December 6, 2011
BERLIN — European nations were pressed Tuesday by a credit downgrade threat and the U.S. Treasury chief to deliver on markets’ huge hopes for a solution to the 2-year-old financial crisis engulfing the continent.
Germany and France downplayed Standard & Poor’s warnings to downgrade 15 eurozone nations and Europe’s bailout fund. But a downgrade of their AAA ratings would complicate their efforts to restore investor confidence in Europe.
Loans from the bailout fund have rescued Ireland, Portugal and Greece, but if the fund loses its own AAA rating, it could have to charge higher rates to rescue countries in the future, making it tougher for them to recover.
That heaps more uncertainty on the fund, which many had already dismissed as too small to bail out a country like Italy. Help from abroad also seemed unlikely — U.S. Treasury Secretary Timothy Geithner said the Federal Reserve has no plans to give money to the International Monetary Fund to bolster Europe’s bailout fund.
He is on a three-day tour of Europe to express U.S. support but also, many say, to impress on regional leaders the need to get their crisis plan right. A break-up of the eurozone would have dire consequences for the global economy.
German Finance Minister Wolfgang Schaeuble said the S&P ratings warning may not be all bad, since it could spur action at a European summit this week billed as the meeting “to save the euro.”
“We take this assessment as further reassurance to do everything to achieve a good result on December 9th,” Schaeuble said in Vienna.
The markets also largely shrugged off the news, perhaps because they had long ago resigned themselves to the fact that the eurozone’s credit ratings might be lowered. Investors have recently been charging even big countries like France more to borrow, suggesting they did not quite believe in the AAA ratings.
S&P’s first warning — on the 15 countries’ ratings — came Monday, just hours after German Chancellor Angela Merkel and French President Nicolas Sarkozy urged changes to the European Union treaty that would centralize decision-making on spending and borrowing for the 17 countries that use the euro.
While those reforms will likely take months or years to implement, European leaders hope they will impress the European Central Bank or the International Monetary Fund enough to persuade one or both to step into the breach quickly with more financial aid.
While there is a sense that leaders are simply scrambling to come up with the formula that induces the ECB to act, Moritz Kraemer, S&P’s head of sovereign ratings for Europe, cautioned that ECB action would not in itself save the AAA ratings. He told reporters Tuesday that a credible plan to solve the crisis was also needed.
The German and French leaders shot back Tuesday that they had just unveiled one, and that the agency had jumped the gun in putting the eurozone on notice.
“What strikes me is the time-lag of this announcement,” French Foreign Minister Alain Juppe told RTL radio. Merkel and Sarkozy’s proposals are “exactly the response to one of the major questions from the ratings agency, which talks about insufficient European economic governance.”
While it’s true that S&P had already made its decision by Monday, when it warned leaders of it, the contents of Sarkozy and Merkel’s proposals later that afternoon couldn’t have been that surprising to analysts at S&P. They included introducing an automatic penalty for any government that allows its deficit to exceed 3 percent of GDP; requiring countries to promise to balance their budgets; pledging that any future bailouts would not require private bond investors to absorb a part of the costs, as was the case for the Greek bailout; and reiterating a promise not to criticize the ECB.
Those are mostly a rehash of ideas that had already been floated and, in fact, Germany’s inclusion on the list of countries that could be downgraded indicates S&P was already anticipating them: Berlin’s bonds are considered some of the safest in the world, the German economy has been praised for maintaining modest growth even among dire circumstances. Only the prospect of further tying Germany to weaker countries would make its bonds more suspect.
Kraemer also underscored that the warning targeted all of the eurozone countries — with the exception of two whose bonds are already rated very low — because the agency is concerned about a paralysis in European decision-making, which cripples all of the economies, no matter how robust.
At a press conference alongside Schaeuble in Berlin, Geithner said he is “very encouraged” by the reforms taken so far by European nations. He is on a three-day trip to Germany, France and Italy in a show of support for key countries grappling with the financial crisis.
Geithner will next go to France, where he plans meetings with Sarkozy, and also with incoming Spanish Prime Minister Mariano Rajoy who will be attending a meeting in Marsailles, then to Milan, Italy, for talks with new Italian premier Mario Monti.
He said he was “very encouraged” by reform steps taken by European nations.
“I am here in Europe to emphasize how important it is for the United States and the global economy as a whole that Germany and France succeed, along side the other nations, in building a stronger Europe,” Geithner said.