Euro Drags Germany Down

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5 December 2011

Standard & Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc.

The US rating agency said late on Monday that Germany, France, the Netherlands, Austria, Finland and Luxembourg were all being placed on “creditwatch negative”, indicating there is a 50 per cent chance of a downgrade within 90 days.

A total of 15 countries in the EU were placed on watch with negative implications by S&P, and the agency said: “We expect to conclude our review of eurozone sovereign ratings as soon as possible following the EU summit scheduled for [December] 8 and 9.”It warned all of the six triple A rated governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France, but few expected Germany’s top rating to be called into question.

With regard to Germany, S&P said it was worried about “the potential impact … of what we view as deepening political, financial and monetary problems with the European economic and monetary union.”

The agency is acting as eurozone governments make further progress towards a comprehensive deal to contain the region’s sovereign debate crisis ahead of a crucial EU summit on December 9. Berlin and Paris want the eurozone to sign up to tougher fiscal rules to calm investors’ worries.

S&P told the six governments it would conclude its review “as soon as possible” after the summit. It told governments: “[I]t is our opinion that the lack of progress the European policymakers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union.”

S&P’s move at such a sensitive stage in negotiations is likely to spark further recriminations following ongoing political criticism about the behaviours of rating agencies during the crisis. They stand accused by many politicians of exacerbating the crisis and are facing stringent new regulation.

But the rating agencies are worried about who will pick up the bill for any eurozone solution with many plans likely to increase the strain on the triple A countries.

Governments are concerned that a downgrade will make it harder for the eurozone bail-out fund, the European Financial Stability Facility, to arrange financing in the markets for its rescue packages for Ireland, Portugal and Greece, as it is underpinned by guarantees from the six nations which are rated triple A. Those countries also fret that it could raise their own financing costs.

Any downgrading would further diminish the number of top-rated countries after S&P cut the US earlier this summer, although it saw its borrowing costs fall on the move as investors remain desperate for highly-rated paper.