Eurozone nations hit back yesterday at a threat by ratings agency Standard & Poor’s to downgrade 15 eurozone countries, and promised to push ahead with reforms to tighten budget discipline.
Many EU officials criticised the timing of S&P’s warning, coming hours after France and Germany announced a joint plan to pull the euro back from the brink with a new EU treaty and tougher budgetary rules.
The warning came three days before an EU summit tomorrow and on Friday, which S&P said was now of critical importance.
French Foreign Minister Alain Juppe said that the strategy aimed at ending the eurozone debt crisis announced by President Nicolas Sarkozy and German Chancellor Angela Merkel after crisis talks in Paris was “the response” to S&P.
Monday’s plan to toughen EU budgetary rules “is precisely the response to one of the major questions of this ratings agency (S&P) that mentions the insufficiency of European economic governance,” Mr Juppe told RTL radio.
“We have a trajectory for revising our public deficits that we will stick to,” Mr Juppe said, voicing confidence that the Franco-German plan would provide impetus to the crucial summit of EU leaders in Brussels.
Mr Juppe said that he was surprised by the timing of S&P’s announcement, of which eurozone governments were forewarned on Monday morning several hours before the ratings agency issued a public statement.
The Governor of the Bank of France, Christian Noyer, said that S&P’s warning was “totally inopportune after a Franco-German agreement on an extremely powerful governance package”.
“When you look at how Standard & Poor’s argues its point, you can see that the methodology has evolved and is now more linked to political factors than to economic fundamentals,” he told a gathering near Paris.
The head of the eurozone finance ministers grouping, Jean-Claude Juncker, joined Mr Noyer in lashing out at S&P’s warning, telling Germany’s Deutschlandfunk radio it was “completely over the top and also unfair”.
“After the very substantial efforts in the eurozone in recent days to get the debt crisis under control, this warning comes as crushing blow,” said Mr Juncker, who is also Prime Minister of Luxembourg.
“We are on the way to solving the debt crisis. We’re consolidating, we’re reforming and we’re also reforming the way Europe is governed,” he said.
Ms Merkel responded to a question on the downgrade threat yesterday morning by saying that she would press on with “important” reforms for the eurozone. “On Thursday and Friday we will take the decisions which we consider important for the eurozone,” she said of the EU summit.
“I have always said it’s a long process which will still last a long time. But this path is now mapped out, also yesterday through the meeting with the French President, and we will continue on this path,” she added.
However, German Finance Minister Wolfgang Schaeuble said that the S&P warning was a good way of concentrating minds before the summit and raising pressure for an agreement.
Ms Merkel and Mr Sarkozy’s plan backed automatic sanctions against any EU member state with a public deficit exceeding three per cent of gross domestic product.
S&P’s warning threatened a one-notch cut to the hallowed AAA ratings of Germany, The Netherlands, Finland, Luxembourg and Austria.
France, also AAA-rated and the eurozone’s second-largest economy, could be hit with a two-notch cut, as could the other countries currently rated below AAA.
S&P said it would complete a review of the 15 countries’ ratings “as soon as possible” following the EU summit.
Sony Kapoor of the Re-Define think tank said S&P’s warning “upped the ante for what was already going to be a very high-stakes summit even more”.
While EU leaders might point the finger of blame at S&P for deepening the crisis, “S&P’s actions have not caused the worsening of the euro crisis but are merely a symptom of it,” he said.
Analysts at Swiss bank UBS issued a note, saying: “Market reaction to the S&P news is muted by the fact that markets had worked out the existence of systemic risks in the euro area a little while ago.
“Still, it is nice that S&P are catching up. Sarkozy and Merkel had little new to add after their special summit.”