S&P downgrade looms, pressure mounts on EU leaders to deliver credible crisis plan

International rating agency Standard & Poor's warned Monday that it would downgrade 15 eurozone countries, including AAA-rated Germany and France, if a solution to the debt crisis is not found within 90 days.

Analysts said the unprecedented warning, coming just before a crucial EU summit on Thursday, was aimed at increasing pressure on European policymakers to take bolder action to save the shaky euro area.

Across-the-Board Downgrade

Given the festering economic and political situation in the euro area, S&P has put almost the whole eurozone, including six AAA-rated countries, on "CreditWatch negative," meaning there is a 50 percent chance of a downgrade within the next 90 days.

"The CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole," S&P said in its latest statement.

With tightening credit conditions, rising borrowing costs and a worsening economic climate, all of these factors are threatening to drag the 17-nation currency union back into recession, according to the rating agency.

Meanwhile, the firm said ratings could be cut by one notch for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg, and by up to two notches for the other countries.

S&P said the final review would be made after the EU summit on Thursday and Friday.

Delicate Timing

Analysts said S&P's move, coming at a delicate time, was aimed at piling more pressure on the upcoming EU summit to thrash out a plan to stem the spreading crisis.

Brian Dolan, chief strategist at Forex.com, said the announcement was designed to release a signal to the EU that "they've got to get something done now."

Recent weeks have seen an escalating sovereign debt crisis which has spread far beyond the starting point of Greece.

To stop the downward spiral, French President Nicolas Sarkozy and German Chancellor Angela Merkel met Monday in Paris to make a joint proposal involving sweeping changes to European treaties. The proposal would be sent to EU President Herman Van Rompuy on Wednesday.

According to the two leaders, the proposed treaty changes will incorporate automatic penalties for any country whose budget deficits exceed 3 percent of its GDP as well as some new rules on balanced budgets.

They expressed the belief that through imposing coercive budget discipline the measures could put the governance of the eurozone on a sounder footing.

If eurozone countries agreed to the proposal at the summit, it would spell a fundamental step toward a fiscal union.

However, analysts cautioned that S&P's downgrade warning, which came on the heels of the joint initiative, might dampen market optimism and increase investors' jitters over the debt crisis, thus pushing up the borrowing costs of debt-ridden countries such as Italy and bringing the euro area one step closer to the brink of collapse.

Facing Unprecedented Pressure

Despite a glimmer of hope created by the Franco-Germany commitment, S&P made no mention of their joint proposal in its statement, but criticized European leaders' failure to take coordinated action to restore market confidence.

The statement put huge pressure on European leaders, prompting Sarkozy and Merkel to issue a joint statement to reaffirm their pledge to overcome the crisis.

"France and Germany, in full solidarity, confirm their determination to take all the necessary measures, in liaison with their partners and the European institutions, to ensure the stability of the euro area," the statement said.

To add U.S. weight to the EU crisis talks, U.S. Treasury Secretary Geithner Timothy arrived in Germany Tuesday for a three-day visit to Europe to push for swift and decisive action to rein in the crisis.

This is Geithner's fourth visit to Europe in two months, underscoring U.S. concerns that a deteriorating eurozone crisis could ultimately hurt the health of the U.S. economy.

The European leaders are under unprecedented pressure both at home and abroad. As Sarkozy said in a televised speech last Thursday, without swift and coordinated action, global history will be written without Europe.

[Source: Xinhua, Beijing, 06Dec11]

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