'The Substance of What S&P Is Saying Is Quite Right'

Spiegel
December 7, 2011

On Tuesday, Standard & Poor's warned that six AAA-rated euro-zone countries could soon be facing a downgrade. For most German newspaper editorialists, the news comes as no suprise given the recent negative developments in the euro zone. However, some believe it could give a needed push to European leaders to take big decisions in Brussels this week.

Angela Merkel and Nicolas Sarkozy seemed to shrug off the warning by American ratings agency Standard and Poor's that it may remove the top rating for Germany, France and four other AAA countries in the euro zone because of the ever-worsening euro crisis.

"What a rating agency does is the responsibility of the rating agency," Merkel said in response.

Still, the development is being viewed in Berlin as a warning shot ahead of a major euro crisis summit on Thursday and Friday that some are speculating could determine the fate of the currency union.

S&P has warned that a downgrade should be expected if decisive steps aren't taken at this week's summit. "Systemic stress in the euro zone has risen in recent weeks and reached such a level that a review of all euro-zone sovereign ratings is warranted," S&P said in a statement.

The ratings agency also indirectly criticized Germany's obsession with austerity measures,and warned that saving alone will not save the euro. "As the European economy slows, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand shrinks in line with citizens' concerns about job security and disposable incomes, eroding the revenue side of national budgets," the agency said.

In an analysis, center-left Süddeutsche Zeitung newspaper writes that "in order to correct these imbalances, it will not be sufficient to demand austerity measures from deficit states. Equally important will be to strengthen the economies in the affected countries, particularly in the export sector, through targeted investments. And the surplus states will also have to change if the euro is to have permanence, especially Germany." Analysts at S&P, it seems, are seeking to shift the debate beyond state finances and into the need for more economic governance to address massive imbalances in the euro zone.

But the more immediate concern for many right now is what a ratings downgrade would mean for efforts to bail out the euro. Finance experts have stated that if a single AAA euro-zone country loses the coveted top rating, it could spell doom or at least massive problems for the euro bailout fund, the European Financial Stability Facility (EFSF). Affordable lending to crisis-stricken countries in the euro zone is contingent on the EFSF maintaining its top credit rating for the €440 billion backstop fund. "The fund would no longer function," warned the Süddeutsche.

Like German politicians, editorialists at the country's major newspapers on Wednesday suggest they knew this was coming given the recent spate of negative euro headlines. Most argue it should serve as a warning for Europe's leaders to act this week.

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