P said it would deliver its view on the impact to the EFSF from the sovereign downgrades "shortly."

(Writing by Brian Rohan and Robin Emmott; additional reporting by Nigel Davies in Madrid, Adrian Croft in London, Michael Shields in Vienna, Luke Baker and Robin Emmott in Brussels; editing by Mike Peacock)

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Comments (8)
AZWarrior wrote:
First, I think it is more than apparent that the Euro is a mistake and unworkable in the long run. The bigger question I see is why Germany is so determined to shackle themselves to a corpse. If one was to hazard a guess based on German history, it would appear the Reich is using economic ties to slowly assemble the continental states into a modern version of the long time dream of a greater Germany.

With the embedded entitlement classes of today’s European states, one should well be careful what one wishes for.

Jan 14, 2012 11:01pm EST  --  Report as abuse
Intriped wrote:
This will eventually either break the stronger states for towing the weak ones or a massive but semi orderly disengagement of the weak ones will happen. This is not something unforeseeable nor does it require a Rhodes Scholar to view the writing on the wall.

Jan 15, 2012 12:48am EST  --  Report as abuse
AmrNaeem wrote:
A question that is essential in this text. Who gives the S&B the right to effect the economies of Europian countries?

Such downgrading techniques seem to be politically-controlled by agencies to move the economies the way the like.

What happened by the downgrading will lead to more fractions in the Euro Zone, setting Germany and 3 other countries aside, and the 9 will take the path down. A solution should be traced by such intelligent agencies so we could get Europe back rather than putting it on the brink of falldown.

There should be internal allies within the defaulted countries on all levels, the government should come closer to the public and disclosing and defining the main problem exactly, then investment could be sought with some emerging countries that could assist in pumping much money in a lucraive projects that satisfies main communities needs.

All is an idea that pass by mind, there is more at ur public, however success isn’t guaranteed.

Jan 15, 2012 3:36am EST  --  Report as abuse
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