x Abu Dhabi, UAEWednesday 26 July 2017

Anger at Standard & Poor's as 15 euro-zone nations put on credit watch

Rating's agency puts almost the entire bloc on credit watch just as the single currency is desperately fighting for its survival.

The US treasury secretary Timothy Geithner, centre, leaves the headquarters of the European Central Bank in Frankfurt yesterday. In addition to the bank’s president, Mario Draghi, Mr Geithner is scheduled to meet the Bundesbank president and a number of German government officials.
The US treasury secretary Timothy Geithner, centre, leaves the headquarters of the European Central Bank in Frankfurt yesterday. In addition to the bank’s president, Mario Draghi, Mr Geithner is scheduled to meet the Bundesbank president and a number of German government officials.

France and Germany, leaders of the 17 euro-zone nations, were angered yesterday by the international financial agency Standard & Poor's decision to put almost the entire bloc on credit watch just as the single currency is desperately fighting for its survival.

As the Italian parliament debated an emergency €30 billion (Dh148bn) austerity programme in one of the starkest consequences of the crisis, the French and German governments insisted the deal they struck on Monday would strengthen the euro area.

Alain Juppé, the French foreign minister, said the accord, which would require a new European Union treaty, was "precisely the response to one of the major questions of this ratings agency that mentions the insufficiency of European economic governance".

According to the agency, 15 euro-zone member states, including six enjoying the highest triple-A status, have been placed on credit watch, potentially a prelude to formal downgrading, which would increase the cost of their borrowings.

Of the remaining two, Greece has already been downgraded and Cyprus is under review.

Germany, France, Austria, the Netherlands, Finland and Luxembourg have AAA ratings. All but France face possible downgrading by a single notch; France - along with eight other lower-rated nations in the bloc, including Spain and Ireland - could lose up to two.

The German media turned on S&P for timing its announcement to coincide with this week's frantic search for a solution to Europe's debt crisis.

The website of the German newspaper Handelsblatt reported resentment and indignation, with political and banking figures highly critical of the agency.

The office of the French president, Nicolas Sarkozy, pointed out the S&P decision was taken before Mr Sarkozy and the German chancellor, Angela Merkel, reached Monday's agreement on a new treaty to enable a centralised body to impose tough fiscal control on recalcitrant member states.

Christian Noyer, the president of Banque de France, was more blunt. He accused rating agencies of acting as "one of the motors of the crisis in 2008" and said it could be asked whether they were playing the same role now.

Mr Noyer said that in the light of Monday's Franco-Germany agreement on far-reaching measures to tackle the crisis, the agency had mistimed its announcement as well as relying on methodology based more on political than economic factors.

Outside the zone, too, some eyebrows were raised.

Alastair Campbell, who was press secretary to Tony Blair when the latter was British prime minister, said on Twitter it was time for television documentary makers to "shine a light" on ratings companies.

But some analysts felt the announcement would concentrate minds ahead of tomorrow's start to a crucial EU leaders summit in Brussels on European debt.

The so-called "Merkozy" plan, involving penalties for countries that fail to meet strict deficit rules, will be put to the meeting.

Mr Sarkozy argues a new treaty could be in place by March. He and Mrs Merkel would prefer it to be backed by the 27-nation EU as a whole but say it could otherwise go ahead in the smaller single currency area, with other EU member states permitted to join.

S&P made a robust defence of its position. "If our opinion of creditworthiness changes, it is our responsibility to call it as we see it, without fear or favour and without regard to political expediency," it said.

Some commentators interpreted the agency's intervention as a sign that it regarded the Brussels summit as make-or-break for the euro.

S&P itself said its report was driven by a belief "systemic stresses" in the euro zone had risen in recent weeks, placing pressure on the credit standing of the entire bloc.

Historically, nations put on alert for possible downgrading have a one-in-two chance of seeing their status reduced within 90 days.

A swifter judgement is expected in the present case, piling more pressure on EU leaders to emerge from their summit with a strong, united front.

Steve Barrow, the head of G10 currency research at Standard Bank in London, told Reuters he doubted the threatened downgrading would happen.

He felt the EU summit was likely to produce some agreement but warned of a "low tolerance level" among investors.

Meanwhile, the international focus on Europe's woes intensified as the US treasury secretary, Tim Geithner, arrived in Germany to begin a round of meetings starting with talks in Frankfurt yesterday with Mario Draghi, the president of the European Central Bank, Jens Weidmann, the Bundesbank president, and German government officials including the finance minister, Wolfgang Schäuble.

And the start of the EU summit coincides with the monthly policy meeting of the European Central Bank.

"The digestion of the ratings news has raised the stakes for the summit," David Schnautz, a fixed-income strategist at Commerzbank AG in London, told Bloomberg.

"The debt crisis and the outcome of the meeting of politicians ... is the focus for the markets. There was a rally last week on expectations of a positive outcome from this meeting and we see risk for a setback there."

crandall@thenational.ae

* With additional reporting by Reuters