Sarkozy accepts German demands on EU budget rules
French President Nicolas Sarkozy bowed to German demands for tougher European budget rules as a steep downgrade of Greece's credit rating and distress signals from some Spanish banks put new pressure on the euro zone.
After talks in Berlin late on Monday, Sarkozy accepted a German proposal that euro zone states which persistently breach budget deficit limits should have their voting rights in the bloc suspended, even if that requires changing the EU treaty.
He also yielded to Chancellor Angela Merkel's insistence that closer "economic government" should involve all 27 European Union members and not just the 16 that share the common currency, as France had sought, and he dropped demands for a dedicated euro zone secretariat.
The four-notch downgrade of Greek sovereign debt to junk status by Moody's Investors Service reversed a four-day rise in the euro and European shares, and sent a fresh nervousness around global markets.
An index measuring German investors' and analysts' sentiment on Tuesday fell much more than expected, sending the euro lower against the dollar.
The Mannheim-based ZEW economic think tank's monthly poll tumbled to 28.7 in June from 45.8 in May. The consensus forecast in a Reuters poll of 40 analysts was for a fall to 42.0.
The risk premium investors charge for holding the debt of peripheral euro zone countries such as Greece, Spain, Italy and Ireland rather than benchmark German bonds rose on Tuesday.
The cost of insuring those countries' debt against default also spiked.
Moody's raised doubts about Greece's ability to repay its debts in the medium-term despite a 110 billion euro bailout, because harsh austerity measures agreed with the euro zone and IMF may stunt growth and prove politically hard to enforce.
"The macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating," Moody's senior analyst Sarah Carlson said to explain the sudden, sharp drop in the rating.
Greek bank stocks fell 2.3 percent at Tuesday's opening and the Athens stock market was down 1.1 percent.
Spain, struggling to cut a high deficit and restructure its financial sector, admitted on Monday that foreign banks were refusing to lend to some of its banks but denied German media reports that it was preparing to seek an EU bailout.
Asked about those reports, Merkel said she did not want to fuel speculation, but added that Spain and other countries knew that a European financial safety net was now in place if they were unable to access credit markets.
Spanish stocks fell 1.5 percent on Tuesday while the pan-European share index was down 0.5 percent on jitters about sovereign debt and the banking crisis.
The Spanish daily El Pais quoted government sources as saying Madrid wants European regulators to publish the results of stress tests of individual banks to restore confidence.
Spain believes that publishing the findings of tests being carried out on the main European institutions, including Spanish banks, would help dispel rumors that the country is preparing to seek EU aid, the left-wing newspaper said.
There was no immediate comment from the government or the Bank of Spain on the report.
Germany, France and the European Central Bank have opposed such a move, advocated forcefully by U.S. Treasury Secretary Timothy Geithner, because they fear it could trigger more speculation against some European banks.
"If the results of the tests were known there would be more than one surprise," El Pais quoted one Spanish government source as saying.
Economists have said Europe could face a prolonged period of economic stagnation with zombie banks similar to the situation in Japan in the 1990s unless governments take decisive action to force banks to resolve bad debts and recapitalize, merge or shut down those in trouble.
"Political leaders, including those in France and Germany, are deeply captured by national banking establishments," Nicolas Veron of the Bruegel economic think-tank wrote last month.
"Banking reform has become as urgent as fiscal adjustment, and as important for stability as enhancing Europe's growth potential and fixing the euro zone's fiscal policy framework," he said.
Before a one-day European Union summit on budget rules and economic reform on Thursday, France and Spain are both due to announce structural reforms on Wednesday.
Sarkozy was due to make final choices on Tuesday on a reform of France's generous pay-as-you-go pension system, expected to entail a raising of the retirement age from 60 to 62 or 63, longer contribution periods to receive a full pension and extra levies on higher earners.
Spain's minority Socialist government, fighting a 20 percent unemployment rate, is seeking support among regionalist parties to enact a major shake-up of the country's rigid labor market to make it easier to hire and fire, and reduce layoff payments.
[Source: By Andreas Rinke and Emmanuel Jarry, Reuters, Berlin, 15Jun10]
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