A threat by Standard & Poor’s to slash credit ratings across the euro zone has sounded a clarion call, which could help Nicolas Sarkozy and Angela Merkel force through a change to the European Union treaty at a summit this week.
The French president and German chancellor are determined to change European rules to impose mandatory penalties on countries that exceed deficit targets, aiming to restore market confidence and prevent a sovereign debt crisis spiralling out of control.Citing "continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis," S&P threatened to cut the credit ratings of 15 countries, including Germany and France, by 1-2 notches.
It also warned of slowing growth amid so much austerity, predicting a 40% chance of a fall in euro zone output.
A downgrade could automatically require some funds to sell bonds of affected states, making those countries’ borrowing costs rise still further. Merkel brushed off the threat.
“What a ratings agency does is its own responsibility,” she said, promising that European leaders would make decisions at this week’s summit that would restore confidence.
Jean-Claude Juncker, chairman of the 17 euro zone finance ministers, said he was "astonished” by S&P’s announcement.
He described it as “a wild exaggeration and also unfair” and said it failed to take into account a new austerity plan for Italy, which pulled borrowing costs for the biggest of the euro zone’s ailing countries back from the brink.
In Paris, Sarkozy’s office said Standard & Poor’s had taken its decision last Tuesday, before both the Italian budget and the Franco-German plan for stricter budget rules.