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France, Germany face S&P downgrade
Deepening EU problems cited
Question of the Day
The long-running debt crisis in Europe intensified and broadened dramatically Monday as a top Wall Street credit agency warned Germany, France and a handful of other previously stable Northern European countries that they are in danger of losing their top ratings as they get drawn ever more deeply into the financial maelstrom.
The announcement by Standard & Poor’s Corp. after U.S. financial markets closed Monday overshadowed the latest plan offered by the leaders of France and Germany earlier in the day to alter the treaty binding the European Union together to make running big budget deficits more difficult in the future.
S&P, which rocked markets this summer by giving the United States its first-ever downgrade from AAA, said the worsening crisis in Europe that has unfolded slowly as it moved from country to country over the past two years has reached a point where it is driving the whole continent into recession and imperiling even the healthiest nations with the lowest budget deficits.
S&P cited “deepening political, financial, and monetary problems within the eurozone” and pointedly questioned the “debt-crisis management” skills of Germany and France, the leading nations that have sought to piece together a unified response to the crisis from the 17 nations that use the euro as their currency.
Those leaders, while having to grapple with politically difficult and legally complex problems in more than a dozen states, have been widely criticized by the U.S. and global investors for acting too late and with too little firepower to stop the financial hemorrhaging that now threatens economies as far away as China and Brazil.
France and Germany quickly denounced the ratings action and pledged to continue to “reinforce the governance of the euro area” and “foster stability, competitiveness and growth.”
Earlier in the day, French President Nicolas Sarkozy stressed that they are trying to “re-establish confidence in the eurozone.” With German Chancellor Angela Merkel at his side, he said: “We are conscious of the gravity of the situation and the responsibility that rests on our shoulders.”
The Wall Street agency’s move was a particularly sharp rebuke to Germany, which has advocated a plodding, step-by-step response to the crisis, as well as other northern countries that heretofore had been largely untouched by the crisis and where citizens often have resented being called upon to help their beleaguered neighbors cope with big debt burdens.
While Greece, Ireland, Italy, Spain and other mostly southern European countries have been engulfed in a slow-motion train wreck, Germany, France, the Netherlands, Luxembourg and Austria had managed to maintain their gold-plated AAA ratings.
S&P’s warning, along with signs of difficulty that even industrial powerhouse Germany has had accessing the credit markets, may help prod Europe’s diverse assortment of countries to agree to the French-German debt limit plan and other more dramatic actions at a summit meeting of European leaders planned for Friday, analysts said.
The plan, proposed jointly by Mrs. Merkel and Mr. Sarkozy in Paris on Monday, would institute a balanced-budget requirement for European countries and impose automatic penalties on nations that allow their budget deficits to exceed 3 percent of economic output.
S&P indicated any decision to downgrade, which it gave about a 50-50 chance, would be influenced by the outcome of the meeting. The firm put a total of 15 European nations on notice Monday that they could be downgraded. Only two eurozone nations, Cyprus and Greece, were not affected by the sweeping ratings action.
Earlier in the day, market optimism had risen with the unveiling of the Sarkozy-Merkel debt limit plan. The Dow Jones industrial average surged as much as 160 points on hopes spawned by the plan, but pared those gains to end up 78 at 12,098 on reports of the impending S&P announcement.
Despite the welcoming market response, some investment analysts immediately criticized the Sarkozy-Merkel plan for not providing a clear enough road map on how to get the eurozone economies growing again so as to reduce borrowing costs for struggling countries in the future.
The consequences of sweeping downgrades is not likely to be trivial in Europe, unlike the U.S., which - largely because of its status as a safe-haven refuge for investors burned by the European crisis - experienced little fallout from the loss of its top rating in August, beyond a week or two of severe market turmoil.
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