Euro Crisis: S&P Warns 17 Euro Zone Countries of Ratings Downgrades

Standard & Poor’s has warned it may carry out an unprecedented mass downgrade of euro zone countries, including Germany and France, if EU leaders fail to deliver a convincing agreement on how to solve the region’s debt crisis in a summit on Friday.

European leaders have been threatened with a downgrade in their credit ratings if a Franco-German plan to resolve the eurozone debt crisis does not soon show progress. Photo: Patrick Rasenberg/Flickr

Standard&Poor’s on Monday warned that it might strip the euro zone’s two biggest economies, Germany and France, of their top-notch AAA long-term credit ratings because of the Continent’s economic crisis. The agency also said the ratings of 13 other euro zone countries were vulnerable.

The “lack of progress the European policy-makers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union,” the agency said.

In addition to Germany and France, S.& P. named the Netherlands, Austria, Finland and Luxembourg as countries that could lose their AAA rating.

Cyprus was already on downgrade watch and Greece already has a ‘junk’ CC-rating.

The agency said the action was “prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.”

“If the response of policy makers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downward,” the agency said.

The agency warned that ratings could be lowered by “up to one notch for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments,” including France.

The action by Standard & Poor’s, which had never before threatened France and Germany’s top ratings, came at the beginning of an important week in Europe, with European Union leaders gathering in Brussels on Thursday and Friday to try to finally stop the crisis.

President Nicolas Sarkozy and Chancellor Angela Merkel told reporters that their plan, to be discussed at Friday’s summit, included automatic penalties for states that fail to keep deficits under control, and an early launch of a permanent bailout fund for euro states in distress.

They said they wanted treaty change to be agreed in March and ratified after France wraps up presidential and legislative elections in June. “We need to go fast,” Sarkozy said.

After about two hours of talks with Merkel in Paris, Sarkozy told a joint news conference: “What we want … is to tell the world that in Europe the rule is that we pay back our debts, reduce our deficits, restore growth.”

Merkel added: “This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability.”

Financial markets rose after the meeting as traders calculated that the plan would protect indebted countries such as Italy and Greece. The rally came even though Germany backed away from plans to let the European Court of Justice veto national budgets that would run up excessive debts.

The two leaders also made no progress on letting the European Central Bank intervene in the crisis.

Sarkozy and Merkel said they would send off their plan on Wednesday, in time for Friday’s summit, and made clear their determination to drive through an EU treaty change despite objections from some member states.

“In this extremely worrying period and serious crisis, France believes that the alliance and understanding with Germany are of strategic importance,” Sarkozy said. “Risking a disagreement would be risking the euro zone exploding.”

Several governments, notably Britain, Ireland and the Netherlands, oppose treaty change because it might not win public backing if put to a referendum.

Both Italy and Ireland have announced fresh austerity measures.

Italy, the biggest euro zone nation in trouble, offered a glimmer of hope that the bloc could halt a crisis that is threatening the survival of the common currency. Its borrowing costs tumbled after its new technocrat government announced an austerity program.

S&P’s statement made no mention of that program, and French Finance Minister Francois Baroin said it did not take into account Sarkozy and Merkel’s announcement.

Italian Prime Minister Mario Monti declared that if it was not for his 30-billion-euro austerity plan, “Italy would have collapsed, Italy would go into a situation similar to that of Greece.”

Ireland also unveiled a tough budget with new spending cuts accounting for nearly 60 percent of next year’s 3.8 billion euro fiscal adjustment. [via The New York Times, The Telegraph and Reuters]

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