Ratings agency puts EU bailout fund on credit downgrade watch
Pressure to find a solution to the eurozone financial crisis increased today when a ratings agency threatened to downgrade its member countries and the emergency bailout fund.
German Chancellor Angela Merkel downplayed Standard & Poor’s warnings, but the possibility complicates the region’s fight against the crisis.
The first warning came just hours after Mrs Merkel and French President Nicolas Sarkozy urged changes to the European Union treaty that would centralise decision-making on spending and borrowing for the 17 countries that use the euro.
The threat to cut Germany’s prized AAA rating was particularly surprising. Its bonds are considered among the safest in the world and are the basis upon which Europe finances its bailout fund. S&P warned in a follow-up report that it could cut the AAA rating of Europe’s bailout fund by up to two notches if it decides to downgrade one of the eurozone’s top-rated countries.
The bailout fund needs the AAA rating to cheaply raise money on markets. Losing it would mean it would cost billions more to fund bailouts, hurting the rescued countries that ultimately have to pay the higher interest rates.
Investors mostly took the S&P warnings in stride. European stocks and bonds held onto the gains they made on Monday.
“What a rating agency does is the responsibility of the rating agency,” Mrs Merkel said.
She added, however, that she expected a meeting of European leaders later this week in Brussels would help restore markets’ confidence.
She and Mr Sarkozy on Monday outlined sweeping plans to change the EU treaty in an effort to keep tighter checks on overspending nations. The proposal is set to form the basis of discussions at an EU summit in Brussels on Friday.
The financial markets of Italy and Spain rallied after Mrs Merkel and Mr Sarkozy unveiled their proposals, suggesting investor are more confident Europe can survive the crisis.
S&P said there was a 50% chance that the countries’ ratings it put on review would be downgraded.
French Foreign Minister Alain Juppe said he thought S&P had made its decision before Mrs Merkel and Mr Sarkozy released details of the new plan, so had not been able to factor that into its considerations.
Investors are hoping that the summit of European leaders on Thursday and Friday will produce concrete measures to prevent a messy break up of the euro. Markets have been jittery because of fears that the euro might disintegrate, causing a sharp recession in Europe that would spread through the world economy.
